But you think about outdoor, in the last four years, we’ve gone from $100 million to $200 million and you talked about which ones are still accelerators. Outdoor is definitely an accelerator for us. We’re just getting better at it and smarter at it. And we’ve hired some talent and our product looks better. And with time, you learn some things and you learn about your consumer and we really like the new product that’s coming out here. So feel really good about that. Our T business has been accelerating really, really nicely. So we think about those two. Right now, work is a little bumpy for us. So, we’ll continue to work through that and get that in a place that it needs to be, but we still love that channel. It’s a big channel for us as a company already.
And we think that it’s just a business that we’re going to be in for the long term, and it’s got real structural tailwinds for us. So we’re excited about that too. But that’s kind of where I would focus and emphasis from those newer categories that we enter.
Operator: Our next questions come from the line of Brooke Roach with Goldman Sachs.
Brooke Roach: You’ve talked a lot about the optimism that you have on new categories and the growth of the business in non-denim today, but I was hoping you could give us your view on the health and the outlook for growth of the US denim market. Have you seen any benefit from some of the recent Western cultural moments, and are you seeing accelerating April POS as a result of the recent pricing changes that have been put in place at some of your key customers?
Scott Baxter: No question. We have a significant business, obviously, and it’s critically important to us. And we call it our core business. And we see that denim is in fashion, has been in fashion, the casualization of the world. One of the things that was really interesting was that we went through this casualization when we went through the pandemic. And then when we came out, people said that we’ll probably return to normal and people dress like they used to. It just never happened. People stay casual or continuing to be casual. And we fit right into that in a really perfect way around the globe. So feel really good about that. We do have some new distribution coming even in our core denim categories here for the second half of the year, which is pretty exciting with a big retailer that we’ve talked about.
So you couple those two things. When you go to western, the one thing I always think about and try to remind people is that we’ve been on a western trend since 1947 when we brought out the first really great cowboy jean, our MWZ 13s. And we’ve been working that and loving that for a long time. And we are western. If you think about Western, you think about the cowboy, you think about the mountains, you think about that lifestyle, the first thing you think about is Wrangler Jeans and Wrangler tops. So we are a huge part of that business. And it just continues to grow. And it’s been really nice. And I think it’s really spiritual for some people to be part of that and the west and what it stands for and what it stood for us as a country. And it’s interesting too now that, for the first time in a long time, we did have this many, many years ago, but the Western piece is starting to hit Europe a little bit now, which is really interesting for us.
So we’re enthusiastic about and we’ll see what happens there, but we are seeing some greenshoots in that respect over in the European area. But we continue to bring new products to market in our Western business. And I don’t know if everybody saw or has heard the new Miranda Lambert song that came out about Wrangler jeans that’s debuting here today, I think. And Miranda is the all-time winningest ACM Award winner ever. So it’s pretty interesting that things like that happen, and they’re completely organic for us as a company. And it just goes to show you when people think about that Western business, they think about Wrangler first.
Joe Alkire: Now, Brooke, just on April specifically, we actually saw April POS soften a little bit versus Q1. Nothing dramatic, nothing that concerns us. It did improve sequentially over the course of the month. That’s continued into the first couple of days of May here, and that’s all reflected in our outlook. But it was a little softer than Q1.
Brooke Roach: If I could just follow-up on international, it appears that Europe wholesale continues to be a little weaker than we would have expected. I was wondering if you could discuss, relative to your outlook for Europe and Asia provided in February, what are you forecasting for growth in both wholesale and DTC in those markets for the remainder of the year?
Scott Baxter: Brooke, I’ll go ahead and start and then kick it over to Joe. But yeah, you’re right. Europe is still a little bit lumpy. The business there is kind of up and down. And we’ve been riding that like a lot of other folks. We’re certainly hopeful that that economy starts to pick up here over time. We are seeing some things that are beneficial. Our product is still resonating in a pretty significant way. And we’ve got a really good team on the ground there. And our new Project Genius work should help that from a global standpoint, as we go ahead and accelerate our global product development under one person. So I do have some optimism, but we do need to see the economy approve. And we’re hopeful that that happens and strengthens throughout the rest of the year. But, truly, we think it’s going to pick up a little bit more steam in 2025 than in 2024.
Joe Alkire: Just in terms of this year, Brooke, we actually came through Q1 a little better than our plan, both Europe and Asia. Again, just to the point I made earlier, we plan the business pretty conservatively. So no real change in terms of how we’re thinking about the business. Europe will be tougher than Asia. Asia, we still expect growth more in that mid to high single digit range on a full year basis, much stronger in the second half. Within that, we expect stronger growth from D2C, which you’ve seen from both regions pretty consistently.
Operator: Our next questions come from the line of Mauricio Serna with UBS.
Mauricio Serna: I just wanted to confirm first on the sales guidance that Q1, like the sales speed, there wasn’t really any shift in shipments from Q2 to Q1. And if that’s the case, just to understand, again, why is that not being flown through to the full year sales guidance. Second on that, thinking about the full year sales guidance, maybe if you could provide some type of bridge or kind of explanation similar to what you mentioned in the gross margin outlook in terms of how much you’re getting roughly contribution from the new distribution gains or channel expansion. And particularly interested on the launch in the second half of Wrangler denim, how much do you think that could contribute to your sales growth?
