Greetings and welcome to Kontoor Brands' Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn this conference over to your host Eric Tracy, Vice President, Corporate Finance and Investor Relations. Thank you. And over to you sir.

Thank you, operator. And welcome to Kontoor Brands' fourth quarter and fiscal 2021 earnings conference call. Participants on today's call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to materially differ. These uncertainties are detailed in documents filed with the SEC. We urge you to read our risk factors, cautionary language, and other disclosures contained in those reports. Amounts referred to on today's call will often be on an adjusted dollar basis, which we clearly defined in the news release that was issued earlier this morning. Adjustments during the fourth quarter and fiscal years 2021 and 2020 primarily represent cost associated with the Company’s global ERP implementation and information technology infrastructure build-out. Adjustments during the fourth quarter and fiscal 2019 primarily represent restricting and separation costs, a non-cash impairment charge related to our Rock & Republic® trademark and other adjustments. Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in today’s news release, which is available on our website at kontoorbrands.com. These tables identify and quantify excluded items and provide management's view of why this information is useful to investors. Unless otherwise noted, growth rates are in constant currency compared to the fourth quarter of 2020. Also, given the impacts of COVID-19 had on our prior year results, we will provide select references to the same period in 2019 for additional context where appropriate. Joining me on today's call are Kontoor Brands' President, Chief Executive Officer and Chair of the Board, Scott Baxter; and Chief Financial Officer, Rustin Welton. In addition, we will also be joined by Tom Waldron, Global Brand President of Wrangler; and Chris Waldeck, Global Brand President of Lee. Following our prepared remarks, we will open the call for your questions. We anticipate the call will last about an hour. Scott?

Thanks, Eric. And thank you all for joining us today. As Eric mentioned, our global brand presidents, Tom Walden, and Chris Waldeck will be joining us for this year-end review. We believe these yearend calls provide a great opportunity to have them share insights from the past year, as well as go-forward strategies for each of their respective brands. You'll hear more from them in a bit. Let me first provide some thoughts at a Kontoor level, as I'm pleased to share our strong results for the fourth quarter and full year. And I'm even more excited to discuss the building momentum of our brands and how our Horizon 2 strategy begins to take hold, which gives me great confidence in what lies ahead. Our solid fundamental performance during 2021 was driven by the incredible spirit, perseverance and effort of our teams around the world. I want to thank each and every one of our Kontoor colleagues whose resilience and dedication to excellence allowed us to not only deliver near term results despite the ongoing macroeconomic challenges, but also set the foundation for a brighter future ahead. Kontoor is not immune to the obstacles facing companies and individuals around the world, but I wouldn't want to face these tests with any other team. At Kontoor we truly do win together. I said this on our last call, and I have even greater confidence today, Kontoor, and our Wrangler and Lee brands are now uniquely positioned to win in the marketplace to drive more sustainable and profitable long-term growth and to create value for all of our stakeholders. What gives me this confidence? First, the proof points from our fourth quarter in full year 2021 performance. If you look at our results relative to our initial 2021 guidance, we delivered significant…

Thanks, Scott. It's great to have the opportunity to speak with you all today. I've got a lot to cover, so let's get to it. This time last year, I stated, the Wrangler brand was positioned better than it ever had been and that was true, but it's even more accurate today. As we begin our 75th Anniversary year, demand for the brand has never been stronger. It would be easy to assume that recent strength has been driven by fiscal stimulus supporting consumer spending, and no doubt the health of the U.S. consumer has contributed, but that would significantly underestimate what is new and incremental to our business. And it would certainly underestimate the breadth of our product portfolio, whether compared to five years ago or one year ago, the evolution of our brand has been tremendous, and we are just beginning stages of harnessing strategic investment to catalyze future growth. As evidence that our investments are yielding superior returns, let me take you through some highlights of our fourth quarter and full year. For fiscal 2021, Wrangler Global revenue increased 4% versus 2019, but excluding our strategic actions, we even saw stronger, up 8%, and our business only accelerated in the fourth quarter versus the year-to-date trend with global revenues up 10% versus 2019, excluding our strategic actions. In Q4, POS outpaced shipments as well. In North America, across planned accounts worth approximately 60% of our shipments, POS increased 11% versus 2019. Further demonstrating strength in our core U.S. wholesale business during 2021, the Wrangler brand in men's bottoms drove over 100 points of share gains compared to 2019. Augmenting our core denim bottoms business, we are seeing broad strength with category, channel and geographic growth. First, within category expansion, Wrangler is rapidly evolving the product assortment, becoming…

