Kontoor Brands, Inc. (NYSE:KTB) Q4 2022 Earnings Call Transcript

Kontoor Brands, Inc. (NYSE:KTB) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Greetings, and welcome to the Kontoor Brands’ Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eric Tracy, Vice President, Corporate Finance and Investor Relations. Thank you, Eric. You may begin.

Eric Tracy: Thank you, operator and welcome to Kontoor Brands’ fourth quarter and fiscal year 2022 earnings conference call. Participants on today’s call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to materially differ. These uncertainties are detailed in documents filed with the SEC. We urge you to read our risk factors, cautionary language, and other disclosures contained in those reports. Select comparisons to 2021 results will be on an adjusted basis and in certain cases, we will make comparisons to 2019 adjusted results. Reconciliations of GAAP measures to adjusted amounts can be found on the supplemental financial tables included in the news release that was issued early this morning and is available on our website at kontoorbrands.com.

These tables identify and quantify excluded items and provide management’s view of why this information is useful to investors. Comparisons will be in constant currency, unless otherwise stated with the exception of comparisons to the 2019 period. Joining me on today’s call are Kontoor Brands’ President, Chief Executive Officer and Chair, Scott Baxter and Chief Financial Officer, Rustin Welton. In addition, we will also be joined by Tom Waldron, Co-Chief Operating Officer and Global Brand President of Wrangler; and Chris Waldeck, Co-Chief Operating Officer and Global Brand President of Lee. Following our prepared remarks, we will open the call for questions. We anticipate this call will last about an hour. Scott?

Scott Baxter: Thanks, Eric, and thank you all for joining us today. As Eric mentioned, Tom and Chris will be joining us as usual for this year-end review. We believe these year-end calls provide a great opportunity to have them share insights from the past year, as well as go-forward strategies for each of their respective brands and functional areas. You’ll hear more from them in a bit. Let me first provide some thoughts at a Kontoor level, as I’m pleased to share our strong results for the fourth quarter as I’ve been more excited to discuss our incredible opportunities ahead. As we begin 2023 from a position of strength, while we expect macroeconomic challenges to persist, our results afford us great proof points that when we execute on our playbook, all of our key stakeholders win.

Beginning with some highlights from the fourth quarter and full year 2022, in Q4, global Kontoor revenue grew 9%, well-above our internal forecast as shipments in the US accelerated, augmented by continued share gains in AUR growth, and profitability in the quarter was outstanding with adjusted operating income increasing 19%. Despite the significant macro pressures during 2022, when we were able to deliver another year of healthy growth with revenue increasing high single digits, and we returned a total of $166 million to shareholders through a combination of dividend payouts, which you will recall, we increased last quarter, as well as share repurchases. And stepping back a bit, we think it’s important to note, relative to pre-pandemic 2019 levels during 2022, we were able to grow revenue mid-single digits or double-digit growth, excluding proactive actions to exit our DFO fleet and lower quality points of distribution, expand reported gross margin 230 basis points compared to adjusted 2019 gross margin, even with the impacts of inflation, supply chain challenges, retailer inventory rebalancing and COVID lockdowns in China.

And finally, we’ve grown adjusted earnings 17% over 2019. These results are a direct function of our catalyzed growth strategies we laid out at our last Investor Day. Let me remind everyone of these focus areas and some great proof points for how we are tracking. First, enhancing our core US denim business. In 2022, our US business grew 11%, again, with broad-based strength and share gains. Second, diversifying our categories with expansion across outdoor work and tees. During the year, our non-denim business grew 13% and now stands at 38% of our global mix. Third, amplifying the connection to our consumers through channel expansion, focused on digital and more recently owned retail. In 2022, global digital owned.com grew 17%, and revenue in this important growth vehicle has doubled since 2019.

