Kontoor Brands, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Third quarter and first nine months of fiscal 2021, ended October 2, 2021; comparisons are with the corresponding 2020 periods. The filing was signed November 8, 2021. Kontoor designs and sells apparel primarily under the Wrangler and Lee brands. Unless indicated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $652.3 | $583.2 | $1,794.8 | $1,437.0 |
| Gross margin | 44.4% | 44.2% | 45.5% | 40.6% |
| Operating income | $86.0 | $82.9 | $214.3 | $60.9 |
| Net income | $63.4 | $60.8 | $151.5 | $24.8 |
| Diluted EPS | $1.07 | $1.05 | $2.56 | $0.43 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $209.4 | $129.7 |
Q3 revenue rose 12%; nine-month revenue rose 25%. Q3 gross margin increased 20 basis points, while SG&A rose to 31.2% of revenue from 30.0%, reflecting higher demand-creation, digital and compensation costs. Operating margin was 13.2% in Q3 versus 14.2% a year earlier. For the nine months, operating margin improved to 11.9% from 4.2%. Comparisons were affected by the pandemic-driven weakness and lower spending in 2020.
Q3 revenue increased in both reportable segments: Wrangler was $421.5 million, up 22%, and Lee was $228.0 million, up 6%. Nine-month segment revenue was $1,131.6 million for Wrangler and $654.1 million for Lee. The “Other” category fell sharply as the company discontinued third-party merchandise sales at VF Outlet stores.
Cash, debt and liquidity
At October 2, 2021, cash and equivalents were $215.4 million. Total debt was approximately $791.8 million, including current debt; long-term debt on the balance sheet was $773.4 million. Debt declined from $913.0 million at December 2020, including $125.0 million of term-loan repayments during the first nine months. The company had no revolving-credit borrowings and reported $487.7 million of available capacity, net of standby letters of credit. It was in compliance with debt covenants and expected to remain compliant for at least one year from issuance of the financial statements.
Nine-month operating cash flow of $209.4 million was partly offset by $32.0 million of investing outflows and $206.8 million of financing outflows. Financing uses included term-loan repayments, $69.1 million of dividends and $10.0 million of share repurchases. Inventory was $409.1 million, up from $340.7 million at December 2020; accounts receivable was $269.9 million, up from $231.4 million.
Material changes, outlook and risks
- Management attributed growth to improved demand versus the COVID-affected prior year, digital wholesale and e-commerce growth, and U.S. new business. Favorable product and channel mix supported margins, but Q3 air freight costs reduced gross margin by 180 basis points.
- Global supply-chain disruption, port congestion and transportation delays caused product availability delays and higher air freight costs. Management expected elevated air freight costs to continue through the rest of fiscal 2021 and into fiscal 2022.
- The global ERP system had been implemented in all regions. EMEA customers shifted some shipments from Q3 to Q2 2021 because of implementation timing. The company also noted possible additional ERP-related expenses and operational difficulties.
- Management expected 2021 capital expenditures of $40–$50 million, primarily for the ERP system. The filing gives no earnings or revenue guidance.
- The board authorized a share repurchase program of up to $200 million; $10.0 million had been spent by quarter-end. A quarterly dividend of $0.46 per share was declared after quarter-end, payable December 20, 2021.
- COVID-19 remained an uncertainty, with potential effects from renewed restrictions, consumer demand, store traffic, suppliers and covenant compliance. Other disclosed risks include competition and margin pressure, customer concentration, foreign exchange, raw-material availability, cybersecurity, and legal and regulatory matters.
- The effective tax rate for the first nine months was 19.3%, versus negative 7.2% in 2020, when discrete tax benefits materially affected the comparison. Nine-month 2021 results included a $1.3 million net discrete tax benefit.
- No material adverse effect was expected from ordinary-course legal claims. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether supply-chain delays and elevated freight costs persist, and how they affect shipment fulfillment and margins.
- Whether revenue and margin trends continue after allowing for COVID-affected comparisons and EMEA shipment timing shifts.
- Inventory and receivables growth, working-capital needs, and the company’s use of its receivables-sale program.
- Debt repayment progress, covenant headroom, and the capacity to fund dividends, capital spending and repurchases.
- Actual 2021 capital expenditures versus the $40–$50 million estimate, and any subsequent ERP-related costs or disruption.