A weakening wholesale channel and the coronavirus are putting the pressure on Kontoor Brands Inc.
The denim company, parent to Wranglers, Lee and Rock & Republic, reported quarterly earnings before the bell on Thursday, falling short on the top and bottom lines for the quarter and for the year, and causing company shares to dip by nearly 5 percent during Thursday’s trading session.
Revenues in the fourth quarter fell 10 percent to $652 million, down from $726 million during 2018’s fourth quarter, while income was $28.7 million, down from $51.9 million.
For the year, revenues were $2.54 billion, down from $2.76 billion. Income came in at $96.6 million, down from $263 million a year earlier, partially as a result of impairment and other charges.
But Kontoor Brands president and chief executive officer Scott Baxter called 2019 a “transformational” year and said he’s optimistic about the future of the brands.
“We’re really happy with our progress,” Baxter told WWD. “We outlined a really strategic, specific set of actions and things that we were going to accomplish and do, and we’ve gone ahead and we’ve done that.”
That includes paying down $127 million in debt in the quarter — $27 million more than originally anticipated.
“This robust cash flow will continue to be an important pillar in support of our evolving capital structure, further enhancing our financial flexibility in 2020 and beyond,” Baxter said.
China makes up roughly 7 percent of Kontoor’s global revenues, including wholesale channels, digital and partnership stores.
But Baxter pointed out that sales in January, particularly in China — before the virus began spreading — were up double-digits across all channels.
“Obviously, I think that China is going to be fine going forward,” Baxter said. “Here’s the key: there was a lot of planning, a lot of preparation and a lot of investment [in China]. We’ve got a fairly senior leadership team — folks that really know the marketplace extremely well. The product is resonating with the consumer there, which is a really big deal. And we’re advertising; we’ve invested some [significant] dollars into advertising in the market like we haven’t before.
“We’re not doctors here; we’re in the apparel business,” Baxter continued. “We’re simply dealing with the facts. And the fact of the matter right now is that we’re reopening stores [in China]. The government wants us to and that regions are reopening and that consumers are slowing starting to come back in and starting to get out and shop again. I believe over the short term, the world and things will normalize again. And because of the investments that we have made over the last year and a half in that region, they will continue to pay off.”
Thomas Waldron, Wrangler global brand president, added that there’s significant white space to expand into new categories, such as T-shirts and other tops.
“For perspective, we currently sell roughly 500 pairs of jeans for every one T-shirt sold compared to most of our competitors that sell as many as five Ts for every one pair of jeans sold,” Waldron said on Thursday morning’s conference call with analysts.
Kontoor, which spun off of VF Corp. in May 2019, has partnered, franchised, licensed and owned branded, nonbranded and outlet stores throughout the world, but does the majority of its business through various wholesale channels and its e-commerce business.
“Our biggest customers are all really good and they’re really big and they’re winning in their channels and their space,” Baxter said. “We remain extremely confident in the underlying fundamentals of our business.”