Greetings, and welcome to the Kontoor Brands’ Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Karapetian, Vice President, Corporate Development, Strategy, and Investor Relations. Please proceed.

Thank you, operator, and welcome to Kontoor Brands’ fourth quarter and fiscal year 2023 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. 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, amounts referred to on this call will be in constant currency, which exclude the translation impact of changes in foreign currency exchange rates. Joining me on today’s call are Kontoor Brands’ President, Chief Executive Officer and Chair, Scott Baxter; and Chief Financial Officer, Joe Alkire. In addition, we will be joined by Tom Waldron, Co-Chief Operating Officer and Global Brand President of Wrangler; and Chris Waldeck, Co-Chief Operating Officer and Global Brand President of Lee. Following our prepared remarks, we will open the call for questions. We anticipate this call will last about 1-hour. Scott?

Thanks, Mike. And thank you to everybody joining us on today’s call. Before I discuss our results, I’d like to start with the announcement we made this morning on our global transformation project. Project Jeanius is one of our most significant and important undertakings as a public company. The work we are doing will transform our organization from the legacy clone and go structure required at the spin to a truly best-in-class global multi-brand platform, while unlocking significant sources of value. Let me first start with what this project is not? This is not a cost-cutting exercise. Expense discipline is a foundational strength of our business and one that we prioritize regardless of market conditions. Rather, we are pursuing this proactively and from a position of strength. The steps we are 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. I’m packing this a bit more. When we first spun as a public company, our organization was set up to mirror our legacy structure. This was required to ensure continuity in the business while we focused on our Horizon 1 priorities, including de-levering our balance sheet, paying a superior dividend, and stabilizing our brands. After successfully completing Horizon 1, we embarked on Horizon 2 with a solid foundation now in place. As a result, we have grown our top-line, gained market share, and improved operating margins from 2019 levels. But as an organization, we do not rest on our laurels. The leadership team we have in place is tailor-made for this strategy and our next phase of growth. I am highly confident now is the right time to pursue this transformational initiative. A word you hear from us a lot is…

Thanks, Scott, and thank everyone for joining us today. 2023 was an incredible year for the Wrangler brand. We reached consumers like never before, expanded our market share, and grew our direct-to-consumer business all while navigating a challenging marketplace. It starts at the intersection of product and storytelling. Wrangler is synonymous with cowboy culture and that took on a new meeting last year with two of our most significant demand creation platforms in years. Starting with our brand ambassador, Lainey Wilson. Our partnership has exceeded all expectations. She is an incredible artist and to cap off an amazing year, she recently won the Best Country Album at the Grammy Awards. Congratulations to Lainey on her tremendous achievement. She is expanding her reach with new audiences while being authentically western. We can see this in the data. Lainey picks a collection of her favorite styles introduced throughout 2023 resulted in over 60% new-to-file consumers. In the fall of 2024, we will be building on this momentum launching our first Lainey Wilson collection. This will be a full assortment designed from the ground up in partnership with Lainey drawing from her life on and off the stage. The product is already generating excitement and we can’t wait for it to reach consumers later this year. And with the Dallas Cowboys, in the third quarter, we became the official jean of America’s Team. This connection of two iconic American brands was an immediate success and will continue over the next two football seasons and, importantly, it is reaching a broader audience in a truly authentic way. The Dallas Cowboys consistently ranked among the most watched games of the season and I couldn’t be more excited about building on this partnership in the coming years. And this only scratches the surface. Our sponsorship of…

Thanks, Tom, and thank you all for joining us. I would like for you to take away one word from the day, innovation. Lee has a deep history of bringing newness and is a standard for innovation in the world of denim. Our archives are among the deepest in apparel and allows us to draw from years of authentic heritage and craftsmanship while always looking forward. Our team’s focus has been and will always be the consumer and answering their needs. We do this through intense focus on innovation like flexibility, fit, softness and climate control to name a few. To put this in perspective, in 2023, two-thirds of our U.S. men’s denim business came from our innovation platforms. This year, we will launch our most significant new innovation in years. Comfort and style too often require trade-offs. Lee-X addresses this gap by taking all the comfort of our performance pan and combining it with the aesthetic of a world-class jean in a way only Lee can. And importantly, Lee-X will be a true global innovation platform with denim bottoms, non-denim bottoms, and tops. This combination of craftsmanship and style and comfort don’t exist at our price points, and we are excited to share it with consumers later this year. And we are bringing these platforms to life through our successful digitally-based demand creation strategy targeting a new younger consumer, the Lee-X platform was designed for. These platforms also expand our ability to engage with consumers wherever and however they choose. Innovation could also be found in our collaboration strategy. In December, Lee and Diesel came together to create something incredibly unique and innovative. 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…

