Good day, ladies and gentlemen and welcome to the Kontoor Brands’ Q2 2022 Earnings Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Eric Tracy, Vice President of Corporate Finance and Investor Relations. Sir, the floor is yours.

Thank you, operator and welcome to Kontoor Brands’ Second Quarter 2022 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. Second quarter 2022 results are on a GAAP basis. Select comparisons to first quarter 2021 results will be on an adjusted dollar basis and in certain cases, we will make comparisons to 2019 results, which we clearly defined in the news release that was issued earlier this morning and is available on our website at kontoorbrands.com. Reconciliations of GAAP measures to adjusted amounts can be found on the supplemental financial tables included in today’s news release. These tables identify and quantify excluded items and provide management’s view of why this information is useful to investors. Comparisons will be in constant currency, unless otherwise stated. Joining me on today’s call are Kontoor Brands’ Chief Executive Officer and Chair, Scott Baxter and Chief Financial Officer, Rustin Welton. We anticipate this call will last about an hour. Scott?

Thanks, Eric and thanks everyone for joining us today. I want to start today’s call by sincerely thanking our colleagues around the world. I have been greatly humbled by our team’s agility, collaboration in resolve to not only persevere through these dynamic times, but deliver on our near-term operational results and drive industry leading TSR since our spin, all while continuing to position Kontoor for greater long-term success. And let’s be clear, to say the macro economic environment has been dynamic simply isn’t enough. Let’s call it like it is, it’s been downright difficult from the COVID pandemic and lockdowns to the war to supply chain disruptions to inflation, the pressures that companies, consumers and people around the world have and continue to face are unprecedented. And as we have discussed on many of our recent quarterly calls, Kontoor has not been immune to these obstacles. In addition to and in the face of these challenging times, we at Kontoor have executed a spin-off, stood up an independent company, implemented a new global ERP system and set the foundation for our catalyzing growth strategy. And as you will hear more about today we are further globalizing our operating model, including relocating our European headquarters. We are really excited about these initiatives as they better position us to attract world class talent in the region, unlock significant benefits for our organization, and further support the transition to a growth oriented model. We knew our journey would not be easy. We knew it wouldn’t be linear. But as we sit here today and even with near-term macro challenges, our strategies to further strengthen our brands, operating model and organization over the last 3 years have been tremendous. But they can’t and don’t transform our business and some of the legacy challenges overnight.…

Thank you, Scott and thank you all for joining us today. I know you all have questions on a number of macro topics, including consumer demand, inflationary pressures and retailer inventory rebalancing. So I will begin by discussing some of these key external factors before reviewing our second quarter performance and closing with how both are incorporated in our updated 2022 outlook. Let’s begin in the U.S. As Scott mentioned, many retailers began to rebalance inventory levels during the quarter to better reflect supply and demand signals in the marketplace. While retail apparel inventory levels have been well chronicled at a macro level, I want to dig a little more into specifically our core categories and how our brands performed at point-of-sale. Over the past 3 months, the U.S. total measured market for denim bottoms, casual pants and seasonals grew in the low to mid single-digits across both men’s and women’s segments. With men’s categories performing a bit better than women’s. In men’s bottoms, our largest core segment, Wrangler and Lee significantly outperformed the market in our key categories of denim and casual pants. As we have stated previously, we believe consumers migrate to trusted brands in times of uncertainty. With the investments made in product, innovation and demand creation that Scott outlined, the value proposition of Wrangler and Lee is as high as ever and we saw this resonate with consumers during the quarter at point-of-sale. In women’s, there was disparity across the portfolio with strength in casual pants and softness in seasonals, but Wrangler and Lee outperformed the market in the majority of categories. And while market softness in the seasonal category is noteworthy, as it is a key rebalancing focus for retailers with discounting taking place prior to end of season, our seasonal business has outperformed the…

Thank you. [Operator Instructions] Our first question comes from Jay Sole with UBS. Please state your question.

Hi, good morning. This is Mauricio Serna on behalf of Jay Sole and thanks for taking our questions. Just a couple of questions from our side, maybe if you could speak a little bit about the confidence that you have on this updated fiscal year ‘22 outflows, how do you feel like this numbers are compared like the level of risk that you perceive in these numbers prior to – compared to the previous outlook? And maybe if you could speak a little bit more about how are you seeing broad consumer demand, especially in your core U.S. business, how that evolved during the quarter and what you’ve seen so far into Q3? Thank you.