Thanks, Tom. And it's great to speak with you all today. Let me start with stating how incredibly proud I am of our team and what they've accomplished this past year. We've embarked on a significant repositioning of the Lee brand and have now successfully established a healthy foundation for more sustained profitable growth. Globally, demand for the Lee brand has never been stronger, and I am confident we are well positioned to meet or exceed the targets we set during Investor Day. Through investments in quality of sales, enhanced design and elevated demand creation, all in support of better mix and higher AURs, we have significantly improved the Lee operating model. Globally, over the last two years, we've exited a significant portion of margin-dilutive wholesale business and have more than offset this with growth-oriented margin-accretive volume. As evidence of this, our core U.S. bottoms business has grown share since 2018, even while exiting underperforming points of distribution. With AURs in the category expanding over 10% during this time, this is a testament to our laser focus on TSR and the impact on our global profitability has been meaningful. From 2019 to 2021, we grew gross margin by 500 basis points. Now with the foundation in place and the momentum we have created for the brand, I am confident that we will continue to drive more profitable topline growth. So let me provide some insights into how this growth has come together over the last year and how we see it evolving in 2022 and beyond. For fiscal 2021, Lee Global revenue grew 26% over last year. And we love that we ended the year strong with Q4 revenues up 14% compared to 2020 and up 19% versus Q4 of 2019, excluding the strategic actions. Within our core U.S. business,…

Thank you, Chris, and thank you all for joining us on today's call. As you have heard from the rest of the team, we are extremely proud of the results we delivered in 2021 and are entering the New Year with incredible momentum. Our global strategies are working and not just against a challenging macro backdrop, but in transforming the fundamentals of the business. I will touch on the progress we are making against our long-term catalyzing growth strategy towards the end. But as Scott mentioned, we are well ahead of where we expect it to be just 10 months ago. I will start with the review of the quarter. As a reminder, comparisons will be in constant currency unless otherwise stated. My comments will focus on key highlights, and I will refer you – refer you to this morning's release for additional detail on the quarter and full year results. Beginning with revenue. Global revenue increased 3% or 8% excluding impact of the 53rd week. Compared to revenue in the fourth quarter of 2019, global revenue increased 4%. Excluding the combined impacts of the previously announced strategic actions related to VFO store closures, discontinuation of the sale of third-party branded merchandise in all domestic stores and the India business model changes. Global revenue increased 7% compared to 2020 and 12% compared to 2019. On a regional basis for the quarter, U.S. revenues increased 1% or up 6% excluding the 53rd week from last year reflecting strong demand that exceeded supply as we navigate through global supply chain disruptions. The demand we are seeing is broad based with strength in key categories and channels such as outdoor, western and workwear. In our digital business, U.S. own.com delivered its highest ever quarterly orderly revenue, increasing 39% compared to 2020 and 108%…

Thank you. [Operator Instructions] Thank you. The first question comes from the line of Jay Sole with UBS. Please go ahead.

Great. Thank you so much. My question is, is it possible to elaborate a little bit on what gives you confidence in your raise 2022 top line guidance, especially in light of some of the concerns that sort of priced into stocks right now around inflation and lapping stimulus and just some of the other macro headwinds that are out there? Thank you.

