[ad_1]
Kontoor Manufacturers, Inc. (NYSE:KTB) This fall 2023 Earnings Convention Name February 28, 2024 8:30 AM ET
Firm Individuals
Michael Karapetian – Vice President, Company Improvement, Technique, and Investor Relations
Scott Baxter – President and Chief Govt Officer
Tom Waldron – Co-Chief Working Officer, World Model President, Wrangler
Chris Waldeck – Co-Chief Working Officer, World Model President, Lee
Joe Alkire – Chief Monetary Officer
Convention Name Individuals
Robert Drbul – Guggenheim Securities
James Duffy – Stifel Monetary Corp.
Brooke Roach – Goldman Sachs
Paul Kearney – Barclays
Mauricio Serna – UBS Group AG
Will Gaertner – Wells Fargo & Firm
Operator
Greetings, and welcome to the Kontoor Manufacturers’ Fourth Quarter and Fiscal 12 months 2023 Earnings Convention Name. At the moment, all contributors are in a listen-only mode. A short question-and-answer session will observe the formal presentation. [Operator Instructions] As a reminder, this convention is being recorded.
It’s now my pleasure to introduce your host, Michael Karapetian, Vice President, Company Improvement, Technique, and Investor Relations. Please proceed.
Michael Karapetian
Thanks, operator, and welcome to Kontoor Manufacturers’ fourth quarter and financial yr 2023 earnings convention name. Individuals on at present’s name will make forward-looking statements. These statements are primarily based on present expectations and are topic to uncertainties that would trigger precise outcomes to materially differ. These uncertainties are detailed in paperwork filed with the SEC. We urge you to learn our threat elements, cautionary language, and different disclosures contained in these experiences. Quantities referred to on at present’s name will typically be on an adjusted greenback foundation, which we clearly outlined within the information launch that was issued earlier this morning.
Reconciliations of GAAP measures to adjusted quantities might be discovered within the supplemental monetary tables included in at present’s information launch, which is out there on our web site at kontoorbrands.com. These tables determine and quantify excluded gadgets and supply administration’s view of why this info is beneficial to buyers. Except in any other case famous, quantities referred to on this name shall be in fixed forex, which exclude the interpretation impression of adjustments in overseas forex alternate charges.
Becoming a member of me on at present’s name are Kontoor Manufacturers’ President, Chief Govt Officer and Chair, Scott Baxter; and Chief Monetary Officer, Joe Alkire. As well as, we shall be joined by Tom Waldron, Co-Chief Working Officer and World Model President of Wrangler; and Chris Waldeck, Co-Chief Working Officer and World Model President of Lee.
Following our ready remarks, we are going to open the decision for questions. We anticipate this name will final about 1-hour. Scott?
Scott Baxter
Thanks, Mike. And thanks to everyone becoming a member of us on at present’s name. Earlier than I focus on our outcomes, I’d like to start out with the announcement we made this morning on our international transformation challenge. Challenge Jeanius is one in all our most vital and vital undertakings as a public firm. The work we’re doing will remodel our group from the legacy clone and go construction required on the spin to a really best-in-class international multi-brand platform, whereas unlocking important sources of worth.
Let me first begin with what this challenge is just not? This isn’t a cost-cutting train. Expense self-discipline is a foundational power of our enterprise and one which we prioritize no matter market situations. Somewhat, we’re pursuing this proactively and from a place of power. The steps we’re taking will basically enhance our group and structurally elevate our profitability ceiling, creating extra funding capability to pursue development, enhanced capital allocation, and enhance our general monetary profile.
I’m packing this a bit extra. Once we first spun as a public firm, our group was set as much as mirror our legacy construction. This was required to make sure continuity within the enterprise whereas we targeted on our Horizon 1 priorities, together with de-levering our steadiness sheet, paying a superior dividend, and stabilizing our manufacturers. After efficiently finishing Horizon 1, we launched into Horizon 2 with a strong basis now in place. Because of this, we have now grown our top-line, gained market share, and improved working margins from 2019 ranges.
However as a corporation, we don’t relaxation on our laurels. The management crew we have now in place is tailored for this technique and our subsequent part of development. I’m extremely assured now could be the precise time to pursue this transformational initiative. A phrase you hear from us loads is optionality. It offers the flexibleness to pursue sources of worth for our stakeholders, wherever that could be. Whereas offering the resiliency to reply to the sorts of disruption we have now seen over the past 5 years, Challenge Jeanius will add optionality nicely above what we have now been in a position to ship up to now.
It’ll additionally simplify our group. It will end in higher visibility into the enterprise, improved decision-making, sooner pace to market, and higher leverage of our international ERP system. We’re additionally establishing a real multi-brand platform from which our manufacturers can develop. This new construction will enable for our model funding at a stage we merely haven’t been in a position to obtain underneath our prior construction.
To place some specifics to this. Challenge Jeanius is predicted to end in $50 million to 100 million of mixed gross margin enchancment in SG&A financial savings. We anticipate the advantages to start out within the fourth quarter of this yr and ramp in 2025 and 2026. A query I anticipate it would be best to know is whether or not we are going to make investments these financial savings again into the enterprise or let it stream to the underside line. The reply is each. And that’s exactly the kind of optionality that may separate us within the market. We shall be sharing extra within the coming quarters and I’m assured this may drive accelerating development over the approaching years within the subsequent chapter of our price creation journey.
Let’s now flip to our outcomes. 2023 was a landmark yr for Kontoor. We related with extra shoppers, launched highly effective new product tales and launched one-of-a-kind model campaigns and partnerships. On the similar time, the market had its share of challenges, notably in U.S. wholesale, the place macro uncertainty is impacting retail stock ranges and we’re seeing the impression of worldwide occasions internationally, notably in Europe, the place shopper sentiment and spending has been uneven. We anticipate these headwinds will proceed into 2024, notably within the first half.
We even have a possibility to higher diversify our enterprise into giant and rising classes, whereas increasing past our core channels of distribution. As we outlined at our 2021 Investor Day, these are important whitespace alternatives for us. That stated, we have now not achieved the targets we set out 3 years in the past. This is a crucial space of focus for us going ahead and initiatives like Challenge Jeanius shall be key in unlocking this potential.
