Kontoor Brands Inc. is taking a proactive approach with a new initiative aimed at setting up the company for growth.
Project Jeanius is the initiative expected to transform the global operating model of the Wrangler and Lee owner, as well as enhance and optimize its supply chain. Kontoor expects that Project Jeanius to drive investment in accretive growth opportunities, improve profitability and leverage advanced data analytics to enhance business insights and decision making.
“This is not a cost-cutting exercise,” Kontoor’s chairman, president and CEO Scott Baxter told investors during an earnings conference call on Wednesday. He explained that when the operations were first spun off from VF Corp., the company relied on a legacy structure to ensure continuity in the business. Over time, Kontoor has evolved operations to where it can now proceed to its next stage of growth.
Related Stories
“We are pursuing this proactively from a position of strength. The steps we’re taking will fundamentally improve our organization, and structurally raise our profitability ceiling, creating more investment capacity to pursue growth, enhanced capital allocation and improve our overall financial profile,” Baxter said. Part of the initiative includes simplifying the organization to provide greater visibility, improved decision making and allow for faster speed-to-market, he said, as well as establish a “true multibrand platform” from where Wrangler and Lee can grow due to investments that weren’t possible under the legacy structure.
The initiative is a three-year plan that is expected to result in between $50 million and $100 million of gross profit improvement and selling, general and administrative savings over the three years. The impact from Project Jeanius is expected to begin in the fourth quarter of 2024, with more significant benefits in 2025 and 2026.
Baxter also said the company is “in a great place from a debt-ratio standpoint,” adding that if the company wanted to make an acquisition, “we can.” But Baxter also said it would have to make sense “from a financial standpoint, from a brand standpoint, and from a culture standpoint. We kind of look at it from those three lenses. And we also are very keenly aware we want to pay the right price for the right type of acquisition. So if that happens to come along, we’ll make sure we go ahead and do that.”
The jeans firm posted mixed fourth-quarter results, due in part to U.S. retailers becoming more conservative in their wholesale orders that were partially offset by gains in digital wholesale, China and direct-to-consumer sales. For the three months ended Dec. 30, net income rose 33.3 percent to $68.8 million, or $1.21 a diluted share, on a revenue decline of 8.1 percent to $594.4 million. On an adjusted basis, diluted earnings per share (EPS) was $1.28. Analysts were expecting adjusted diluted EPS of $1.37 on revenue of $726.9 million.
Wrangler brand global revenue fell 9 percent to $461 million from year-ago results, with the decline driven mostly by reduced wholesale shipments to U.S. retailers as they tightly managed inventory levels. Lee brand global revenue fell 6 percent to $206 million, largely for the same reason. Gross margin for the quarter rose 90 basis points to 41.7 percent.
For the year, net income was down 5.9 percent to $231 million, or $4.06 a diluted share, on a 1 percent decrease in net revenues to $2.61 billion.
Kontoor’s outlook for 2024, which doesn’t include the expected fourth-quarter benefit from Project Jeanius, forecasts adjusted EPS in the range of $4.65 to $4.75, on a revenue range of $2.57 billion to $2.63 billion. Kontoor expects challenges to be “most pronounced in the first half of 2024,” including a 9 percent revenue decline in the first quarter, due to conservative inventory management by retailers and the continued backdrop of a challenging retail macroenvironment.
Tom Waldron, Kontoor’s executive president, co-chief operating officer and global brand president for Wrangler, said its partnership with brand ambassador Lainey Wilson, an American singer and songwriter, has exceeded expectations. “She’s expanding our reach with new audiences while being authentically Western,” Waldron said. Her collection of favorite styles introduced in 2023 resulted in “over 60 percent new-to-file consumers.” Her first Lainey Wilson collection featuring a full assortment “designed from the ground up” is slated for Fall 2024. In general, Wrangler’s women’s business grew 5 percent, while non-denim bottoms business was up 10 percent. Waldron also said the brand will be “relaunching denim at a major national retailer starting in the third quarter,” but declined to provide further details.
Chris Waldeck, executive vice president, co-chief operating officer and global brand president for Lee, spoke about the innovation in comfort and stretch, such as the launch of Lee X, which he said will be a “true global innovation platform with denim bottoms, nondenim bottoms and tops.” Lee X, which will be expanded across the brand’s global markets, targets the younger consumer, he said. Waldeck also spoke about innovation in its collaboration strategy, such as the one with Diesel in December. “Each jean is made with 50-50 combination of unsold Lee and Diesel jeans. Initially launched in limited collection in Europe and Japan, the first drop sold out in weeks and the second drop will be in March globally,” he said, adding that the new innovative strategies are “opening up elevated channels of distribution and attracting new consumers to the brand.”