Thanks, Chris, and thank you all for joining us today. I’d like to begin by providing perspective on the fourth quarter before reviewing our results in more detail. POS significantly outpaced our shipments as we continued to drive market share gains in the U.S. That said, the wholesale environment was challenging during the holiday period, with retailers tightly managing inventory receipts in the face of an uncertain consumer spending backdrop, which negatively impacted our revenue. Overall, we fell short of our revenue outlook by approximately $50 million. The POS performance of both Wrangler and Lee was fairly consistent with our expectations as both brands continued to gain share. However, in light of the slowdown in POS, which we did anticipate, key accounts reduced inventory levels more than expected. Despite the revenue shortfall, we are pleased with our execution and the profit inflection we delivered as a result of strong gross margin expansion, which we expect to continue in the coming year. We also took more aggressive action on our own inventory during the quarter, resulting in stronger cash generation and a healthier foundation for 2024, albeit at the expense of near-term gross margin. I will expand on this in a moment as well as highlight how the confidence we have in our 2024 outlook and the additional actions we announced this morning with Project Jeanius will fuel the next leg of our TSR journey and support the optionality we see in the business moving forward. Before we review the details of our fourth quarter, I’d like to briefly touch on the additional audit period duty charge we incurred. If you recall, the duty matter was originally identified late in the third quarter and arose from our ERP implementation dating back to 2021. We recognized $13 million of audit period duty…

Thank you. We will now conduct a question-and-answer session. [Operator Instructions] Our first question comes from Bob Drbul with Guggenheim. Please proceed.

Hi. Good morning. I was wondering if you could spend some time, just a little bit more time, on the U.S. wholesale business. I guess, when you think about what materialized in the fourth quarter, I think it would be interesting to just understand how you’re planning. I don’t know if you could sort of put some more numbers around how you’re planning the wholesale business in the first half versus the second half, how much of the businesses’ replenishment versus preorder. And then, I guess, if you could expand a little more on distribution gains in the shelf space that you’re winning, just where that’s coming from, and sort of how that factors into the assumptions on the U.S. business? Thanks.

Hey, Bob. Good morning. It’s Joe. Maybe I’ll tee this up with the financials and I’ll toss it to Scott, Tom, and Chris to provide some color. So, yeah, in the fourth quarter, the delta-to-hour outlook, of the $50 million revenue shortfall was really a direct result of more conservative inventory retailer management by the U.S. partners. The slowdown in POS, as we said, we did anticipate the reduction in inventory levels we did not. But in Q4, our POS did outpace our shipments. We did continue to gain share, but selling was clearly impacted by the inventory management dynamics. And just to put some perspective on that, inventory levels at our key accounts declined close to 20% by the end of the year versus where they were in Q3, which clearly had an impact on our selling. But, Scott?

Yeah, Bob, I’ll make just a couple of comments before I hand it over to Tom and Chris. But, I’m coming up on 20 years of leading or being involved in the denim business here. And I will tell you this, I’ve seen this before 5 or 6 times. And, I think, I wanted to speak about how I see this before and how I see this now, and it really is different. It’s a much different picture previous, when we weren’t investing in these brands a decade ago and even just prior to the spin. We were in a much different place when our retailers behaved and acted like this and totally understand that, but we weren’t investing in the brands. They weren’t growing. We weren’t putting any energy behind them. But we are in a totally different space right now as we go through this, and Joe hit on it, and the other guys will hit on a little bit. But we are taking significant share in a category, that’s growing a little bit. But we just continue over a long period of time to put a lot of energy behind our 2 big brands. Our collaborations are working, our advertising programs are working, our digital programs are working, the consumer is really excited about our brands, most importantly, our product looks great. And because of that we will come out of this in a much different place than the previous times this has happened, because we are really important to our customer in that respect. Our product turns in the marketplace, our product turns on the floor and they need our product and this will work its way through the cycle that it usually does. But going through this in a position of strength taking share and having strong POS is a much different feeling that it’s been years ago.