And lastly, driving accretive growth geographically, broadening our reach beyond domestic orders. Excluding China, international markets grew 7% in 2022. Rustin will go through our full year ’23 guidance in more detail in a bit, but continued execution of these strategies will be critical in driving this year’s performance. Even as we assume, macro challenges will weigh on consumer demand throughout 2023. And we want to prudently account for this in our full year guide. I’m excited that our domestic US share and AUR gains have continued here in the first quarter. As you would expect, we’ve seen some lag in wholesale shipments relative to the solid sell-through, as retailers normalize their order patterns, and we have factored that into our plans accordingly.

But the combination of strong quarter-to-date POS, coupled with robust gains in our own D2C, with US comps up 20% year-to-date, gives us confidence that the Wrangler and Lee brands are healthy and well positioned in the marketplace, as we begin 2023. In addition, I would note, we expect these positive US trends to be somewhat subdued by near-term softness in the international markets, particularly China. Chris and Rustin will touch on this later. But the overall healthy fundamental performance, coupled with the significant actions taken over the last several years to fortify our balance sheet and enhance our capital structure, provide us increased flexibility to deliver in the face of uneven conditions. This is reflected in our strong returns to shareholders, totaling $455 million since becoming a publicly traded company.

And while the individual components of our fundamental outlook may differ a bit from the long-term targets we laid out at our Investor Day back in May of ’21, I’m pleased to share that 2022 revenue and earnings came in ahead of those strategic targets, despite the incremental impacts from 40-year inflation highs, massive supply chain disruptions and significant regional lockdowns due to COVID. These operational results are a testament to the incredible efforts of our amazing colleagues that I’m fortunate to partner with every day. I want to close by thanking each and every one of our people around the world for their ability, perseverance and dedication to Kontoor, both in navigating the near term and in setting the foundation for our future success.

This commitment to excellence inspires me and gives me confidence that we can continue to yield superior returns for all KTV stakeholders. Tom?

Tom Waldron: Thanks, Scott, and hello to everyone joining us on the call today. I want to echo Scott’s comments in thanking our teams across the organization. Wrangler’s fourth quarter and 2022 results are because of the extraordinary efforts throughout the year. Before I get to our Wrangler results, let me share some thoughts from my seat as Co-COO, specifically in leading our supply chain platform. We know supply chain and, in particular, inventory management is on everyone’s mind, so I’d like to provide some perspective. Kontoor, similar to most of the apparel industry, experienced global supply chain disruptions into 2022, including significant retail inventory rebalancing affecting our operations, with the most pronounced impact occurring in the third quarter.

These actions, combined with cost inflation and improved lead times on sourced goods, has led to higher inventory dollars to end the year. Rustin will take you through the numbers, but let me provide some context on how we are addressing the elevated inventory position. As we have discussed last quarter, we have flexed our internal manufacturing, as well as adjusted receipts on sourced goods to right-size our inventory position in a profitable manner. While this production downtime impacted Q4 gross margins, and we expect we’ll continue to weigh on margins in the first half of 2023, we believe these actions are the right ones in preserving long-term brand health. Importantly, we remain on track to see more normalized inventory levels by mid-2023.

No doubt, there is much work to be done here, but I’m confident we are executing the right plan to optimize our inventory position in a prudent and profitable manner as we move through the year. Let me now turn to discuss fourth quarter and full year highlights for the Wrangler brand. I couldn’t be prouder of the team’s accomplishments during 2022, our 75th anniversary year, which saw a multitude of successes, culminating in our largest fourth quarter ever. And for the first time, the brand experienced a quarter with revenue above $500 million. Revenue grew 16% globally in the quarter and 19% in the US our largest market, with a healthy balance across categories and channels. In our core, we continue to drive share gains in the quarter with Wrangler men’s bottoms outpacing the US market by 160 basis points and our largest competitor by nearly 500 basis points according to NPD.

These gains were once again led by continued AUR momentum, up 8% in the quarter. And this strong sell-through and share momentum only improved as we move through the year. From a category perspective, fourth quarter sales of outdoor, workwear and teas were up approximately 20%. And once again, our own digital led our quarter performance with global wrangler.com, up 18% in Q4, sequentially improving from Q3. And looking at highlights for the full year, Wrangler brand performance during 2022 demonstrates our commitment to diversified accretive growth across categories, channels and geographies, all while enhancing our core business. Full year Wrangler revenue increased 12% globally and was up 13% in the US. And while we continue to drive share gains in our core US denim business, I am excited about the progress we’ve made in our diversified strategies.