So what provides me confidence we will ship? Initially, our manufacturers are profitable within the market. Within the fourth quarter, denim sell-through of each Wrangler and Lee in U.S. wholesale elevated 2% as measured by Circana, outpacing the market by 500 foundation factors. And for the yr, we noticed an identical story with sell-through rising 1% and outpacing the market by a mixed 350 factors. Importantly, this isn’t only a 1-year story. During the last 2 years, we have now persistently outperformed the market by a mean of three full proportion factors.
Whereas we have now seen intervals of lag between sell-in and sell-through, the underside line is shoppers proceed to decide on our manufacturers. As you’ll hear from Tom and Chris, every model has its personal distinctive story to inform that’s resonating out there.
And at last, as Joe will focus on later, we made important monetary progress in 2023. We efficiently labored on our stock place, ending the yr 16% under prior yr ranges. Gross margin has inflected with an extended runway for continued enlargement forward, and our money era accelerated. This helps rising capital allocation optionality, together with the $139 million we returned to shareholders via dividends in share repurchases final yr, in addition to our new $300 million repurchase program.
I’d like to shut by reiterating my earlier feedback. Whereas the market stays dynamic, we aren’t standing nonetheless, and I’m assured we have now the crew and technique to ship on the unbelievable alternatives forward. The actions we announce at present will basically enhance how we function and drive the subsequent part of accelerating worth creation for all our stakeholders. Tom?
Tom Waldron
Thanks, Scott, and thank everybody for becoming a member of us at present. 2023 was an unbelievable yr for the Wrangler model. We reached shoppers like by no means earlier than, expanded our market share, and grew our direct-to-consumer enterprise all whereas navigating a difficult market. It begins on the intersection of product and storytelling. Wrangler is synonymous with cowboy tradition and that took on a brand new assembly final yr with two of our most vital demand creation platforms in years.
Beginning with our model ambassador, Lainey Wilson. Our partnership has exceeded all expectations. She is an unbelievable artist and to cap off an incredible yr, she just lately gained the Finest Nation Album on the Grammy Awards. Congratulations to Lainey on her large achievement. She is increasing her attain with new audiences whereas being authentically western. We will see this within the knowledge. Lainey picks a set of her favourite types launched all through 2023 resulted in over 60% new-to-file shoppers.
Within the fall of 2024, we shall be constructing on this momentum launching our first Lainey Wilson assortment. This shall be a full assortment designed from the bottom up in partnership with Lainey drawing from her life on and off the stage. The product is already producing pleasure and we will’t look ahead to it to achieve shoppers later this yr.
And with the Dallas Cowboys, within the third quarter, we grew to become the official jean of America’s Group. This connection of two iconic American manufacturers was a direct success and can proceed over the subsequent two soccer seasons and, importantly, it’s reaching a broader viewers in a really genuine approach. The Dallas Cowboys persistently ranked among the many most watched video games of the season and I couldn’t be extra enthusiastic about constructing on this partnership within the coming years. And this solely scratches the floor.
Our sponsorship of Wrangler Nationwide Finals Rodeo was supported by our most profitable Cowboy Christmas retail retailer ever. Our collaborations with Buffalo Hint and Barbie proceed to point out the broad attain of the model and our new innovation platforms similar to abrasion resistance and offering efficiency attributes our shoppers want and love.
So how does this all translate? Our direct-to-consumer enterprise grew 11% final yr reflecting investments we’re making in our digital platform mixed with most of the initiatives I simply mentioned. Our feminine enterprise and a key space focus for us grew 5%. Our non-denim bottoms enterprise grew 10%. And at last, in wholesale, we drove share positive aspects in each quarter of the yr.
Because it pertains to U.S. wholesale, as Scott talked about, we skilled the impression of U.S. retail stock actions late within the yr, and we anticipate this to proceed over the near-term. That stated, Wrangler continues to win within the market. As an instance this level, whereas shipments had been down within the fourth quarter, our denim POS as measured by Circana elevated 1%, outpacing the market by roughly 400 foundation factors.
Waiting for 2024, we are going to proceed to diversify Wrangler into giant and rising classes. Out of doors has been an excellent story and one that we are going to construct on. Out of doors is now practically $200 million enterprise, rising 11% final yr, and up roughly $100 million from 4 years in the past. We’ll proceed to advance our product improvement capabilities on this vital class, and I see one other yr of robust development forward, supported by new launches, together with our efficiency ATG genome.
We may also proceed to diversify our channel distribution. Out of doors offers an excellent alternative to develop our attain into sports activities specialty, supported by improved product segmentation and elevated design. And I’m notably enthusiastic about our new bespoke launch for feminine. This premium efficiency match innovation shall be offered via our digital platform and specialty retail, and the response from {the marketplace} has been incredible.
At a Kontoor stage, we’re additionally extremely targeted on driving higher effectivity within the enterprise. Past Challenge Jeanius, we’re conducting SKU-level productiveness evaluation. Whereas much less seen than a lot of what I’ve mentioned at present, this foundational-level work is a core power of our group and can assist make Wrangler and Lee extra worthwhile companies in 2024.
Lastly, I wish to present just a few extra ideas on the upcoming yr. First, as you may have heard, Wrangler continues to win, supported by an unbelievable array of product and demand creation initiatives. That stated, we’re planning the enterprise prudently, notably within the first half, because the U.S. wholesale impacted by cautious retail ordering. On the take a look at the again half, there are a number of elements that give me confidence.
First, we have now good visibility into new distribution positive aspects, pushed by product launches I mentioned at present, in addition to elevated actual property as a result of robust sell-through. These largely begin within the second half of the yr. Second, we have now a robust cadence of collaboration and demand creation platforms which are primarily again half weighted. And at last, we shall be relaunching Denim at a significant nationwide retailer beginning within the third quarter.
