Kontoor Brands, Inc. — Q1 FY2024 Form 10-Q
Reporting period: Three months ended March 30, 2024; comparable period ended April 1, 2023. The filing is for Q1 FY2024, notwithstanding the request metadata’s “2023 Q1” label. Kontoor designs, sells and licenses apparel, footwear and accessories, primarily under Wrangler and Lee.
Financial performance
| Metric | Q1 FY2024 | Prior year | Change |
|---|---|---|---|
| Net revenue | $631.2 million | $667.1 million | Down 5% |
| Gross margin | 45.2% | 43.0% | Up 220 basis points |
| Operating income | $84.4 million | $94.9 million | Down 11% |
| Operating margin | 13.4% | 14.2% | Down 80 basis points |
| Net income | $59.5 million | $66.3 million | Down 10% |
| Diluted EPS | $1.05 | $1.16 | Down 9% |
| Operating cash flow | $56.5 million | $(12.6) million | Improved |
Revenue weakness was concentrated in wholesale: U.S. Wholesale declined 6% and Non-U.S. Wholesale declined 8%; Direct-to-Consumer revenue was flat. Wrangler revenue fell 3%, while segment profit rose 5% and operating margin improved to 18.2%. Lee revenue fell 9%, segment profit fell 11%, and operating margin declined to 16.0%.
Gross margin benefited mainly from lower product costs and favorable channel mix, partly offset by pricing and product mix and restructuring/transformation charges. SG&A rose to $200.7 million from $191.8 million and increased to 31.8% of revenue from 28.7%, reflecting transformation charges and higher DTC, IT and demand-creation investment, partly offset by lower distribution and freight costs.
Cash, debt and liquidity
- Cash and cash equivalents were $215.1 million at March 30, 2024, essentially unchanged from year-end 2023.
- Long-term debt carrying value was $779.2 million, including $383.6 million of Term Loan A and $395.6 million of 4.125% senior notes due 2029; $20.0 million was current. No revolving-credit borrowings were outstanding. The company reported $493.3 million of revolver availability, net of letters of credit.
- Operating cash flow was $56.5 million; investing cash use was $6.4 million and financing cash use was $54.6 million. Financing included $20.0 million of share repurchases and $27.8 million of dividends.
- Inventories were $501.3 million, versus $500.4 million at December 2023 and $660.1 million a year earlier.
- The company reported compliance with debt covenants and expected to remain compliant for at least one year from issuance of the financial statements.
Management outlook, risks and unusual items
Management cited retailer inventory management and lower seasonal-product revenue as pressures on wholesale sales. It noted continuing uncertainty from inflation, elevated interest rates, recession concerns, currency movements, supply-chain issues, geopolitical conflict and uneven economic results in China. Red Sea and Panama Canal disruptions affected logistics but did not materially affect Q1 results; management expects higher freight costs during 2024.
Management said it expects operating cash flows and available borrowing capacity to support operations, investment, debt repayment, dividends and repurchases. It expects approximately $40 million of capital expenditures in 2024. The filing does not provide a full-year revenue, earnings or EPS forecast.
Q1 included $8.4 million of restructuring and other transformation charges, including $4.6 million of restructuring charges, related to optimization and production-network actions. Project Jeanius, a multi-year business-model transformation launched in late 2023, is expected to generate additional costs in future periods. The company also repurchased 0.3 million shares for $20.0 million; $280.0 million remained under its authorization. A quarterly dividend of $0.50 per share was declared after quarter-end.
Other risks include consumer-demand and customer concentration exposure, competition and margin pressure, supply and shipping disruption, foreign-exchange movements, cyber and data-security risks, and potential covenant or financing pressure if economic conditions deteriorate. Management said there were no material changes to the risk factors in its 2023 Form 10-K; ordinary-course legal claims were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether wholesale demand and retailer inventory reductions stabilize, particularly in the U.S. and EMEA, and whether Lee’s revenue and margin performance improves.
- Whether lower product costs continue to support gross margin as higher freight costs and pricing or product-mix pressures emerge.
- The expected timing, total cost and benefits of Project Jeanius and other restructuring actions.
- Whether operating cash generation, cash balances and revolver availability remain sufficient to fund investment, debt service, dividends and buybacks.
- The scale and cash-flow implications of receivables sales: $223.9 million of sold receivables remained outstanding off balance sheet at quarter-end.
- Whether the company maintains debt-covenant compliance amid macroeconomic uncertainty; the filing reports compliance at quarter-end.