Joe Alkire: It’s Joe. I’ll start. So on the first half guidance specifically, we kept it the same, so no real change. We raised the outlook. At least from a revenue standpoint, no change for first half or full year. I’d say we’re just being a little bit cautious, just given the environment, but no real change. We continue to not assume any real improvement or any improvement in either POS trends or inventory levels at retail. We held the year as well, down 1% to up 1% on the top line, and the growth we assume in the back half is really all non-comp distribution gains, category expansion, D2C in China. So from a top line standpoint, there’s really no change to our outlook for the year. There’s been some movement between the quarters, but nothing significant in the context of the full year.
Mauricio Serna: Just a quick follow-up. Could you talk a little bit more about what you saw in China? You usually mention that on the release, but I didn’t see any comments this quarter. And maybe also, how should we think about – with the meaningful cash flow generation that you have for this year, how should we think about the optionality in terms of returns to shareholders, in terms of dividends and share repurchases?
Mauricio Serna: This is Scott. I’ll go ahead and start. From a China standpoint, we took 2023 to really spend some time to work with our partners and clean up our inventory, which our team – and I want to be very thankful to them for this, but they did an outstanding job there. So, really appreciate that, get inventory levels really cleaned. Because if you remember, and I think everybody does, China came out of the pandemic a little bit slower than everybody else. So, as we go through these kinds of inventory issues, they are the kind of the tailwind of it. So really nice work there. Now we’re going about and we’re refreshing about 70% of our fleet over there, which is fairly significant over the next two years, but it’s really good work and work that needed to be done.
Teams heavily engaged in that. We did a lot of resource work in there and a lot of insight work in there. So we’re in a really good place as we start that process going forward. Some of the things that we’re thinking about over there, we’re leaning into the newer live streaming platforms which have become really, really interesting and really powerful from us in speaking to the consumer standpoint. So that’s kind of where that consumer has migrated a bit. So those are some of the things that we’re doing. Really like where we are right now as we come through a very difficult time there, way back in 2022 and 2023. And a little bit of it, Mauricio, I would say is a little bit of blocking and tackling that we’re doing there and then just building some great product and doing what we do.
So look forward to the future there. I’ll go ahead and start capital allocation and kick it over to Joe. It is a fabulous position to be in. We’re creating a lot of cash. The business is doing well. We’ve got options in front of us. You saw that we went ahead and bought back $20 million of stock this quarter under our new $300 million program that we have. In addition, our dividend, our very significant dividend that we pay and we’re investing back in the businesses. If we want to do M&A, we’re in a really good position to do M&A. Maybe I can make a few comments on that. From an M&A standpoint, I’ve said it before, I’ve said it for years, we’re not going to surprise you. Anything that we do, you would immediately get. If anything we do, we would look to do something accretive, we would look for a very, very fast pay down and pay back.
So count on that too, we’re very prudent. Listen, we’re really serious about making sure that we continue to do what’s best for our shareholders and stakeholders. And right now, we’re in a really good position. There’s difficulty in the environment. There’s difficulty in the sector, but we’re not in that position. We’re in a position of strength. So we can look at things from a position of strength, which is also really important. So we feel really good about where we are and the cash that we’re generating as a company, and we’ve done a really prudent job as far as how we’ve gone ahead and giving it back to the shareholders. Joe, anything to add?
Joe Alkire: Mauricio, I would just say from a priority standpoint, the priorities are unchanged. We want to prioritize reinvesting in the business first. We’re committed to growing the dividend over time. And then you’ve got share repu and M&A. Our cash flow is accelerating, it’s stronger. We raised the outlook, the balance sheet is strong. We repurchased $20 million of stock in the first quarter. We repurchased $30 million in the fourth quarter. So we’re putting more capital to work. The M&A environment is active. As you know, we do think it’s an opportunity for us, but we’re going to stay disciplined. We like our strategic plan. And so, I’d say the bar is high relative to where we can invest in Kontoor today. So, again, a lot of optionality given the position we’re in, and Project Genius just further supports our flexibility going forward.
Operator: Our next questions come from the line of Laurent Vasilescu with BNP Paribas.
Laurent Vasilescu: I wanted to follow up on Mauricio’s question on China. Last quarter, the transcript called out that China grew 25% in the fourth quarter and that Lee China would accelerate. Curious to know how China actually performed for this quarter year-over-year. That would be great. And are you still expecting for China to accelerate throughout the year?
Joe Alkire: China was down a little bit in the first quarter. It was a little ahead of our plan. We still expect growth for the full year. Digital increased at a double-digit rate. Brick and mortar was a little tougher. As you know, Lee has a larger presence from a brick and mortar retail standpoint, and traffic trends were difficult in the quarter. Inventory levels just in the market are much improved versus a year ago. I’d say we’re pretty much back at more normalized levels of inventory, and we continue to work on improving the health and quality of our retail partners. So no real change. It remains a pretty significant opportunity for us long term.