Earlier than I hand it over to Chris, let me reiterate the arrogance I’ve in all the Wrangler crew and our positioning as we enter the brand new yr. I’ve been on this enterprise for practically 30 years and have by no means been extra optimistic in regards to the future. Chris?
Chris Waldeck
Thanks, Tom, and thanks all for becoming a member of us. I would love so that you can take away one phrase from the day, innovation. Lee has a deep historical past of bringing newness and is a regular for innovation on the planet of denim. Our archives are among the many deepest in attire and permits us to attract from years of genuine heritage and craftsmanship whereas at all times trying ahead. Our crew’s focus has been and can at all times be the patron and answering their wants. We do that via intense concentrate on innovation like flexibility, match, softness and local weather management to call just a few.
To place this in perspective, in 2023, two-thirds of our U.S. males’s denim enterprise got here from our innovation platforms. This yr, we are going to launch our most vital new innovation in years. Consolation and elegance too typically require trade-offs. Lee-X addresses this hole by taking all of the consolation of our efficiency pan and mixing it with the aesthetic of a world-class jean in a approach solely Lee can.
And importantly, Lee-X shall be a real international innovation platform with denim bottoms, non-denim bottoms, and tops. This mix of workmanship and elegance and luxury don’t exist at our value factors, and we’re excited to share it with shoppers later this yr. And we’re bringing these platforms to life via our profitable digitally-based demand creation technique concentrating on a brand new youthful shopper, the Lee-X platform was designed for. These platforms additionally develop our capability to have interaction with shoppers wherever and nevertheless they select.
Innovation may be present in our collaboration technique. In December, Lee and Diesel got here collectively to create one thing extremely distinctive and progressive. Every jean is made with 50-50 mixture of unsold Lee and Diesel denims. Initially launched in restricted assortment in Europe and Japan, the primary drop offered out in weeks, and the second drop shall be in March globally. Mixed these methods are opening up elevated channels of distribution and attracting new shoppers to the model.
With that, let’s evaluation our outcomes and the way we’re planning the upcoming yr. First, as Scott and Tom mentioned, U.S. wholesale is at present seeing the impression of cautious retail ordering, and I anticipate this to proceed over the near-term. That stated, Lee is coming into the yr with nice momentum, with POS accelerating over the again half of the yr. As measured by Circana, Lee denim sell-through elevated 4% for the fourth quarter and outpaced the market by 750 foundation factors. For the yr, Lee outpaced the market by roughly 150 foundation factors, and the power is not only in denim.
our broader classes of denim, informal pants, and shorts, our sell-through grew 2% for the yr and accelerated to eight% development over the past 6 months. Whereas we’re seeing the near-term impacts on shipments, there is no such thing as a doubt innovation-led newness is a strong mixture and is resonating with shoppers.
Let me now contact on Kontoor’s worldwide enterprise for each manufacturers. In EMEA, the macro headwinds are anticipated to proceed, notably within the wholesale channel as financial disruption has weighed on retailer open to purchase. We noticed this in 2023 with our wholesale enterprise declining 8% for the yr. This was partially offset by development in direct-to-consumer. To help our rising D2C enterprise, we had been refining our brick-and-mortar technique, leveraging finest practices from our Asian market, whereas persevering with to spend money on our digital platforms.
We launched a loyalty program that’s already producing spectacular outcomes, together with larger AOVs and repeat purchases. Our EMEA D2C enterprise grew 13% in 2023, and we anticipate one other yr of wholesome development forward. Scott talked about Challenge Jeanius, and we anticipated to have a significant impression on our EMEA enterprise, simplifying our go-to-market course of and enabling a real pan-European enterprise mannequin.
In APAC, we ended the yr robust, with China income rising 25% within the fourth quarter. The important thing focus for 2023 was enhancing retail stock ranges and the crew delivered. On the finish of the fourth quarter, channel inventories decreased roughly 30% in comparison with a yr in the past. This shall be a key unlock to acceleration we anticipate within the coming yr. We may also proceed to evolve our digital technique, leaning into newer e-commerce applied sciences. These reside streaming platforms have rapidly change into a channel of alternative for this extremely refined shopper, and we’re seeing robust double-digit development consequently.
Moreover, we launched an initiative to refresh over 70% of our China retailer fleet over the subsequent 2 years. And our licensing enterprise is scaling, reflecting momentum for each Lee and Wrangler, in addition to optimistic impression of latest markets added over the past 2 years. Mixed, each manufacturers grew double-digit in 2023. And at last, 6 months in the past, we had a robust chief to the area who joined us from Adidas and had beforehand spent 15 years with Nike. She has made a direct impression, and I’m excited in regards to the future for Asia enterprise.
Earlier than I flip over to Joe, I’d like to offer some ultimate perspective. First, our innovation pipeline is as robust as I’ve ever seen. And we have now clear visibility to thrilling launches, similar to Lee-X later this yr. Second, the Lee model is robust in gaining share out there with sell-through accelerating supported by most of the initiatives we mentioned at present. And, lastly, our China enterprise is poised for development, with channel inventories clear, investments in shops, and our robust management crew in place. Whereas we’re planning the enterprise conservatively, notably over the near-term, this provides me nice confidence as I look to the brand new yr. Joe?
Joe Alkire
Thanks, Chris, and thanks all for becoming a member of us at present. I’d like to start by offering perspective on the fourth quarter earlier than reviewing our ends in extra element. POS considerably outpaced our shipments as we continued to drive market share positive aspects within the U.S. That stated, the wholesale setting was difficult throughout the vacation interval, with retailers tightly managing stock receipts within the face of an unsure shopper spending backdrop, which negatively impacted our income.
General, we fell wanting our income outlook by roughly $50 million. The POS efficiency of each Wrangler and Lee was pretty in step with our expectations as each manufacturers continued to achieve share. Nevertheless, in mild of the slowdown in POS, which we did anticipate, key accounts decreased stock ranges greater than anticipated.