Within categories, tops and non-denim bottoms now account for over 40% of Wrangler’s business, driven by a 12% CAGR since 2019. And from a channel perspective, we are clearly still driving growth in wholesale, but digital has significantly outpaced with both digital wholesale growing at a 31% CAGR and wrangler.com increasing at a 37% CAGR since 2019. The evolution of our product innovations within outdoor, including our performance ATG line as well as workwear, female tees and Western Specialty combined to give us a greater permission to play in different categories and channels of distribution and reach new consumers like never before. Internationally, and Chris will provide more detail, clearly, COVID impacted our results, particularly, in ramping of the Wrangler brand in China.

But the opportunity for accretive growth internationally remains significant for the brand. In addition to the investments we’ve made in product design and innovation, we’ve also amplified our demand creation efforts. 2022 saw us evolve our incredible partnerships with brand ambassadors, Leon Bridges and Georgia May Jagger and build out authentic brand-enhancing collab with Yellowstone, Fender and Billabong as well as sponsorships of music events such as Lollapalooza in the US and Berlin, and Austin City Limits. And our pipeline of product category extensions, innovations and new demand creation platforms gives me great confidence that our investments will support continued momentum for the Wrangler brand. Perfect examples of this include new highly elevated, but still authentic partnerships with premium brands such as Buffalo Trace, Pendleton and Lacase .

The collaboration with Lacase showcases a new collection of Wrangler premium denim with AURs approaching $500. Stay tuned for more Wrangler brand activation events in the year to come. As you can see, Wrangler has begun 2023 from a position of strength. Our strategic investments allow us to not only participate in movements, but more importantly, create and lead them. I’ll now turn it over to Chris.

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Chris Waldeck: Thanks, Tom. Lee US 2023 was significant momentum in enhanced brand equity, matched by a tremendous global growth opportunity long-term. Our strategies are beginning to unlock the brand’s true potential as we continue to build on lease premium international positioning, while amplifying investments in design and demand creation, bringing new consumers into the brand and opening elevated points of distribution, including our own D2C, which I will touch on in a bit. Before I discuss the go forward, let me first share some of Lee’s Q4 and 2022 results. In the fourth quarter, globally revenue declined 3%, with strength in the US offset by challenges in international markets. Excluding China, Lee global revenue was up 2% versus prior year.

In the US, Lee grew 5%, led by digital with lee.com, up 11%. Internationally, the Lee brand was down 13% during the quarter, primarily driven by COVID lockdowns and restrictions in China. I’ll provide more perspective on China in a minute. Importantly, AURs in Q4 were up 9%, a direct function of our continued investment in quality of sales, enhanced product and mix shifts. And we are seeing sequential improvement come through in the NPD market share data, highlighted by Lee women’s, which grew significant share in Q4, outpacing the market and our largest competitor by 80 basis points. Turning to the full year. Globally, revenue increased 1%. Excluding China, we grew 7% for the year with EMEA growing 8%. Again, the US core was strong, increasing 7% over 2021, with a combination of share gains and improving AURs driving a healthy balanced growth profile.

And while geographic mix owing to China lockdowns weighed on 2022 gross margin, the lead brand repositioning and focus on more accretive growth drove over 400 basis points of adjusted gross margin expansion since 2019. Similar to Wrangler, Lee maximize investments in brand building across talent, design, innovation and demand creation. We continued our partnership with Creative Director, Mark Seliger, and launched our second global brand equity campaign, Lee Originals. From the Lee Originals campaign to sponsoring the 22 Bonnaroo Festival or up-and-coming music duo, Tiger Lilly, and fashion collaborations like Forbidden City in China and the Brooklyn surface here in the US, we connected with new younger consumers in 2022, and that momentum continues into 2023.

