Kontoor Brands Reports Steep Sales Decline

Kontoor Brands (KTB 2.71%), the company behind the Wrangler and Lee brands of jeans that was spun off from VF Corporation earlier this year, still sees slow-and-steady growth in its future. But Kontoor's third-quarter report showed that it will take time to get the top line moving in the right direction.

Data source: Kontoor Brands. YOY = year over year. GAAP = generally accepted accounting principles.

Multiple headwinds

Most of Kontoor's revenue decline in the third quarter was driven by a few factors. First, the company took actions to exit certain channels in India, along with other global points of distribution, as part of its quality-of-sales initiatives. These moves accounted for 3 percentage points of the drop.

Second, the bankruptcy of Sears in late 2018 accounted for 2 percentage points of the decline. Kontoor will begin to lap that bankruptcy in the fourth quarter. Third, currency was responsible for 1 percentage point of the revenue slump.

"[W]e're improving the quality of our sales, including exiting unprofitable points of distribution, changing business models, and rationalizing underperforming SKUs. These actions create the building blocks for healthy, sustainable future growth," CEO Scott Baxter said in a statement.

U.S. sales were down 9% year over year, hurt by Sears and actions to exit less profitable points of distribution. International revenue fell 11%, weighed down by strategic actions in India and other countries. Sales in China grew, picking up some of the slack.

Image source: Getty Images.

Both the Wrangler and Lee brands suffered sales declines in the third quarter. Wrangler produced revenue of $367 million, down 7%, although Wrangler wholesale revenue in the U.S. is down just 2% year to date. Kontoor expects the performance of the Wrangler brand to improve in the fourth quarter.

Lee produced revenue of $232 million, down 8% year over year. The quality-of-sales initiatives hurt sales during the quarter, partly offset by strength in China. Lee revenue in China rose 8% in Q3, driven by a 10% comparable-store sales increase and 41% growth in the digital business.

Gross margin increased by 30 basis points to 40.1%, fueled by restructuring and the quality-of-sales initiatives. The company took a $33 million charge related to the Rock & Republic brand, which knocked down earnings on a GAAP basis. Adjusted earnings per share, which excludes that impairment charge, were reduced by $0.09 due to the actions taken in India.

A return to growth expected

Despite the steep sales decline in the third quarter, Kontoor maintained its outlook for full-year revenue. The company still expects to produce sales of at least $2.5 billion, down a mid-single-digit percentage from 2018 on an adjusted basis. Excluding currency, the impact of Sears, and business exits, full-year revenue will be roughly flat compared to 2018.

Kontoor also maintained its plan for 2020 and 2021. The company expects revenue to grow at a low-single-digit rate through 2021, and adjusted EBITDA is expected to increase by a mid-single-digit rate annually.

"We remain confident that we will continue to drive improved profitability and generate significant cash flow in support of achieving our long-term annualized total shareholder return goal of 8 to 10 percent," said Baxter.

Kontoor is positioning itself as a slow-growth, high-yield dividend stock. The company's quarterly dividend of $0.56 per share is good for a yield around 6%. While Kontoor's third-quarter results were messy, nothing has changed about the long-term story.