Regardless of the income shortfall, we’re happy with our execution and the revenue inflection we delivered on account of robust gross margin enlargement, which we anticipate to proceed within the coming yr. We additionally took extra aggressive motion on our personal stock throughout the quarter, leading to stronger money era and a more healthy basis for 2024, albeit on the expense of near-term gross margin.
I’ll develop on this in a second in addition to spotlight how the arrogance we have now in our 2024 outlook and the extra actions we introduced this morning with Challenge Jeanius will gas the subsequent leg of our TSR journey and help the optionality we see within the enterprise shifting ahead.
Earlier than we evaluation the small print of our fourth quarter, I’d wish to briefly contact on the extra audit interval obligation cost we incurred. If you happen to recall, the obligation matter was initially recognized late within the third quarter and arose from our ERP implementation relationship again to 2021. We acknowledged $13 million of audit interval obligation expense within the third quarter, which was an estimate primarily based on the data obtainable on the time.
Because of extra testing and procedures, we recognized $6 million of extra obligation expense associated to prior intervals and acknowledged the expense accordingly within the fourth quarter. To reply a query doubtless in your minds, we don’t anticipate to incur expense associated to this matter going ahead.
So with that, let’s evaluation our fourth quarter outcomes. World income decreased 9%. Two predominant elements impacted the quarter relative to our earlier expectations. First, we skilled a higher than anticipated decline in U.S. wholesale as retailers extra aggressively managed stock receipts. Stock normalization has been a theme for almost all of 2023 as we work with our companions to search out equilibrium in opposition to what stays an unsure setting.
Whereas we anticipated a deceleration in POS, the magnitude of the stock reductions was higher than anticipated and weighed on promoting throughout the quarter. Whereas stock ranges at retail are at present suboptimal, we anticipate retailer warning to proceed within the near-term. However the efficiency of our manufacturers and continued market share positive aspects is resulting in expanded distribution in 2024, which we anticipate to drive an enchancment in income as we progress via the yr.
Second, in mid-2023, we started a modernization challenge in our distribution middle community. This included course of and methods upgrades to enhance service ranges and effectivity, most notably in help of our rising DTC enterprise. This work continued into the fourth quarter and had a higher than anticipated impression on e-commerce success throughout the vacation interval, notably for the Lee model. The challenge is now full and we have now returned to regular service ranges.
Stepping again, full-year income declined 1%. We drove 9% development in DTC with positive aspects in each digital and brick-and-mortar, in addition to 4% development in digital wholesale. This was offset by a low-single-digit decline in wholesale due primarily to retailer stock administration dynamics on the finish of the yr. And for the second half of 2023, regardless of the two% decline in income, gross margin expanded 120 foundation factors, excluding the out-of-period obligation cost, working earnings elevated 5%, and we generated roughly $225 million of free money stream on account of robust profitability enchancment and reductions in stock. We anticipate this elementary profile to additional enhance in 2024.
Turning to our manufacturers, international income for the Wrangler model decreased 10%. The decline was primarily pushed by U.S. wholesale, offset by development in DTC and digital wholesale. For the complete yr, Wrangler was flat, with double-digit development in DTC offset by a decline in wholesale. Exterior the U.S., full-year Wrangler worldwide income decreased 1%, pushed by a slight decline in wholesale. This was partially offset by development in European DTC, which elevated 13%, reflecting investments in owned shops and our digital platform.
Turning to Lee, international income decreased 7%. Much like Wrangler, the decline was pushed by decreased shipments in U.S. wholesale, in addition to impacts to DTC from the beforehand talked about distribution middle improve. This was partially offset by a return to development in China. For the complete yr, Lee income decreased 4%. We anticipate to see enchancment in Lee’s efficiency in 2024, pushed by new innovation platforms, distribution positive aspects, in addition to an acceleration in China.
Turning to gross margin, as anticipated, adjusted gross margin inflected strongly within the fourth quarter, increasing 230 foundation factors excluding the obligation impression pushed by the advantages of pricing, channel combine, and decrease product prices. The quarter included the impression of proactive stock administration actions as we extra aggressively cleared extra stock in mild of the setting. Excluding this impression, adjusted gross margin expanded 290 foundation factors, which was consistent with our expectations. These incremental stock actions drove stronger money era as we closed out the yr and established a good stronger basis for 2024.
Adjusted SG&A expense was $202 million. Investments in DTC and know-how had been partially offset by disciplined administration of discretionary bills. For the complete yr, adjusted SG&A expense was $760 million flat in comparison with the prior yr. Adjusted earnings per share was $1.28, together with a $0.07 damaging impression from the obligation cost. Excluding the obligation cost, adjusted EPS was $1.35, representing a 54% enhance versus the prior yr.
EPS was positively impacted by discrete tax gadgets, primarily on account of the execution of tax planning methods which are anticipated to decrease money tax funds in future years. For the complete yr, adjusted EPS was $4.45, excluding the obligation cost, in comparison with adjusted EPS of $4.49 within the prior yr.
Now turning to our steadiness sheet. Stock decreased 16% to $500 million, consistent with our expectations regardless of the income shortfall. We’re happy with our execution and the progress we made to additional scale back stock ranges. Whereas we nonetheless have work to do, web working capital enchancment is driving important money era, additional supporting operational and capital allocation flexibility. We anticipate our stock to proceed to say no in 2024, together with a 20% lower within the first quarter.
We completed the yr with web debt or long-term debt much less money of $569 million and $215 million of money available. Our web leverage ratio or web debt divided by trailing 12-month adjusted EBITDA was 1.6 occasions, consistent with expectations and inside our focused vary.
Through the quarter, we repurchased $30 million of inventory underneath our earlier program. As we introduced in December, our Board accredited a brand new $300 million share repurchase program, which displays the arrogance we have now in our strategic plan. The robust money era of the enterprise, and the improved capital allocation optionality that may help robust shareholder returns over time.
And at last, as beforehand introduced, our Board declared a daily quarterly money dividend of $0.50 per share. Mixed with share repurchases, we returned a complete of $139 million to shareholders throughout the yr.