Jay, how are you? Good morning. Thanks for joining us today, and I'm happy to do that. For us, Jay, when you think about 2021 and then our Q4 results and just the solid proof points that we have made in our business relative to the investments that we're making in our brands and how they're working and how our people are thinking about brands going forward. I think for me though, if you step back and look at it in a holistic view, the broad-based top line growth. So, it's not just happening in a specific category or a channel or what have you, it's happening in the U.S. wholesale business. It's happening in China. It's happening in Europe. It's happening in our category extension, right? It's happening in ATG. It's happening in work, teams. The things that we have taken a standard and decided to invest behind is really working. And then what makes me feel really good going into the coming years, we have strong visibility for the first half, obviously, and taking our guidance up from mid-single digit to low teens relative to what we see in our business is just a real catalyst relative to all the great things that our people are doing. So, I think as we think about our incremental investments and how we're making those power and how will they be those work for our business, that's what gives me great confidence. And I'll leave you with this. If it weren't for 2022 maybe stronger if they work for some of these transitory things that we're going through right now. So that's what gives me confidence in 2022, the escalation. And just one last comment and how we guided ourselves into our [indiscernible]. Thanks Jay.

Got it. Thank you so much.

Thank you. The next question comes from the line of Brooke Roach with Goldman Sachs. Please go ahead.

Good morning and thank you so much for taking our question. I'd love to follow up a little bit on Jay's question and ask a little bit about how you're thinking about the revenue strength that you anticipate in the first half, in particular, between brands and channels? Any sense of what proportion of this momentum is driven by new program wins across the portfolio relative to comp growth in existing distribution?

Yes. Good morning, Brooke, it's Rustin. Thanks for the question. Thanks for joining. So, I think if you step back and you look at the back half of 2021, both brands were up double-digits in the second half of 2021. So, approaching 2022 with significant momentum as we talked about in our prepared remarks, we do see low teen growth in the first half of 2022, and it's really broad-based across our growth catalysts in both brands. As Scott talked about, we're seeing that momentum really across the entire business. As you step back and you think about new distribution and comp growth, it's predominantly driven by growth within the existing accounts, including category extensions. So, one of the drivers for us in the back half of 2021, and you heard in our prepared remarks, just really broad strength across outdoor, ATG, workwear, female and just really proud of those accomplishments, and that momentum will continue and carry forward in the first half.

Thank you. And then Rustin, just a quick follow-up on the gross margin expectations for the year. Thanks for all of the color that you provided so far, but I would love to hear about how you're thinking about the benefit of higher pricing across the portfolio relative to the higher cotton raw material input costs that the industry is seeing? How do those factors into the 100 bps of structural margin gains relative to the 100 bps of transitory costs that you're expecting for the year?

Yes. Great, Brooke. So let me step back again. You hit it exactly right. We expect 100 basis points of structural margin gains, being offset by 100 basis points of transitory headwinds again on a full year basis. So, for competitive reasons, I won't itemize the individual elements, but let's talk about kind of how we are assuming inflation transitory expenses and then those offsets, if you will, pricing mix, cost savings and how we expect those to evolve through 2022. So, as we look at inflationary pressures with product costs obviously being the biggest driver that really began to emerge in the second half of 2021 for us. We expect that to accelerate in the first half of 2022 and then really peak in the second half of 2022. As we talked about on last quarter's call, as cotton moves and input costs move, it takes a few quarters for it to come through the P&L, and we see the inflationary impact stronger in the second half. Transitory expenses, as we said in our prepared remarks, they really kind of accelerated in the second half of 2021. We expect those to peak in the first half of 2022 as we chase demand, as we said. And then we anticipate those to moderate deeper modestly in the second half of 2022. And then as you think about pricing mix and cost savings, and we think about those in one broad bucket, those will offset inflation in the incremental transitory expenses. Those benefits are expected to really begin accelerating in the first half of 2022 with significant acceleration in the back half of 2022. So hopefully, that lays out a little bit more about the gross margin cadence that we've seen, or we project. And again, I just want to highlight that relative to our Investor Day algorithm, those structural gross margins are on track with up to 100 basis points of improvement in 2022.

Thanks so much Rustin. And then just as a final follow-up, with the global ERP initiative in the rearview mirror and significant debt paydown completed in 2021, can you provide an update on your capital allocation strategy from here? Thank you.