A great example of this, a few weeks ago in kicking off our celebration of Black History Month, Lee had the honor of sponsoring the 50 years of HipHop style exhibit at the Fashion Institute of Technology in New York City. We are proud to have been woven into the history of this influential cultural movement, and we look forward to further expressing these impact with brand activation events planned in the coming months. Again, we are just beginning to unlock the full potential with this brand, and I couldn’t be more excited with the opportunity ahead and to share future developments with you as we move through 2023. Speaking of potential, I’d like to share some perspective from my role as co-COO overseeing Kontoor’s international and D2C businesses.

As you all know, the opportunity for growth in these areas, importantly, highly accretive growth remains significant for both brands. First, touching on international markets, when we discuss geographic expansion as a key growth catalyst at our last Investor Day, we knew the path wouldn’t necessarily be linear. We did not, however, contemplate a war in Europe or prolonged COVID lockdowns and restrictions in China. And there is no doubt these macro factors have impacted and altered our trajectory of growth. In the near-term, you will see us continue to navigate through challenging conditions, but with an eye to the future, focusing on the health of our brands and positioning each for long-term profitable growth. In China, we are seeing two things.

First, consumer demand for the lead brand continues to be strong, and that is best represented through the digital marketplaces that have not been impacted by COVID restrictions. Like others in the market, we are seeing significant fluctuations in comps around the country with the China New Year timing shifts, festival travel and people now getting back to work. We exited 2022 clean in our own inventories, but inventories at retail remain elevated. Given these dynamics, we expect the China business will be challenged during the first half, with the most pronounced headwinds in the first quarter. We do see this stabilizing in the coming quarters as consumers get back to normal course of daily life and pent-up demand is released. I would like to emphasize, we are taking a measured approach, including the ramp-up of Wrangler in China.

But the China market and more broadly, Asia and Europe represents substantial white space for Kontoor. There is no reason why our brands shouldn’t operate at a similar level to our peers, which suggests an opportunity to double our international business over time, not only a positive to the top line, but again materially accretive to the gross margin given our brand’s premium positioning, higher AURs and greater D2C mix outside of the US. And as we drive closer connections with our consumer, there is no more important channel than the continued evolution of our own retail and digital platforms. As you all know, we remain in the early days here, well below our competition in terms of penetration. Within digital, Kontoor global own.com increased 17% over 2021.

While our US-owned com experienced 23% growth over last year. Great proof points that our investments, including digital demand creation in this highly accretive growth channel are paying off. Last quarter, you heard us begin to discuss the development of our own brick and mortar retail strategy. First, in Europe, during the fourth quarter, we opened three new Lee Wrangler premium retail stores with plans to expand our footprint in the region during 2023. These brand-enhancing retail destinations offer consumers a unique immersive experience with a full lifestyle assortment for both brands. We also recently launched our retail excellence initiative, a comprehensive program across retail operations, talent and training, combined with merchandising and planning aimed at transforming Kontoor into a world-class retailer.

Based on the success of the early testing, we are now rolling out the retail excellence initiative across the Asia region now. And over the next 12 to 18 months, we will do so globally. The opportunities to leverage our learnings in Asia as we fully develop our brick and mortar strategy globally are significant. As you would expect from us, we will be deliberate in evolving our retail footprint. We will test and learn building in concert with our branded digital sites to create a seamless omnichannel experience as we build an ever closer connection to our consumers. Before I turn it over to Rustin, I too want to sincerely thank all of our teams for all their tremendous work and collaboration through 2022, delivering great results for the year, but also setting Kontoor up for incredible things to come.

Rustin?

Rustin Welton: Thank you, Chris, and thank you all for joining us today. As the team stated, we are very pleased with the strong finish to the year with revenue and earnings coming in well above expectations. For additional detail on the quarter and full year results, I will refer you to today’s release. For the balance of the call, I’m going to cover key highlights for the quarter before discussing our guidance for 2023. Beginning with revenue. Global revenue increased 9% compared to the prior year. Growth in global digital and US wholesale was partially offset by softness in international markets, driven by lockdowns and restrictions in China as well as heightened inflationary and macro pressures. On a regional basis, US revenues increased 16%, driven by gains across both Wrangler and Lee.