Now, turning to our outlook. Income is predicted to be within the vary of $2.57 billion to $2.63 billion, reflecting a lower of 1% to a rise of 1%. Our outlook displays the next expectations. First, we proceed to anticipate a difficult U.S. macro setting, notably within the first half of the yr, reflecting most of the dynamics we mentioned within the fourth quarter, in addition to the cautious strategy retailers are taking to seasonal product following a troublesome spring 2023 season.
Whereas we’re happy with continued U.S. market share positive aspects, we’re planning the enterprise conservatively as retailers tightly handle stock ranges. Our full yr outlook doesn’t ponder a significant enchancment in general POS or retail stock positions in comparison with the fourth quarter of 2023.
Second, we have now visibility to a lot of distinct initiatives which are anticipated to profit the second half of the yr. This consists of the brand new class and distribution positive aspects, Chris and Tom mentioned, enlargement of our tops in outside companies, and new innovation platforms.
Third, we anticipate stronger worldwide development pushed by China, reflecting a continuation of the momentum we noticed within the fourth quarter, the investments we’re making, and improved market fundamentals. This shall be partially offset by Europe, the place we anticipate continued softness given ongoing headwinds within the area.
Lastly, we anticipate robust development in DTC as we proceed to spend money on our digital platform, enhance channel segmentation, and help our demand creation pipeline. We anticipate first half income to say no at a mid-single-digit fee, adopted by mid-single-digit development within the second half of the yr. First quarter income is predicted to say no about 9%, due partly to ongoing retailer warning and the extra conservative strategy to seasonal merchandise simply mentioned.
Gross margin is predicted to be within the vary of 44.2% to 44.4% on an adjusted foundation, representing a rise of 170 to 190 foundation factors, in comparison with adjusted gross margin of 42.5% in 2023, excluding the obligation expense. Our outlook displays greater than 250 foundation factors of gross margin enlargement within the first half, with the primary quarter within the vary of 44% to 44.2% pushed by the structural advantages of combine in addition to decrease enter prices, partially offset by focused pricing and the impression of the Purple Sea disruption within the first half of the yr.
Gross margin enlargement is important to the earnings development assumptions in our outlook, so let me dive deeper into the constructing blocks of our plan and the arrogance we have now in our capability to fulfill or exceed the outlook simply offered. First, structural drivers similar to DTC and worldwide are intact. Second, we have now good visibility on enter prices with value locked in via the second quarter on manufacturing and into the third quarter on sourced product. Third, we have now taken motion to additional optimize our provide chain footprint, structurally decreasing our prices. And fourth, the composition of each our personal stock and stock at retail has improved versus a yr in the past and we have now been prudent with regard to our assumptions associated to the pricing and promotional panorama.
Past these near-term drivers, we have now the chance for additional gross margin enlargement on account of Challenge Jeanius, SKU rationalization, and higher provide chain effectivity, which can drive gross margin past our earlier expectations over time.
SG&A is predicted to extend at a low- to mid-single-digit fee on an adjusted foundation, and working earnings is predicted to be within the vary of $372 million to $382 million, reflecting development of roughly 7% to 10% in comparison with the prior yr excluding the obligation cost, together with double-digit working earnings development starting within the second quarter.
EPS is predicted within the vary of $4.65 to $4.75, representing development of roughly 4% to 7% in comparison with adjusted EPS within the prior yr excluding the obligation cost. Full yr EPS development shall be negatively impacted by about 5 proportion factors from the upper tax fee. We anticipate first half EPS to be in step with prior yr ranges with first quarter EPS of roughly $0.90.
To wrap up, I’d wish to share extra perspective on Challenge Jeanius and the numerous optionality we see within the enterprise shifting ahead. In late 2023, we launched the planning part of a complete end-to-end enterprise mannequin transformation with the aim of making funding capability to catalyze the subsequent leg of Kontoor’s worth creation journey. Challenge Jeanius will end in important gross and working margin enlargement and permit for a step operate change in funding to gas accelerated development.
We see complete run fee financial savings of between $50 million and $100 million with advantages beginning within the fourth quarter of this yr. As we activate this system, we anticipate restructuring, one-time, and different prices within the coming quarters, which we are going to disclose as applicable. The impression of Challenge Jeanius is just not but mirrored in our 2024 outlook, and we intend to share extra particulars within the coming quarters.
Earlier than we open it up for questions, just a few closing remarks. The worldwide working setting is unsure, and we’re planning the enterprise conservatively. We’ll stay disciplined with regard to investments, steadiness sheet administration, and capital allocation. Our manufacturers are profitable within the market. Our gross margin algorithm is poised to speed up, and when mixed with our proactive stock actions, I’ve excessive confidence in our outlook for robust working earnings development, money era, and returns on capital.
The power of our steadiness sheet mixed with our money era offers important capital allocation optionality, and we’re in an offensive posture, commencing Challenge Jeanius from a place of power to extend funding capability and speed up development, all of which mixes to help our dedication to delivering robust TSR. We stay up for sharing extra within the coming quarters, in addition to at our Investor Day later this yr.
This concludes our ready remarks, and I’ll now flip the decision again to the operator.
Query-and-Reply Session
Operator
Thanks. We’ll now conduct a question-and-answer session. [Operator Instructions] Our first query comes from Bob Drbul with Guggenheim. Please proceed.
Robert Drbul
Hello. Good morning. I used to be questioning in the event you might spend a while, just a bit bit extra time, on the U.S. wholesale enterprise. I suppose, when you consider what materialized within the fourth quarter, I believe it could be fascinating to simply perceive the way you’re planning. I don’t know in the event you might kind of put some extra numbers round the way you’re planning the wholesale enterprise within the first half versus the second half, how a lot of the companies’ replenishment versus preorder. After which, I suppose, in the event you might develop somewhat extra on distribution positive aspects within the shelf house that you just’re profitable, simply the place that’s coming from, and kind of how that elements into the assumptions on the U.S. enterprise? Thanks.