You bet. Hey, Mauricio. This is Scott. I will start and then I will just hand it over to Rustin. And I will speak a little bit about the consumer in our outlook and then Rustin will follow up. But in our prepared remarks, we really, really understood the challenges that we all face and we did a very thoughtful review of our business. So, that’s why we came today with our updated outlook. Hopefully, everybody understands the analysis than the thought that went into that. And we are right now really working on controlling what we can from a business standpoint. So, as we think about the consumer and think about what’s happening out in the marketplace right now, all the investments that we have made in our business through the last 4 years, the investments in the product, the investments in the design, specifically, the investments in the brands themselves that hadn’t been made before are really starting to payoff in the marketplace. And I feel and the team feels really strongly about our fundamentals and our strategy right now. And I think the thing that when you couple that with our really strong cash flow and the investments that we can continue to make in the business, I think that puts us in a really good position going forward. And you saw that in the results today, right, you saw that in the first half, you saw that in the first quarter and even in our updated outlook, as we’ve looked at it. And we understand, the dynamics of the current marketplace that we are working in, but we are going to continue to invest in the core. We are checking really well in the core, which gives us great confidence. We are going to continue to invest in our channels, our geographies and our categories in tees and work in the outdoor space, which really advantage us going forward. And I think the thing that I want to leave you with, which is really important to us is the big advancements we have made in our brands. And that’s giving us real pricing power that we have never had before in these brands and it’s given us a real conversation to weigh with the end consumer. But you think about some of the comments that I made in my prepared remarks, we have invested in the Bonnaroo festival. Something like that would have never happened before with Lee, the investment that we have made in Lollapalooza with Wrangler and Wrangler’s 75th anniversary and in some of our different collabs that we’ve had with like The Hundreds. So pleased, I am not happy, we will continue to work real hard, and then I’ll flip it over to Rustin to go ahead and talk a little bit about the outlook. Thanks for the questions.

Thanks, Scott. Good morning, Mauricio. Thanks for the question. First I will start with a comment. As Scott mentioned, I think the investments that he talked about that we are making in the brands, particularly in product and demand creation are really important. It’s really driving that value proposition we offer consumers and that is as high as it has ever been. You are seeing that in the strong sell-throughs that we talked about in the prepared remarks in the second quarter and the double-digit increases on our own us.com. So additionally, maybe a little bit more context, many of the price increases have already been put in place at retail. And I remind everyone we were strategic with our price increases. While it’s still early, we are seeing a favorable response as seen in the strong POS. That said, as we talked about, we do expect open-to-buy dollars to be more restricted until the broader inventory levels are rebalanced and we are certainly taking a more conservative view on China in this updated outlook. We have incorporated this into our updated guide. And just maybe closing Mauricio with one point, we expect the second half revenues to be relatively flat compared to 2021 as we said versus the first half, where we were up 14% globally in constant currency. So, hopefully that gives you a little perspective between Scott’s comments and mine on how we are thinking about revenue. Thank you.

Thank you very much.

Thanks, Mauricio.

Okay. Our next question comes from Bob Drbul with Guggenheim Securities. Please state your question.

Hi. Good morning. Just a couple questions from me. Just further on the gross margin, the expectations of Q3 into Q4, how much visibility do you have on little bit on support of the retailers as they continue to work down the inventory levels and what your commitments are around the brands? And then the second question I have is just on the inventory levels at retail, where do you think we are in terms of the readjustments? Do you think it’s a 3-month readjustment and how are you really adjusting your own manufacturing plans over the next few quarters? Thanks.

Hey, Bob. How are you? Thanks for the questions. Hope you are doing well. I will go ahead and start a little bit on the support. We talked a lot about and put a lot of emphasis on making sure that we understand the business going forward and feel really confident where we are from an outlook standpoint. Our product at retail has checked really well, which is the thing that we are really happy about. But I think the key here is and I will just kind of touch on it before I hand it over to Rustin for the other two is that, we have been real thoughtful about the investments that we have made behind the brands. We have been real thoughtful about the design in the direction of the brands and winning with winners. So, for us from the standpoint of the rebalancing that’s been going on, our position is strong and continues to be very strong going forward. So pleased with the work that our teams have done globally in that respect. Rustin, you want to go ahead and take the rest?

