Kontoor Brands, Inc. — Q2 FY2021 Form 10-Q
Period clarification: Although the request metadata says 2020 Q2, this filing covers the quarter ended July 3, 2021, and the six months ended July 3, 2021. Comparisons are to the corresponding 2020 periods. Amounts below are in millions unless otherwise stated.
Business context and results
Kontoor designs, sources, markets and distributes apparel primarily under the Wrangler and Lee brands. Q2 FY2021 results rebounded from the prior-year period, which management said was significantly affected by COVID-19-related store closures and weaker demand. Year-over-year growth also reflected digital wholesale and e-commerce gains, new U.S. business, favorable foreign currency, and shipment timing shifts related to ERP implementations.
| Metric | Q2 2021 | Q2 2020 | First six months 2021 | First six months 2020 |
|---|---|---|---|---|
| Revenue | $490.8 | $349.3 | $1,142.5 | $853.8 |
| Gross margin | 46.1% | 38.5% | 46.1% | 38.1% |
| Operating income (loss) | $35.2 | $(21.8) | $128.4 | $(22.0) |
| Net income (loss) | $23.6 | $(33.3) | $88.1 | $(36.0) |
| Diluted EPS | $0.40 | $(0.58) | $1.49 | $(0.63) |
| Operating cash flow | Not separately stated for the quarter | $120.2 | $4.4 |
Performance and material changes
- Q2 revenue increased 41%; first-half revenue increased 34%. Q2 gross margin rose 760 basis points, and first-half gross margin rose 800 basis points.
- Management attributed margin improvement principally to higher production and fixed-cost leverage, favorable customer/product/channel mix, and product-cost benefits; lower inventory-loss provisions also supported the first-half comparison.
- Q2 SG&A was 38.9% of revenue versus 44.7% a year earlier; first-half SG&A was 34.9% versus 40.7%. Higher revenue, lower bad-debt expense, and lower outlet-store costs helped, partly offset by greater demand-creation and digital spending.
- Wrangler Q2 revenue was $311.3 and segment profit $52.8; Lee revenue was $176.0 and segment profit $18.5. Lee’s prior-year Q2 segment loss was $18.4. Both brands’ results benefited from the less severe pandemic impact compared with 2020.
- U.S. and non-U.S. wholesale and direct-to-consumer sales all grew in Q2. Reported non-U.S. wholesale and DTC growth included favorable foreign-currency effects. The prior-year comparison also included third-party VF Outlet merchandise sales that were subsequently discontinued.
- First-half operating cash flow rose to $120.2 from $4.4, primarily because of higher net income. Investing used $21.2, versus $39.2 in the prior year. Financing used $170.5, including $125.0 of term-loan repayments and $46.0 of dividends; prior-year financing included net revolving-facility borrowings.
Debt, liquidity and capital allocation
- At July 3, 2021, cash and equivalents were $175.6. Long-term debt carrying value was $791.0, including $8.8 current portion; the filing also reports $0.9 of other short-term debt.
- No revolving-credit borrowings were outstanding. The company reported $487.7 of available revolving capacity after $12.3 of standby letters of credit. It was in compliance with applicable debt covenants and expected to remain compliant for at least one year from issuance of the financial statements.
- Management said cash, operating cash flows, borrowing capacity and capital-market access together were expected to provide adequate liquidity for obligations, capital expenditures and planned dividends. The company expected 2021 capital expenditures of $40–$50, primarily for its global ERP system.
- The board declared a $0.40-per-share quarterly dividend payable September 20, 2021. On August 5, 2021, it approved a share-repurchase authorization of up to $200.0, with timing and amounts subject to management’s evaluation; the company expected to use operating cash flow.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management described COVID-19’s economic effects as fluid, citing renewed cases and restrictions, differing recovery rates by geography, store closures or reduced traffic, and product-availability delays from supply-chain disruption.
- ERP implementation caused customer shipment shifts between quarters and increased corporate expenses. The Americas ERP system went live during Q2; management identified implementation costs, operational difficulties and related systems risks.
- Management cautioned that prolonged deterioration could pressure results, cash flows and covenant compliance and might require additional financing or other liquidity measures. Other stated risks include consumer demand and competition, supplier and raw-material availability and costs, foreign exchange, cybersecurity, customer concentration, and debt-market access.
- First-half 2021 included $1.0 of restructuring charges and a $0.6 net discrete tax benefit. First-half 2020 included $11.6 of restructuring charges and a $7.7 discrete tax benefit, affecting comparisons.
- The company terminated a renewable-power purchase agreement in February 2021, eliminating $33.3 of commitments previously reported at year-end. Management said ordinary-course litigation was not expected to have a material adverse effect, and reported no material changes to the prior annual report’s risk factors.
Important facts for investors to verify
- How much of reported revenue and margin growth reflects recovery from the unusually weak COVID-affected 2020 comparison versus underlying demand, foreign exchange, and shipment timing?
- Whether inventory growth to $403.2 at July 3, 2021, and supply delays are affecting product availability, working capital, or future margins.
- Progress, costs and control impacts of the global ERP rollout, including the Americas implementation and planned capital spending.
- Debt repayment pace, covenant headroom, and the balance between dividends, the new repurchase authorization, and liquidity needs.
- Whether renewed COVID-19 restrictions, supplier disruption, or slower international recovery materially change operating performance or management’s liquidity expectations.