Joe Alkire
Hey, Bob. Good morning. It’s Joe. Perhaps I’ll tee this up with the financials and I’ll toss it to Scott, Tom, and Chris to offer some shade. So, yeah, within the fourth quarter, the delta-to-hour outlook, of the $50 million income shortfall was actually a direct results of extra conservative stock retailer administration by the U.S. companions. The slowdown in POS, as we stated, we did anticipate the discount in stock ranges we didn’t. However in This fall, our POS did outpace our shipments. We did proceed to achieve share, however promoting was clearly impacted by the stock administration dynamics.
And simply to place some perspective on that, stock ranges at our key accounts declined shut to twenty% by the tip of the yr versus the place they had been in Q3, which clearly had an impression on our promoting. However, Scott?
Scott Baxter
Yeah, Bob, I’ll make simply a few feedback earlier than I hand it over to Tom and Chris. However, I’m developing on 20 years of main or being concerned within the denim enterprise right here. And I’ll inform you this, I’ve seen this earlier than 5 or 6 occasions. And, I believe, I needed to talk about how I see this earlier than and the way I see this now, and it truly is completely different. It’s a a lot completely different image earlier, once we weren’t investing in these manufacturers a decade in the past and even simply previous to the spin. We had been in a a lot completely different place when our retailers behaved and acted like this and completely perceive that, however we weren’t investing within the manufacturers. They weren’t rising. We weren’t placing any power behind them. However we’re in a very completely different house proper now as we undergo this, and Joe hit on it, and the opposite guys will hit on somewhat bit. However we’re taking important share in a class, that’s rising somewhat bit.
However we simply proceed over an extended time frame to place a number of power behind our 2 massive manufacturers. Our collaborations are working, our promoting applications are working, our digital applications are working, the patron is admittedly enthusiastic about our manufacturers, most significantly, our product appears nice. And due to that we are going to come out of this in a a lot completely different place than the earlier occasions this has occurred, as a result of we’re actually vital to our buyer in that respect. Our product turns within the market, our product activates the ground and so they want our product and this may work its approach via the cycle that it often does. However going via this able of power taking share and having robust POS is a a lot completely different feeling that it’s been years in the past.
Tom Waldron
Yeah, I’ll soar in right here, Bob. When you consider manufacturers that do nicely with shoppers get a [little bit more real estate] [ph] and attending to your query when it comes to the again half of subsequent yr, each manufacturers have actually resonated with shoppers as evidenced by the POS and the investments we’re making in these manufacturers are definitely pulling via and we’ve received some good distribution positive aspects whether or not it’s an outside and shirts, as a result of the shoppers are voting for the model and we’re actually enthusiastic about that. We additionally talked in regards to the relaunch at a significant U.S. retailer. That’s vital for us, but it surely’s not really the massive a part of the brand new distribution positive aspects, that’s one thing that’s going to pay dividends over the subsequent 3 or 4 years. However we’re actually enthusiastic about how our manufacturers are resonating with shoppers. Chris?
Chris Waldeck
Good morning, Bob. It’s Chris. I’ll simply discuss somewhat bit about Lee particularly. Coming into 2024, Lee posted some actually robust market share positive aspects within the again half of 2023, each in models and {dollars}. We’ve a number of momentum with the patron proper now. Our product is resonating with them. Due to the success we had within the again half of 2023, it’s actually opened up new incremental house positive aspects for Lee within the again half of this yr. I talked about our new innovation launches round Lee-X, that may achieve an area. But additionally, candidly, we’re seeing it in our core and particularly round our feminine merchandise and that’s actually received me excited. So I really feel assured in regards to the incremental house that we’ve gained, the momentum we have now with the patron and looking out ahead to 2024.
Robert Drbul
Nice. Thanks.
Operator
Our subsequent query comes from Jim Duffy with Stifel. Please proceed.
James Duffy
Whats up, good morning. Thanks for the insights. Thanks for taking my query. I wish to begin on the outlook. Guys, we’d ever wish to see the information second half weighted, recognize you may have some new shelf house. I’m simply hoping you may converse extra in regards to the visibility round a few of these key assumptions underwriting the steerage. 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? After which what’s your confidence within the enchancment in declines within the second quarter and the idea for acceleration into the second half?
Joe Alkire
Hey, good morning, Jim. I’ll begin. It’s Joe. I’d say look simply from a posture standpoint, we’re planning the enterprise conservatively. We’re sitting in February amidst an unsure setting. And so, the outlook we’ve put ahead, we’re being prudent. However we’ve received modest top-line development mirrored within the outlook, robust gross margin enlargement and working earnings development, robust money era and returns on capital. There’s nothing constructed into the outlook from both Challenge Jeanius or extra capital allocation selections. I believe that’s a layer of optionality to the outlook that’s not mirrored not less than initially.
I’d say from a income standpoint, we’ve received good visibility into the primary quarter and the income enchancment for the steadiness of the yr is admittedly largely pushed by the brand new applications and distribution positive aspects, D2C in China. We haven’t assumed a significant change in both POS or stock ranges. And within the core enterprise, which could possibly be a possibility, however we anticipate retailers to stay cautious not less than within the near-term.
On the revenue facet, we’ve received excessive confidence within the gross margin, as I alluded to. The enlargement is first half loaded. We’ve received good visibility into the enter prices, pricing and blend. We expect we’ve been prudent with regard to the pricing and promo assumptions within the plan. And stock is in fine condition. And we took some actions on the availability chain entrance that’ll drive prices decrease. And, look, starting within the second quarter, we see double-digit working earnings development and that elementary profile will simply additional strengthen as we get to the again half of the yr.
James Duffy
Thanks. Yeah, definitely a bullish tone on the decision across the present state of the manufacturers, new initiatives, development alternatives. With that, I’m curious the way you’re fascinated by capital allocations. You could have the brand new $300 million repurchase authorization. Simply give us a way of the way you’re fascinated by placing that to work?