Yes. Rustin and I can take that. How are you doing Adrienne? Oh, I am sorry. So, Brooke I apologies. So, for us, it's the capital efficient nature of our model, right? We've talked a lot about how we're thinking about that. We created – creating $1 billion from 2021 to 2023. We paid down debt. We feel really good about where we are. We've increased our dividend, as you know, last quarter, which was significant for us. Rustin talked about our share repurchase. And we'll think about M&A, but it's got to be a good fit. It's got to be complementary. You don't have to be consumer focused. We want to leverage our model. So, all of those things, but right now, we feel really good about the optionality that we have and how quickly we got there as a company and the cash that we're generating as a company. Rustin?

Yes. I think Scott hit the high points, Brooke. Just again draw you back to the prepared remarks of the cash we've generated and how we've deployed that to date. Again, net income has increased 15% since 2019, and we generated over $525 million in operating cash flow. Returning a large portion of that 225 million to shareholders, decreased the debt and completed the ARP investment. So that optionality only increases as we continue to move forward here at Horizon 2 with some of the debt reduction we've done and the completion of the ERP.

Thanks so much. I will pass it on.

Thanks Brooke.

Thanks Brooke.

Thank you. The next question comes from the line of Adrienne Yih with Barclays. Please go ahead.

Thank you very much. Good morning to the team and well done. I mean this is – it's very rare we're seeing people have an optimistic outlook. So, it's really structural here. Scott, I'll start with you. Your digital penetration doubled from a few years ago. It's now sitting at 6%. The Investor Day targets 10%. That seems like it's going much faster. How should we think about sort of a new target and how that flows into kind of the P&L? If you could have any color on the amount of accretion that we have from that channel? Thank you so much.

So yes, I'll start, Adrienne, and good morning and thanks for joining us today. We're really, really pleased, but certainly not happy with where we are. We are still working very hard at this, and it's at the forefront of everything we're doing. I guess to think that as we sit back and think about it most is that we made a decision to focus on. We hire great world-class talent, continue to augment that and then we back it up with investment, right? And now we're seeing that investment really work or touching the consumer in a really good way. And then the net creation piece that we're putting into the models have shown real significant gains because of that. So, we are ahead of our Investor Day targets like we talked a lot about, and we'll continue to go ahead in purely hard to invest in this area significantly. And we haven't come out with any new targets yet that we've shared with anyone, but at some point, in time in the future, we certainly will do that update. Rustin, anything to add?

Yes. I would just say the proof points we talked about, Adrienne, in the prepared remarks. I mean we have to increase the investment in digital [indiscernible] basis points since 2019. And again, our own.com was up 74% since 2019. So obviously an accretive channel for us. We're generating returns, and we're certainly under-indexed even at that 10% target out in 2023 relative to a lot of the peers.

Okay. Great. I'm also going to switch to Tom and Chris about demand creation. I was wondering how you take the global – the corporate demand creation budget. How you're splitting it between the two? And what exactly are the strategies that you're each using to drive that brand momentum?

Yes, Adrienne, this is Tom. I'll go first on that. From a strategy standpoint, we're really excited to be in our 75th anniversary year, and we're excited to be investing behind a multifaceted demand creation approach, kind of broken it into three areas. One is our equity campaign for the ride of life is certainly contributing to the broad base growth that we're seeing. Secondly, the partnerships we're doing like the Georgia May Jagger, Leon Bridges, just if you saw the female growth up 84%. We know that is driving significant growth for us in bringing in new consumers. Then there are the collabs that we're doing, which is bringing new consumers, whether it's Billabong, Yellowstone or [indiscernible], we just couldn't be more excited about the 75th anniversary year. Chris?