Yes. Thanks, Scott. Good morning, Bob. I will go ahead and start with the gross margin question you had. Again, we updated the outlook this morning, Bob, as you are well aware. We now expect gross margins to be approximately 43.5% for full year ‘22. That does compare to about 44.6% in ‘21. And obviously, our prior guide was consistent with ‘21. As you indicated in your question, we do expect Q3 to be more pressure than Q4 and that really is taking into consideration the two factors we talked about on the revenue side that are impacting the back half outlook, specifically the more conservative view in China and then the retailer – rebalancing efforts. The guide for the second half, Bob, does imply about a 42.8% gross margin that is down about 50 bps versus the back half of ‘21. Maybe just breaking down a little bit where we see some of those puts and takes on the headwind side. And in prepared remarks talked a little bit about inflationary pressures on input costs, they continue certainly spiked in the second quarter at a moderated and somewhat off of the recent peaks. But we are not assuming benefit as it takes, as we have talked about in the past, a few quarters the flow through our P&L. The second sort of major headwind, that’s out there is certainly the unfavorable geographic mix shifts from the more conservative view on China I just mentioned. There are some tailwinds as well in those numbers, certainly the structural mix shifts to accretive channels. You have seen us deliver over a number of quarters here. We will continue as we are distorting investment there. Strategic pricing, as we talked about, previously, on the calls, been very thoughtful about how we have taken…

Great. Thank you.

Thanks Bob.

Okay. Our next question comes from Paul Kearney with Barclays. Please state your question.

Hi everybody. Thanks for taking my question. I guess my question is on your long-term targets from your Investor Day, $5 plus in EPS and 46% plus in the gross margin. How should we think about the achievability of those and maybe potential timeline for those and what I saw on track? Thanks.

Rustin, do you want to go ahead?

Yes. Thanks Scott. I will take that. Good morning Paul. Since we hosted our Investor Day back in May of ‘21, we have seen a lot, all that’s happened in the market, certainly hyperinflation, or retail inventory rebalancing. Yet, I think it’s really important to stress that the underlying strategies that we laid out at our Investor Day are driving diversified accretive growth. And they remain intact, as you heard us talk about today in Scott’s remarks about channels, about geographic, about category extensions. So, obviously, we won’t guide ‘23 today, but maybe if we step back and look at it on a on a broader scale, ‘21 was ahead of our plans on a revenue and EPS basis. And for ‘22, with the updated outlook we laid out today, we are targeting revenue of greater than $2.6 billion with $4.40 to $4.50 in EPS. So, structurally, feel really positive about the strategy that we have. And certainly as we get later into the fall, we will talk a little bit more about timing and how it relates to ‘23.

Thanks Paul.

Thanks. Just one more for me if I may. Just curious on kind of the price actions [ph] just in light of consumer pressure, inflationary pressure and inventory difficulties at the retail partners. How do you see kind of future pricing keep increases? Do you have any – and for the back half, and then what are you seeing in terms of the consumer response on your strategic…?

I will go ahead and take that Paul. And if Rustin wants to chime in he can. Paul, we look at it like this. At the end of the day, we need to make great products that our consumers really love and that they want to take out. We are seeing that right now across our businesses. We are seeing it across the globe. We are seeing it across different channels and geographies. The investment that we have made in the design teams here for both Wrangler and Lee that we hadn’t had before and key is the investments that we are making behind the brands. I would tell you, for the first time and I have been involved with this business for 15 years, for the first time here these last 2 years, and it’s accelerating. We are seeing our ability to take price and have pricing power and to have that stick. Our brands are really, really resonating with the consumer. And we are seeing it in social media. We are seeing it in different age groups, which is extremely important to us. And we are seeing it from different locations, different places, different geographies. So, we will continue to work really hard at that. But I do want to make it very clear that we do have pricing power, our brands are strong, they are resonating. And we are going to continue to make those investments because our cash flow, as you know, is very strong. And even in difficult times, we are able to do that. And we will do that.

Perfect. One more…

Paul, I would…

Go ahead.

I was just going to add, Paul, I think the investment Scott’s talking about really allow us to mix up in AURs as well, as you have heard us talk about in those prepared remarks. And that combination of mixing up in AURs, the strategic pricing we are taking, as well as cost savings initiatives that we have had, as you have heard us talk about in the last couple of quarters, really important, the combination of those offsetting some of the inflationary pressures that we are seeing from a margin perspective.

Thanks. And quick one, what is the timing of the AMEA headquarter shift?