Laurent Vasilescu: I wanted to ask about the 1Q adjustments. The footnotes call out streamlining and transferring selection, production within your internal manufacturing network. Maybe could you provide a little bit more code to the audience what this means? And should we assume roughly $0.10 of adjustments per quarter over the next three quarters, so we can get to the model GAAP net income?
Joe Alkire: In the first quarter, what you saw in the gross margin line was a little bit of a spillover from the fourth quarter restructuring charge we took on the supply chain. That was really exiting our manufacturing in Nicaragua and consolidating into Mexico. I’d say the majority of the one-time costs in the first quarter were more Genius-related. As we highlighted last quarter or disclosed last quarter, we’ll have some one-time costs related to that program as we activate it over the next couple of quarters. But I’d say, going forward, outside of Project Genius and the impact of which we’ll disclose appropriately, I’d expect our one-time costs to be pretty minimal, if any. So you should start to see a much cleaner picture for the business going forward.
Operator: Our next questions come from the line of Will Gaertner with Wells Fargo.
Will Gaertner: I just want to talk about the lower product costs. How sustainable is that past this year? I think you parsed out the impact this year. Just maybe talk a little bit about what’s going to happen once you lap those product costs, those lower product costs?
Joe Alkire: We said about 200 basis points benefit for the year from lower product costs. That’s more front half loaded than back half. As we get to the fourth quarter, we’ll start to lap those. But for the second half as a whole, our outlook implies over 100 basis points of gross margin expansion. So that’s 2024. I’d say just as you think about the gross margin algorithm going forward, we basically have our structural mix, which we think is somewhere in that 30 basis points to 40 basis points range. I’d say for everything else, FX, costs, pricing, over time that tends to neutralize for us. That’s been our model historically. And I’d say there’s no structural reason why that would change for us going forward. But we do have Project Genius, just as we think about evolving our supply chain, that will layer on some additional opportunity on the gross margin side, but more to come on that over the next few quarters.
Will Gaertner: Just maybe talk a little bit about the share gains. What’s driving that? Are you selling into new doors at existing retailers or is it new retailers? Are you getting shelf space with core product or is this driven more by category expansion?
Scott Baxter: This is Scott. Will, I’ll tell you exactly what’s doing a great product. Our team is designing and building fantastic product that our consumers want and you combine that great product with things like the new Lainey Wilson collection, our new STAUD collaboration that we’ve continued and just those things that we’re doing. It’s just driving the consumer to our brand. It’s a really exciting time. Lots of just excitement and enthusiasm about both brands and that’s just adding to what’s going on here at our company. Again, I go back to, it’s a fairly simple formula. You build really great products, you market it really well, you treat your consumers really well, we sell our product at a very fair price, a lot of value and people love our brands. It’s a great combination for us.
Will Gaertner: Are you expanding it to new retailers or is it more existing doors? Can you just kind of give a little bit more color there?
Scott Baxter: We’ve expanded into some new retailers for sure. And then in the second half of this year, we do have some new business that we’ve talked a little bit about, which is part of the reason that we’re going to have a little acceleration in our revenue. And that is happening both at existing customers and also at new customers. And some of our new areas that we talked about earlier, like outdoor and Ts, are really working and they’re picking up new distribution too. So it is a combination of all of those.
Operator: Our next questions come from the line of Paul Kearney with Barclays.
Paul Kearney: Most of them have been answered, but maybe can you talk about the investments you’re making for the back half innovation and channel launches? Where are you allocating marketing? And how should we think about that spend longer term on the SG&A line?
Scott Baxter: We’ve done a really nice job of accelerating our marketing spend since the spin and we continue to do that. But I think the most important thing is we’ve actually been very intelligent on how we’ve done that going forward. I think one of the things that’s been really important for us here is our new consumer insights focus. When we built our new ERP system, it gave us an opportunity to go ahead and build out our consumer insights group for both Wrangler and Lee, which really wasn’t very robust before. And let me give you a really great. example of how that’s worked. We found out here recently, not that long ago, through our new consumer insights groups, that our lead male consumer is playing and also watching more golf than the average consumer.
So we went ahead and went to the market with a new lead golf pant short, and that just kicked off in the marketplace, and it’s actually kicked off in a really nice way. We’ve been really pleased with the performance of it already. But that’s a great example of how we’re looking at these different opportunities and utilizing our new ERP system and investing in consumer insights going forward.
Operator: Thank you. There are no further questions at this time. I’d now like to turn the floor back over to Scott Baxter for any closing remarks.
Scott Baxter: Folks, I just wanted to thank you for all your questions and thank you for your interest in our company and certainly appreciate that. And have a wonderful beginning of the summer. And we’ll look forward to touching base with you in July about midsummer and getting you up to date on our progress and everything we talked about today. But again, thank you for your participation today and we’ll talk to you soon.
Operator: Thank you. This does conclude today’s teleconference. We appreciate your participation. You may disconnect at this time. Enjoy the rest of your day.
