Kontoor Brands Easily Beats Expectations

Denim company Kontoor Brands (KTB 2.71%), which was spun off from VF Corp. in May, reported its second-quarter results before the market opened on Aug. 8. Revenue was hurt by the bankruptcy of Sears Holdings, the exit from an underperforming country in Europe, business model changes in certain markets, and foreign-currency headwinds. But the company still managed to beat analyst expectations by a large margin.

A messy quarter

Kontoor's revenue and earnings were down compared to the prior-year period, but both handily exceeded analyst estimates:

Data source: Kontoor Brands.

Adjusted revenue, which excludes the impact of restructuring, separation, and other items, was down 6% year over year. The bankruptcy of Sears was responsible for 2 percentage points of that decline; market exits and business model changes were responsible for another 2 percentage points of decline; and currency accounted for 1 percentage point of decline.

Revenue for the Wrangler brand was down 8% year over year to $364 million, with U.S. sales down 3% due to timing shifts of shipments and Sears' bankruptcy. Excluding Sears, Wrangler U.S. wholesale revenue was up 2% in the first half of 2019, and the company expects global sales to improve in the second half.

Revenue for the Lee brand was down 5% year over year to $207 million. Excluding currency and Sears, Lee adjusted revenue would have risen by 1% from the prior-year period. Other revenue was down 20% year over year to $39 million.

The bottom line was hurt by lower revenue and a 1.1-percentage-point decline in adjusted gross margin to 40%. Gross margin was down mostly due to restructuring charges, currency, lower international sales, and higher distressed sales. The company expects the gross margin picture to look better in the second half.

Image source: Getty Images.

No change to guidance

"We have the pieces in place and see a clear path to achieving our long-term revenue growth, margin improvement, and cash generation goals," said Kontoor CEO Scott Baxter. "These improvements start to gain traction in the second half of 2019 as our business model changes and cost improvement initiatives begin to take hold."

Kontoor reiterated its full-year guidance, which calls for revenue of at least $2.5 billion, down a mid-single-digit percentage from 2018. Excluding currency, Sears, and market exits, revenue is expected to be roughly flat.

Full-year adjusted EBITDA is expected between $340 million and $360 million, down a mid-single-digit to low-double-digit percentage from 2018. Adjusted EBITDA is expected to improve in the second half of the year.

Looking beyond 2019, Kontoor expects revenue to rise at a low-single-digit compound rate in 2020 and 2021, along with mid-single-digit adjusted EBITDA growth.

Kontoor is dealing with plenty of temporary issues this year, and that's hurting the company's results. Additional major retailer bankruptcies aren't out of the question -- J.C. Penney is in deep trouble, for example. Continued retail upheaval could hurt Kontoor's results for years to come.

The good news: With the company reaffirming its full-year and longer-term guidance, Kontoor continues to see a return to growth next year despite these challenges.