Scott Baxter
Certain. Jim, that is Scott. After which, I’ll go forward and kick it over to Joe, however I’ll kick it off. We stated it earlier than, we’re actually in an enviable place. We will do a number of issues on the similar time, you’ve seen us try this. We raised our dividend. We’re shopping for again inventory. We put in a brand new inventory buyback program of $300 million. We’re in an excellent place from a debt ratio standpoint. And if we wish to make an acquisition, we will. I wish to ensure that everybody’s conscious that from a M&A standpoint, we is not going to shock you, proper? So our elementary place is that we’re going to do one thing that makes a number of sense from us from a monetary standpoint, from a model standpoint, and from a tradition standpoint. We sort of take a look at it from these three lenses.
And we are also very keenly conscious if we wish to pay the precise value for the precise sort of acquisition. So if that occurs to come back alongside, we’ll be sure we go forward and try this. And it’ll be accretive to all of us and all of our stakeholders. However proper now, we really feel like we’re in a extremely good place. A number of of us are in somewhat completely different place than we’re, however we have now enhancing fundamentals going into the second half, already from a extremely robust basis at present. So I really feel actually good about what we’re doing, and we’re being actually sensible, Jim.
And Challenge Jeanius is just going to assist this in a big approach. In my profession, I’ve been concerned in a number of actually massive, actually strategic initiatives, some cost-cutting initiatives. However I’ve received extra power round this challenge to distinguish us from everybody else in our sector in a really important approach going ahead. That is the true deal, and I’m actually enthusiastic about it for the group. Joe, something like so as to add?
Joe Alkire
Yeah, Jim, possibly only a couple different factors. From a precedence standpoint, the priorities are unchanged. We’re going to prioritize reinvesting within the enterprise. We’ve received a robust dedication to the dividend and rising the dividend. Over time, the steadiness sheet is robust. We’ve received a number of dry powder. And look, with the $300 million share repurchase, the Board simply accredited. In December, we’ve received over $325 million money we anticipate to generate this yr, and the leverage is low. So, we’ll stay disciplined right here, however we might anticipate to place extra capital to work as we transfer via 2024.
James Duffy
Thanks, guys. Admire it.
Operator
The subsequent query comes from Brooke Roach with Goldman Sachs. Please proceed.
Brooke Roach
Good morning, and thanks for taking our query. I hoped you may elaborate in your outlook for pricing and promo this yr. I believe you talked about that you just had been planning this prudently, how are you fascinated by the chance for AUR throughout your numerous manufacturers and channels this yr, notably within the U.S. market? Do you suppose that value reductions are wanted in any of your key U.S. wholesale channels to keep up the extent of market share development that you just’re at present experiencing relative to your rivals? Thanks.
Joe Alkire
Yeah. Hey, Brooke, it’s Joe. I’ll tee this up from a monetary perspective, after which, Scott, Tom, Chris can soar in right here. Yeah, so from a pricing standpoint, we have now assumed that we take costs again somewhat bit right here in 2024. It’s lower than or a couple of level on the top-line, lower than a degree on the gross margin facet. So that’s within the information. From a promotional standpoint, we have now assumed that the setting is a bit more promotional, 2024 versus 2023. That could possibly be conservative, however we’ll see how that evolves.
Tom Waldron
Yeah, I’ll soar in right here. I imply, we’re at all times actually strategic about how we take into consideration our pricing. There are areas that – from an elasticity standpoint, if costs are coming down, that’s all inbuilt, we’ve had taking some pricing actions, not main. And that’s actually an evaluation to how the model is resonating with the patron from a pricing energy standpoint. So we really feel very well arrange for 2024 from a pricing standpoint. Chris, anything do you wish to add?
Chris Waldeck
Nicely, I believe the one factor I’d add, Brooke, for you simply as we take into consideration our worldwide markets, China, as that market begins to open again up and develop, we really feel very bullish about that long-term, however we’re taking a conservative strategy proper now and like we’re within the U.S., the place we perceive the sensitivity with the patron and we’re responding accordingly. And that very same goes for Europe for us and our enterprise there and the way we take into consideration our model. So it’s one thing that we take a look at, we’re very surgical and the way we take into consideration value and we wish to ensure that we’re aggressive within the market.
Scott Baxter
I’ll simply add one factor, Brooke, we’ve received actually good innovation in our pipeline proper now from each manufacturers throughout the globe. And that’ll give us some pricing energy going ahead, which I’m actually, actually excited for this group to get an opportunity to see right here over the subsequent 12 to 18 months.
Brooke Roach
Nice. Thanks a lot. After which simply to follow-up for Joe, there’s a number of shifting items within the gross margin information, understood, the place the structural advantages are and the visibility within the first half. However are you able to assist us with the tough sizing of a few of these buckets given the places and takes and the place we must be fascinated by alternative for gross margin outperformance? Ought to the setting get somewhat bit stronger?
Joe Alkire
Yeah. Certain, Brooke, I recognize the query given all of the shifting components. So for This fall, excluding the out-of-period obligation cost, gross margin improved about 230 foundation factors. I’d say, X the stock actions that we took, the gross margin enlargement of near 300 was actually consistent with our expectations. So no surprises. The drivers there actually in equal components the place pricing combine and decrease enter prices, which have now flipped to a tailwind as we head into 2024.
For 2024 particularly, we stated 170 to 190 foundation factors off of a 2023 base that excludes the out-of-period obligation cost. That’ll be entrance half loaded. The vast majority of that enhance shall be pushed by decrease enter prices and blend. After which we have now a little bit of an offset from pricing and promo.
Brooke Roach
Thanks a lot. I’ll cross it on.
Operator
The subsequent query comes from David Paul Kearney with Barclays. Please proceed.
Paul Kearney
Thanks. Paul Kearney from Barclays. You talked about some adjustments within the worldwide enterprise, simplifying the go-to-market technique, refining the brick-and-mortar technique. Are you able to go into what a few of these parts of these adjustments are from the prior? Thanks.
Chris Waldeck
Hey, Paul, it’s Chris. I’ll take this one. Simply beginning with Asia and particular round our China enterprise, we’re taking a measured strategy is the financial system positive aspects momentum. However we do have a bullish long-term view on China. Our stock ranges are again at regular ranges, the place they need to be. Development in 2024 for us is admittedly coming from some conservative comps, some new accomplice door enlargement. However actually this funding we have now in refreshing our fleet over the subsequent 2 years. We’ll begin to see that paying-off pressure within the second half of this yr and we’re tremendous enthusiastic about that, I believe, that’s actually going to set us up for long-term development.