Paul, that timing is now. But let me go ahead to step back and just take everybody through kind of our process and our thought process. When we spun off 3 years ago, and when we go over 3 years ago, and when we made the decision to do this, actually, 4 years ago now, we had a very fractured business. So, what I mean by that, and I know you have all heard me talk about that as we built product in five different locations around the world and did not communicate with each other. So, Lee was building products in U.S. South America, Mexico, China, and the teams weren’t talking, building working together. Same thing with Wrangler, our systems didn’t combine. And we embarked upon two really fundamental projects for this business. We went ahead and implemented an ERP system. I know everybody on this call knows the difficulty of that so that our teams could work cohesively together around the globe. We didn’t have one system and we pulled out of another company that didn’t have one system, because their businesses were run from a geography standpoint. And then the other piece is we embarked upon globalizing this business. So, when you pull those two big strategies together, globalizing the model across the world, and then having an ERP system that can support that globalization, we now are moving to one location. And that fundamentally is going to really help us for a lot of reasons. I mean if you think about what it’s going to do for us, it’s going to help us from a capital efficiency standpoints, like I talked about. It’s going to improve our go-to-market capabilities significantly from a product, people and customer standpoint. And then in addition to that, it gives us access to a real apparel market in Switzerland. It gives us access to really good talent, and then helps us from the standpoint of how we think about our SKUs from a rationalization standpoint across the globe. So, lots of advantages, lots of reasons to do it, lots of thought that went into that. And that’s happening right now. Thank you for the question, Paul. Appreciate that.

Thank you. Bye.

Okay. Our next question comes from Brooke Roach with Goldman Sachs. Please state your question.

Good morning and thank you for taking the question. Scott, my question is on marketing investments, which have been a big focus for Kontoor this year. But I think I heard in the prepared remarks that Kontoor is looking to tighten up expense controls as a result of some of these macro headwinds. Can you clarify your plan for demand creation into the second half, any big innovations or campaigns or launches that we should be on the lookout for? And then where are the areas in SG&A that you can really flex down your spend as a result of this tighter macro?

Got it. I will go ahead and take the first part, and then I will hand over to Rustin for the second part. We, as you know, we have outlined our cash flow and our strong optionality. So, we have the ability to do multiple things in the marketplace at the same time. One of the things that we have made a decision on here is that we are going to continue to invest behind the brands in a pretty significant way. One of the things that we don’t want to do is we don’t want to stop the momentum that we had. We have created really good momentum. We have got this really good machine working right now and that we are globalizing the product line. We are creating really good product that’s taking out really well. You heard us talk about, our POS is checking extremely well. In addition to that, we have got really good talented people that are creating great designs that our consumer really likes. And then behind that we are doing and I can talk about some of the most recent stuff. So, this weekend was the bomb, excuse me, the Lollapalooza festival in Chicago. And we had our first ever store there. And it was an incredible store that we got really good feedback from that we had a ton of product that we just finished Bonnaroo. And we have got Austin City Limits coming up. We have got Lollapalooza coming up in Berlin. And we are not backing off of those investments, the 75th anniversary of Wrangler, we are just not doing it. We are going to continue with our demand, products and how we think about it, and it’s going to accelerate as ‘22 goes on into ‘23. So, focus, focus, focus on these brands, because they haven’t had it before. And the single most important thing I would tell you, and we come back to this all the time is we have put energy and money in really good thoughtful campaigns behind these two big, big powerful brands and it’s worked, The consumer has accepted them in a really significant way. Rustin, do you want to talk about some of the other piece of that?

Yes. Thanks Scott. Good morning Brooke. Certainly Scott hit it. We are going to invest behind the brands strategically Brooke. You need to be sure of that. As you saw us do this morning with the globalization and the European headquarter move. But we are in the uncertainty, certainly looking at tightening discretionary and non-strategic spend. That certainly is involving scrutinizing spending across all categories. As we have open positions that that become available, we are certainly going to take a fresh lens at those type of positions and make sure that they are needed. Same goes for whether it’s travel, or it’s training, or other factors like that. So, we are going to look at every spend that’s out there and be very wise with it as you would expect us to be in this type of environment, while continuing to invest in the business. I think that’s the key takeaway. Thanks Brooke.

Thanks Rustin. And if I could just ask one follow-up on China and the more conservative view that you are taking there. Rustin, can you help us understand the proportion of the second half sales and gross margin, guidance reduction that’s attributable to the weaker China outlook versus the headwinds that you are seeing in the macro in the United States?