Yeah, I’ll jump in here, Bob. When you think about brands that do well with consumers get a [little bit more real estate] [ph] and getting to your question in terms of the back half of next year, both brands have really resonated with consumers as evidenced by the POS and the investments we’re making in those brands are certainly pulling through and we’ve got some nice distribution gains whether it be an outdoor and shirts, because the consumers are voting for the brand and we’re really excited about that. We also talked about the relaunch at a major U.S. retailer. That is important for us, but it’s not actually the big part of the new distribution gains, that’s something that’s going to pay dividends over the next 3 or 4 years. But we’re really excited about how our brands are resonating with consumers. Chris?

Good morning, Bob. It’s Chris. I’ll just talk a little bit about Lee specifically. Coming into 2024, Lee posted some really strong market share gains in the back half of 2023, both in units and dollars. We have a lot of momentum with the consumer right now. Our product is resonating with them. Because of the success we had in the back half of 2023, it’s really opened up new incremental space gains for Lee in the back half of this year. I talked about our new innovation launches around Lee-X, that will gain a space. But also, candidly, we’re seeing it in our core and specifically around our female products and that’s really got me excited. So I feel confident about the incremental space that we’ve gained, the momentum we have with the consumer and looking forward to 2024.

Great. Thank you.

Our next question comes from Jim Duffy with Stifel. Please proceed.

Hello, good morning. Thanks for the insights. Thanks for taking my question. I want to start on the outlook. Guys, we’d ever like to see the guide second half weighted, appreciate you have some new shelf space. I’m just hoping you can speak more about the visibility around some of those key assumptions underwriting the guidance. What’s the message from retailers who’ve been de-stocking? What’s the outlook for seasonal product as you get into the second half? And then what’s your confidence in the improvement in declines in the second quarter and the assumption for acceleration into the second half?

Hey, good morning, Jim. I’ll start. It’s Joe. I would say look just from a posture standpoint, we’re planning the business conservatively. We’re sitting in February amidst an uncertain environment. And so, the outlook we’ve put forward, we’re being prudent. But we’ve got modest top-line growth reflected in the outlook, strong gross margin expansion and operating earnings growth, strong cash generation and returns on capital. There’s nothing built into the outlook from either Project Jeanius or additional capital allocation choices. I think that’s a layer of optionality to the outlook that’s not reflected at least initially. I’d say from a revenue standpoint, we’ve got good visibility into the first quarter and the revenue improvement for the balance of the year is really largely driven by the new programs and distribution gains, D2C in China. We haven’t assumed a meaningful change in either POS or inventory levels. And in the core business, which could be an opportunity, but we expect retailers to remain cautious at least in the near-term. On the profit side, we’ve got high confidence in the gross margin, as I alluded to. The expansion is first half loaded. We’ve got good visibility into the input costs, pricing and mix. We think we’ve been prudent with regard to the pricing and promo assumptions in the plan. And inventory is in good shape. And we took some actions on the supply chain front that’ll drive costs lower. And, look, beginning in the second quarter, we see double-digit operating earnings growth and that fundamental profile will just further strengthen as we get to the back half of the year.

Thank you. Yeah, certainly a bullish tone on the call around the current state of the brands, new initiatives, growth opportunities. With that, I’m curious how you’re thinking about capital allocations. You have the new $300 million repurchase authorization. Just give us a sense of how you’re thinking about putting that to work?

Sure. Jim, this is Scott. And then, I’ll go ahead and kick it over to Joe, but I’ll kick it off. We said it before, we’re really in an enviable position. We can do multiple things at the same time, you’ve seen us do that. We raised our dividend. We’re buying back stock. We put in a new stock buyback program of $300 million. We’re in a great place from a debt ratio standpoint. And if we want to make an acquisition, we can. I want to make sure that everyone’s aware that from a M&A standpoint, we will not surprise you, right? So our fundamental position is that we’re going to do something that makes a lot of sense from us 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 if 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. And it’ll be accretive to all of us and all of our stakeholders. But right now, we feel like we’re in a really good position. A lot of folks are in a little different position than we are, but we have improving fundamentals going into the second half, already from a really strong foundation currently. So I feel really good about what we’re doing, and we’re being really smart, Jim. And Project Jeanius is only going to help this in a significant way. In my career, I’ve been involved in a lot of really big, really strategic projects, some cost-cutting projects. But I’ve got more energy around this project to differentiate us from everyone else in our sector in a very significant way going forward. This is the real deal, and I’m really excited about it for the organization. Joe, anything like to add?