In Europe, we’re optimistic in regards to the alternative there for our manufacturers once more simply with the macro financial scenario there, we’re taking a conservative strategy. Scott talked about it, and I’ll simply reinforce it. However challenge Jeanius is admittedly going to be an unlock for us on this area. And what it’s going to do is enable us to realign our enterprise mannequin there into a real pan-European construction. That’s get a easy thought 5 issues, but additionally open up markets that we don’t have publicity to at present.
Operator
Our subsequent query comes from Mauricio Serna with UBS. Please proceed.
Mauricio Serna
Nice. Good morning and thanks for taking our questions. I suppose, I simply needed to listen to somewhat bit extra about what you guys are doing on Lee with the innovation and newness that appears to be actually serving to the model. And possibly in the event you might discuss somewhat bit in regards to the efficiency in This fall, the place you had been mentioning that the retailer’s cautiousness sort of like drove a income shortfall. Might you possibly present somewhat bit extra element on what channels have you ever seen that extra of that cautious being extra pronounced I suppose. And possibly on the upcoming relaunch of Denim at a significant nationwide retailer. Any insights on like what channel are we seeing that, income coming via, like I suppose like several channel, like what channel, what sort of retailer are we speaking about simply to grasp like the place we might see that publicity seeing coming via? Thanks.
Chris Waldeck
Hey Mauricio, that is Chris. I’ll kick it off and thanks. I’m too additionally tremendous enthusiastic about Lee-X and simply actually we’re going to boost the bar as you consider consolation and stretch in denim. However we shouldn’t simply take into consideration Lee-X as Denim. It’s actually a platform for us, an innovation platform for us. So we’re going to develop throughout our international markets. Denim 12 woven tops, we discuss loads about we have to develop classes and that is actually going to assist us try this.
Now, the opposite factor about X is that, it’s actually focused for that youthful shopper. It’s focused at a value level and elevate a value level from the place we’re at present, however nonetheless in that candy spot and I’m tremendous enthusiastic about that, and the way we’re going to get that shifting right here on the again half of 2024.
Let me toss it over to, Tom, and let him discuss to you somewhat bit about simply the channel a part of it.
Tom Waldron
Yeah, I imply, usually – one in all your questions is just like the retailer pullback and conservatives in ordering like that that was actually throughout the board. There wasn’t one sector that that was tied to, it was actually all retailers on the market, and I believe all shoppers are feeling a bit pinched proper now and the conservatism is broad-based when it comes to the brand new denim distribution. We don’t actually touch upon which specific retailer from a method standpoint, however what I’ll inform you it’s a reflection of our POS, our robust market share positive aspects, and that retailer taking a look at that knowledge and understanding that what we will’t function on this setting with out Wrangler. I imply on the finish of the day Wrangler is likely one of the massive three manufacturers out within the U.S. and so they want us and the shoppers are asking for it. So we’re enthusiastic about that when it comes to the again half. However what I’m extra enthusiastic about is, how this has a multi-year development alternative to it.
Mauricio Serna
Obtained it. Thanks very a lot.
Operator
The subsequent query comes from Will Gaertner with Wells Fargo. Please proceed.
Will Gaertner
Hey, guys, thanks for taking my query. First, simply on China, I imply, it’s been robust this quarter. How do you see the expansion going ahead and what are you seeing on the bottom there? And may you simply remind us how massive China is now for you guys?
Chris Waldeck
Hey, Will, it’s Chris. I’ll take that one for you. The Chinese language financial system is as nicely documented all throughout. It’s been opened. It’s been closed. It’s been opened – and, I believe, nicely, everybody was optimistic in regards to the opening in 2023, we noticed that it’s nonetheless fairly uneven for that Chinese language shopper and the challenges are there. Once more, we’re actually bullish about that market. I believe what’s tremendous encouraging is simply the funding that we’re making in that market behind our retail shops over the subsequent 2 years is admittedly going to be impactful. There’s a number of these shops that we frankly haven’t touched for just a few years.
And to get in to refresh these shops and to essentially excite the patron and likewise to provide us a extremely a strong platform for these improvements that we have now coming to the market and bringing these to life for the patron in a extremely highly effective approach, I believe it’s going to be an enormous unlock for us. So excited in regards to the long-term proposition with China and our enterprise will proceed to develop there as that financial system positive aspects momentum, which everyone knows that it’ll.
Will Gaertner
That’s nice. And, Joe, possibly for you, stock. So sounds such as you guys are going to proceed to chop stock. Is that going to be, I suppose, what’s your expectation of whenever you’re going to be in a clear stock place? And the cuts that you just’re speaking about within the first quarter, is that going to stress gross margin?
Joe Alkire
Yeah, so all the things we have now contemplated from a listing standpoint is captured within the gross margin outlook we gave for 2024. We’ve clearly made a number of progress on the stock over the past yr. The groups have labored actually, actually onerous. However exiting 2024, we nonetheless have about 130 days of ahead stock. And we might say, regular for us is plus or minus 100 days. So we’re not there but, we nonetheless have work to do. We’re actually assured within the glide path, however as we proceed to optimize, the stock and work that all the way down to what could be extra regular state, that’s going to proceed to contribute to the money era of the enterprise together with the profitability enchancment.
Will Gaertner
Nice. I’ll cross it on. Thanks.
Operator
Thanks. At the moment, I want to flip the ground again over to Scott Baxter for closing feedback.
Scott Baxter
Only a fast thanks to everybody for taking part on the decision at present. We’ll stay up for reaching out and talking with you once more right here upcoming after the primary quarter. Have an excellent day and an excellent week. Thanks once more, everybody. Take care.
Operator
This concludes at present’s teleconference. Chances are you’ll disconnect your traces presently. Thanks in your participation. Have an excellent day.
[ad_2]
Source link