Yes. I think, Brooke, certainly I am not going to guide on a particular country, as you would expect. But I think if you step back and you look at China, the quarter largely played out as expected, as you heard us talk about a little bit on our prepared remarks. Certainly, the Shanghai reopening was in line with our expectations. And we saw sequential improvement as the quarter progressed, including both in our brick-and-mortar doors and our e-comm. We saw double-digit growth in June for Lee. Certainly, there is a lot of uncertainty out there, though. We have seen lockdowns and movement restrictions that have impacted other jurisdictions including Chengdu, Shenzhen, Wuhan, those remain. I think last quarter we talked a little bit about taking a conservative approach to Q2 and a more cautious outlook in the back half of the year. Certainly, we are going to take a more conservative approach in the back half assumptions, given some of those factors. Certainly, pleased with some of the re-openings that have taken place according to our expectations, but lots of uncertainty that’s there. But I would just say as it relates to China, where I would leave this is we really continue to believe in the long-term opportunity for both Wrangler and Lee in the region. And to really hit upon Scott’s point, we are going to continue to invest to make sure that these brands are strong and healthy as the region reopens appropriately. So, hope that helps a little bit more Brooke about how we are thinking about China.

And Brooke, I would make one kind of broader comment, beyond China. We really have an opportunity internationally for these brands. And some of the actions that we have taken today with our new headquarters in Europe, as we have talked about how and why, we believe that we are under-indexed here relative to our peer set and think that there is a really nice runway here for a very long time as these brands gain acceptance across the globe and we enter new categories and geographies. So, from a broader standpoint, really like where we are very early in the game and feel like we will catch up very quickly here now that we have got the right operating systems to do that. Thanks Brooke.

Thank you.

And our final question comes from Will Gardner with Wells Fargo. Please state your question.

Hey, thank you guys for the question. I just wanted to ask about promotions to the channel. I know you guys you have Walmart, Target, optimizing their inventory, excuse me, but just want to know how you are thinking about it for the balance of the year, with going into holiday and to back-to-school, you heard Under Armour talk about this yesterday, how they are making a lot more promotions for the rest of the year. So, just want to know how you are thinking about that. And secondly, how that’s impacting your merch margin? Thank you.

Will, I will go ahead and start and then Rustin will take it from there. But from our standpoint, we are building product that’s checking. And people really like our product, it’s resonating really well. So, we think that we will have limited promotions going forward. We put ourselves in a really good position, the combination of our marketing and our brand campaigns relative to really good design and product, and then making sure that we understand our consumer and aligning with the right customer too from that standpoint. So, not going to be – we don’t believe we are in a position that we have to be over-promotional at all for back-to-school and/or holiday. Rustin, do you want to talk a little bit about rest?

Yes. I would just add Will, again, if you step back, as you know, our model, our top four customers Walmart, Amazon, Target and Kohl’s, not necessarily in that order. Certainly, most of those have not been promotional in nature. Certainly the retailer rebalancing efforts have been well chronicle here. But we like how we are positioned. And to Scott’s point, we are really focused on delivering product that really resonates with the consumer and delivering on that compelling value proposition that we talked about earlier. So, we have taken certainly the global landscape into consideration and our outlook that you have seen here this morning.

Thank you, Will.

Sorry. My other question was just on AURs, just how they were a quarter. And how is the promotional environment impacting us if at all?

Yes. We talked a little bit about – yes, we talked a little bit Will about AURs in our prepared remarks. We didn’t break it out specifically by the quarter. But I think what the AUR growth that you have seen in the in double digits relative to ‘19, again, really speaks to everything we have highlighted on the call this morning. It’s the investments that we are making. It’s mixing up into that higher product, as well as strategic pricing that’s out there. So, again, as I commented a little bit earlier with Bob as our thinking about gross margins, it’s really that combination of mixing up into the AURs, cost saves and certainly strategic pricing that we are using to offset the inflationary impacts in the business – the combination of those. And we have been very thoughtful and strategic about our thinking about pricing. But really pleased with how the brands have moved and the momentum that we have seen in the AURs. Thanks Will.

Great. Thank you so much.

Thanks Will.

That was our final question. I will turn it back over to Scott for closing remarks.

Well folks, thank you for the interest in our company. We really appreciate it. And thank you for all the thoughtful questions today. And I just want to leave you with this about rest assure, that we are taking all the right and necessary steps to run this business in a really sophisticated way. We really like how we have positioned ourselves going forward, and how we are going to position ourselves coming on this very dynamic marketplace. I think that’s going to differentiate a lot of companies here as we go forward. And we really look forward to talking to you about how and that process in Q3. So, look forward to the next time we get together. Thank you for the support. And thank you again for today. Have a great day everybody.

Thank you. This concludes today’s conference call. We thank you for your participation. You may disconnect your lines at this time and have a great day.