Yeah, Jim, maybe just a couple other points. From a priority standpoint, the priorities are unchanged. We’re going to prioritize reinvesting in the business. We’ve got a strong commitment to the dividend and growing the dividend. Over time, the balance sheet is strong. We’ve got a lot of dry powder. And look, with the $300 million share repurchase, the Board just approved. In December, we’ve got over $325 million cash we expect to generate this year, and the leverage is low. So, we’ll remain disciplined here, but we would expect to put more capital to work as we move through 2024.

Thank you, guys. Appreciate it.

The next question comes from Brooke Roach with Goldman Sachs. Please proceed.

Good morning, and thank you for taking our question. I was hoping you could elaborate on your outlook for pricing and promo this year. I think you mentioned that you were planning this prudently, how are you thinking about the opportunity for AUR across your various brands and channels this year, particularly in the U.S. market? Do you think that price reductions are needed in any of your key U.S. wholesale channels to maintain the level of market share growth that you’re currently experiencing relative to your competitors? Thank you.

Yeah. Hey, Brooke, it’s Joe. I’ll tee this up from a financial perspective, and then, Scott, Tom, Chris can jump in here. Yeah, so from a pricing standpoint, we have assumed that we take prices back a little bit here in 2024. It’s less than or about a point on the top-line, less than a point on the gross margin side. So that is in the guide. From a promotional standpoint, we have assumed that the environment is a little more promotional, 2024 versus 2023. That could be conservative, but we’ll see how that evolves.

Yeah, I’ll jump in here. I mean, we’re always really strategic about how we think about our pricing. There are areas that – from an elasticity standpoint, if prices are coming down, that’s all built in, we’ve had taking some pricing actions, not major. And that’s really an assessment to how the brand is resonating with the consumer from a pricing power standpoint. So we feel really well set up for 2024 from a pricing standpoint. Chris, anything else do you want to add?

Well, I think the only thing I would add, Brooke, for you just as we think about our international markets, China, as that market starts to open back up and develop, we feel very bullish about that long-term, but we’re taking a conservative approach right now and like we are in the U.S., where we understand the sensitivity with the consumer and we’re responding accordingly. And that same goes for Europe for us and our business there and how we think about our brand. So it’s something that we look at, we are very surgical and how we think about price and we want to make sure that we’re competitive in the marketplace.

I’ll just add one thing, Brooke, we’ve got really good innovation in our pipeline right now from both brands across the globe. And that’ll give us some pricing power going forward, which I’m really, really excited for this group to get a chance to see here over the next 12 to 18 months.

Great. Thanks so much. And then just to follow-up for Joe, there’s a lot of moving pieces in the gross margin guide, understood, where the structural benefits are and the visibility in the first half. But can you help us with the rough sizing of some of those buckets given the puts and takes and where we should be thinking about opportunity for gross margin outperformance? Should the environment get a little bit stronger?

Yeah. Sure, Brooke, I appreciate the question given all the moving parts. So for Q4, excluding the out-of-period duty charge, gross margin improved about 230 basis points. I would say, X the inventory actions that we took, the gross margin expansion of close to 300 was really in line with our expectations. So no surprises. The drivers there really in equal parts where pricing mix and lower input costs, which have now flipped to a tailwind as we head into 2024. For 2024 specifically, we said 170 to 190 basis points off of a 2023 base that excludes the out-of-period duty charge. That’ll be front half loaded. The majority of that increase will be driven by lower input costs and mix. And then we have a bit of an offset from pricing and promo.

Thanks so much. I’ll pass it on.

The next question comes from David Paul Kearney with Barclays. Please proceed.

Thanks. Paul Kearney from Barclays. You mentioned some changes in the international business, simplifying the go-to-market strategy, refining the brick-and-mortar strategy. Can you go into what some of those components of those changes are from the prior? Thanks.

Hey, Paul, it’s Chris. I’ll take this one. Just starting with Asia and specific around our China business, we’re taking a measured approach is the economy gains momentum. But we do have a bullish long-term view on China. Our inventory levels are back at normal levels, where they should be. Growth in 2024 for us is really coming from some conservative comps, some new partner door expansion. But really this investment we have in refreshing our fleet over the next 2 years. We’ll start to see that paying-off force in the second half of this year and we’re super excited about that, I think, that’s really going to set us up for long-term growth. In Europe, we’re optimistic about the opportunity there for our brands again just with the macro economic situation there, we’re taking a conservative approach. Scott talked about it, and I’ll just reinforce it. But project Jeanius is really going to be an unlock for us in this region. And what it’s going to do is allow us to realign our business model there into a true pan-European structure. That’s get a simple thought five things, but also open up markets that we don’t have exposure to today.