Yes. Hi, Adrienne, it's Chris Waldeck. Just a little bit on the Lee side. We really had a repositioning of the Lee brand that we had to go and really drive through with the objective. Bringing that new younger consumer into our Lee franchise, and I'm really excited about the progress we've made. We kicked off in Q4 our equity campaign Lee Originals, and it's really resonating both with our existing consumers, but also with that new younger consumer that we're at. And when we think about that into the first part of it, we're really focused on driving our core U.S. wholesale business than regions. And when we think about that, especially for Lee brand, it's China that we're after. So that's how we think about allocating our marketing and where we are, and it's, again, really the premiumization of these brands and what we're trying to drive.

Fantastic. Rustin, I have just three quick ones for you. So, your gross margin is well ahead of plan. I was wondering where you are in kind of the spectrum of reaching those new highs in the gross margin? How much more opportunity is there? So that's number one. Number two, on inventory, it sounds like you have a really good handle on kind of the inventory. What have you done? How many more weeks of supply have you embedded into the organization to avoid some of the supply chain kind of shortages, I'll say, for us for a better term. And then my last one is, $100 oil, we hit that today. And so, remind us what happened in 2010 to 2014, the business was part of VFC at the time with your essential retailers and did it pick up? And how much of the inflationary side of it and how much of the potential demand side do you have, if any, baked into the guidance? I'm not sure if those are quick. Sorry.

Well, thanks, Adrienne. Let me start and make sure I captured them here. So, the gross margin – yes, we talked a little bit about it at Investor Day. The 2023 target was 46%, and we really talked about mixing into those more accretive channels as we distorted growth. And you've seen us distort investment there, and you're certainly seeing distorted growth in those channels like digital and geographies like the international side of the business. So even with those targets, as I just mentioned on the digital side with the 10% penetration target out in 2023, we're still significantly under index. So, we're in the early stages of this. We think there's opportunity beyond that. We have not seen in any way and see that continuing to grow, and that's why we're making those strategic investments in those areas because, as you know, everything we do is on a TSR basis. From an inventory perspective, if I can shift there, we finished the year up about 7% in inventory. Excluding VFO in India, our inventory was up about 9% from the prior year. Quality is good. And as we said in our prepared remarks, we're chasing demand, which implies our results would have been even stronger. As we think about our 2022 revenue outlook, we considered a demand and supply balance. As we've said many times, we're not immune to the macroeconomic challenges that are out there, but certainly, having a third of our global production in this hemisphere [ph] is an asset as we kind of chase demand. We do expect inventory to grow during 2022 as we meet that projected demand and going forward, and that inventory gain or investment, if you will, be tempered in part by some of the ongoing SKU rationalization initiatives that we talked a little bit about at Investor Day. So again, we'll continue to chase and move through the inventory piece but pleased with how we've managed it so far. And then your last question around elasticity and kind of going back to 2010, 2011 time period, I'll just remind you that we are in a materially different place today than when we were back then. And we talked quite a bit about that on the last call with some of the investments we've made, growth into some of these new categories, growth into premium channels, et cetera. So certainly, we are watching the elasticity, but again, I think, during periods of uncertainty, consumers historically just gravitate to brands they trust. And in this exacerbated period of rising prices [indiscernible] look for those brands that deliver good deal performance and of course, value. And that is absolutely where both Wrangler brand [indiscernible] brand play, and we're really focused on delivering that compelling value, which is benefits received for price charge to that consumer when they walk out of the floor.

Thank you very much. Great outlook.

Yes, thanks Adrienne.

Thank you. The next question comes from the line of Sam Poser with Williams Trading. Please go ahead.

Good morning, everybody. Thanks for taking my questions. I've got a few. Many questions have been answered. So, you want them in order? Or should I go one at a time? Do you want to back you up or – it's up to you?

Sam, we'll take them as you give it.

Okay. The Lee and Wrangler business when you think about it for the full year, is – which one do you think will increase more within your guidance? Number two, and part of that, is there any sales shift because of the 53rd week changes, were there any shift in sales, or are we past that? And then with the restructuring charges that happened in the fourth quarter, can you give us some details there? Because I thought that a lot of those restructuring was pretty much going to be gone once you were done with the ERP. So one, little more details there as well as an outlook into 2022, if there's any nonrecurring charges on the Horizon because I understand that your guidance is the GAAP guidance. And then lastly, within the inventory levels, can you give us some idea of your in transit this year versus both last year and the prior? Thanks.