Our next question comes from Mauricio Serna with UBS. Please proceed.

Great. Good morning and thanks for taking our questions. I guess, I just wanted to hear a little bit more about what you guys are doing on Lee with the innovation and newness that seems to be really helping the brand. And maybe if you could talk a little bit about the performance in Q4, where you were mentioning that the retailer’s cautiousness kind of like drove a revenue shortfall. Could you maybe provide a little bit more detail on what channels have you seen that more of that cautious being more pronounced I guess. And maybe on the upcoming relaunch of Denim at a major national retailer. Any insights on like what channel are we seeing that, revenue coming through, like I guess like any channel, like what channel, what kind of retailer are we talking about just to understand like where we would see that exposure seeing coming through? Thank you.

Hey Mauricio, this is Chris. I’ll kick it off and thank you. I am too also super excited about Lee-X and just really we’re going to raise the bar as you think about comfort and stretch in denim. But we shouldn’t just think about Lee-X as Denim. It’s really a platform for us, an innovation platform for us. So we’re going to expand across our global markets. Denim 12 woven tops, we talk a lot about we need to expand categories and this is really going to help us do that. Now, the other thing about X is that, it’s really targeted for that younger consumer. It’s targeted at a price point and elevate a price point from where we are today, but still in that sweet spot and I’m super excited about that, and how we’re going to get that moving here at the back half of 2024. Let me toss it over to, Tom, and let him talk to you a little bit about just the channel part of it.

Yeah, I mean, generally – one of your questions is like the retailer pullback and conservatives in ordering like that that was really across the board. There wasn’t one sector that that was tied to, it was really all retailers out there, and I think all consumers are feeling a bit pinched right now and the conservatism is broad-based in terms of the new denim distribution. We don’t really comment on which particular retailer from a strategy standpoint, but what I will tell you it is a reflection of our POS, our strong market share gains, and that retailer looking at that data and understanding that what we can’t operate in this environment without Wrangler. I mean at the end of the day Wrangler is one of the big three brands out in the U.S. and they need us and the consumers are asking for it. So we’re excited about that in terms of the back half. But what I’m more excited about is, how this has a multi-year growth opportunity to it.

Got it. Thank you very much.

The next question comes from Will Gaertner with Wells Fargo. Please proceed.

Hey, guys, thanks for taking my question. First, just on China, I mean, it’s been strong this quarter. How do you see the growth going forward and what are you seeing on the ground there? And can you just remind us how big China is now for you guys?

Hey, Will, it’s Chris. I’ll take that one for you. The Chinese economy is as well documented all across. It’s been opened. It’s been closed. It’s been opened – and, I think, well, everyone was optimistic about the opening in 2023, we saw that it’s still pretty choppy for that Chinese consumer and the challenges are there. Again, we’re really bullish about that market. I think what’s super encouraging is just the investment that we’re making in that market behind our retail stores over the next 2 years is really going to be impactful. There’s a lot of those stores that we frankly haven’t touched for a few years. And to get in to refresh those stores and to really excite the consumer and also to give us a really a solid platform for these innovations that we have coming to the market and bringing those to life for the consumer in a really powerful way, I think it’s going to be a huge unlock for us. So excited about the long-term proposition with China and our business will continue to grow there as that economy gains momentum, which we all know that it will.

That’s great. And, Joe, maybe for you, inventory. So sounds like you guys are going to continue to cut inventory. Is that going to be, I guess, what is your expectation of when you’re going to be in a clean inventory position? And the cuts that you’re talking about in the first quarter, is that going to pressure gross margin?

Yeah, so everything we have contemplated from an inventory standpoint is captured in the gross margin outlook we gave for 2024. We’ve clearly made a lot of progress on the inventory over the last year. The teams have worked really, really hard. But exiting 2024, we still have about 130 days of forward inventory. And we would say, normal for us is plus or minus 100 days. So we’re not there yet, we still have work to do. We’re really confident in the glide path, but as we continue to optimize, the inventory and work that down to what would be more steady state, that’s going to continue to contribute to the cash generation of the business along with the profitability improvement.

Great. I’ll pass it on. Thank you.

Thank you. At this time, I would like to turn the floor back over to Scott Baxter for closing comments.

Just a quick thank you to everyone for participating on the call today. We’ll look forward to reaching out and speaking with you again here upcoming after the first quarter. Have a great day and a great week. Thanks again, everyone. Take care.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.