Yes. Thanks, Sam. I'll take those. So, when we think about Lee and Wrangler for full year 2022, as you know, we won't guide by brand, but again, I'll draw you back to the comments I made here. The second half, both brands were up double digits. We've been investing, as Chris and Tom talked about in their remarks and in the Q&A here, behind both of the brands as you know, everything we do is on a TSR basis. So, we're continually looking at that, and we see great growth in both of the brands moving forward, being at or above those Investor Day targets. In terms of the sales shift for the 53rd week, that is behind us. We do not see that carrying forward or having an impact, Sam. Restructuring charges, I believe you had a question there, and I think that really relates to how it's classified probably in the appendix. The restructuring charge, if you will, that was under the restructuring and other costs was around $5 million, I believe, in SG&A. And that was the conclusion of the ERP. It was the main driver of that, Sam. Again, that wrapped up with the implementation in the third quarter. We don't expect that moving forward. Right now, there's no nonrecurring charges for 2022 that we've talked about, which is why the SG&A has been guided on an SG&A basis. And then as you relate to inventory, I don't know if I got your last question, certainly, we're in chase mode as we've talked about here quite a bit. So, inventory in transit finished the year a little bit higher in 2021 than it did in 2020, certainly, to meet the strong demand that we see in the first half with low teen growth. So, I believe I hit all those, Sam. Thanks for the questions.

All right. Let me just do two follow-ups real fast, okay? On the in-transit, can you tell us what the percent was this year, last year and the prior year so we can have some idea. And number two, with Lee and Wrangler, I understand you do on a TSR basis. I'm not asking for guidance, I'm asking for, do you expect the Wrangler business today to grow more than Lee or vice versa for the full year? That's it. I'm just trying to get a large picture on which one are anticipating higher growth from.

Yes. On the inventory, Sam, on the in-transit, I don't have the percentages of my hands. We'll get back to you on that. As you think about the growth rates, again, 2022, we haven't broken out. But if we go back to the Investor Day targets, we had Lee growing modestly faster than Wrangler, and again, that's over the 2022, 2023 time period. So, hope that helps. Thanks, Sam.

All right, thanks very much. Continue with success.

Thank you. The next question comes from Robert Drbul with Guggenheim.

Hi, good morning. This is Arian [ph] substituting for Bob. I guess can you give us more color into the trends at higher-end distribution partners? And I guess, any color on China business? Thank you.

Yes, this is Chris. And just to give you a little background on our China business, we've made some significant investments behind it, both on the Lee side of it with our new pioneer store, and that format is really resonating well with consumers. Also on the Wrangler side, just with our new store format we have there, and I think we're really encouraged by with Wrangler in China is just how the brand positioning is resonating with consumers. So, we're encouraged there. Obviously, there's macro issues that we're all dealing with out there. And I think for us, we were looking at optimizing the business near term, and we continue to position ourselves for the long-term success in China.

And then I believe your second question was about the premium channels for the brand [indiscernible].

Yes.

I think Chris and Tom are best to answer that.

Yes. No, absolutely. We've been working very hard on the premiumization of the Wrangler brand as evidenced with some of our partnerships with Georgia May Jagger. And as we've moved up channel, certainly partnering with specialty with our female line and really just better retail partners from a premiumization standpoint, creating this halo for the brand. We're really proud of the progress there.

Got it. Thank you so much.

Thank you for the questions.

Thank you. Ladies and gentlemen, we have reached the end of question-and-answer session. And I would like to turn the call back to Scott Baxter for closing remarks. Thank you.

Well, thank you, everyone for joining us today. I apologize if we didn't get to all the questions today, but certainly, appreciate your participation. Thanks for the support and look forward to talking to everybody again next quarter. Have a great day and week, everyone. Thank you again.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.