As Scott, Tom and Chris discussed, we are seeing great sell-through at wholesale fueled by brand investments and diversification into strategic growth categories. In own digital, we are seeing similar momentum with revenue increasing 19% in the quarter. International revenues decreased 12%. COVID-related restrictions and lockdowns in China had a significant impact in the quarter. In EMEA, revenues decreased 4% driven by growth in D2C, offset by wholesale pressure as retailers navigate macro and inflationary headwinds while normalizing inventories. Despite the Q4 decline, EMEA revenues increased 7% for the year. Turning to our brands. Global revenue of our Wrangler brand increased 16%. In the US, revenues increased 19%, driven by broad-based strength, including double-digit gains in western, outdoor work and tees.

Female also closed out the year delivering positive growth in every quarter. Wrangler International revenue decreased 9%, driven primarily by softness in EMEA wholesale, more than offsetting gains in D2C. Turning to Lee. Global revenue decreased 3%. Lee US revenue increased 5%, driven by double-digit growth in digital, while Lee international revenue decreased 13%. COVID-related restrictions and lockdowns in China had a significant impact on the quarter and region with APAC decreasing 26% and EMEA, revenues decreased slightly and were flat, excluding the Russia exit. And finally, from a channel perspective, US wholesale increased 17%, non-US wholesale decreased 14% and global owned dot com increased 11%. Now on to gross margin. Reported gross margin decreased 180 basis points compared to adjusted gross margin last year.

As expected, inflationary pressures, downtime and foreign currency weighed on margin rates in addition to inventory provisions. Somewhat offsetting these headwinds were ongoing structural mix benefits to accretive channels and strategic pricing. In addition, we have seen relief in transitory headwinds such as airfreight as the global logistics environment has improved. Adjusted SG&A expense was $213 million or a $5 million decrease versus fourth quarter 2021 adjusted SG&A. Tight discretionary expense controls, lower compensation costs and a decrease in credit loss provisions were somewhat offset by higher distribution expenses as well as continued strategic investments in IT. As a percent of revenue, adjusted SG&A leveraged by 290 basis points in the quarter.

Adjusted earnings per share was $0.88 compared to $0.88 in the same period in the prior year. Now turning to our balance sheet. Fourth quarter inventories increased 64% compared to last year and increased 30% compared to 2019. On a dollar basis, inventory levels decreased $81 million from the third quarter. A few additional points on inventory. First, the quality of our inventory is good, with approximately 90% in core styles. In fact, the majority of it is in North America, where we are currently seeing the strongest brand heat and point-of-sale momentum. Second, we will be leveraging our ability to take downtime in our facilities while balancing the need to service our largest and growing US business, as we did in the fourth quarter. And as I will discuss in our outlook, we anticipate to more meaningfully utilize downtime in the first half of the year.

We expect this to result in sequential year-over-year improvement in our inventory growth rate as the year progresses. As we have discussed, this is an important lever we are uniquely positioned to pull to rightsize in a manner that is more brand appropriate. The combination of these factors gives us confidence we have the appropriate strategy to achieve normalized inventory levels by mid-2023. We finished the fourth quarter with net debt or long-term debt less cash of $733 million and $59 million in cash and equivalents. Our net leverage ratio or net debt divided by trailing 12-month adjusted EBITDA at the end of the fourth quarter was 1.8 times, within our targeted range of 1 to 2 times. And as previously announced, our Board of Directors declared a regular quarterly cash dividend of $0.48 per share.

We returned a total of $166 million to shareholders during 2022 and through our dividend and share repurchase program. Finally, at the end of the fourth quarter, we had $62 million remaining under our share repurchase authorization. Now on to our outlook. Revenue is expected to increase by a low single-digit percentage on an annual basis with growth being relatively balanced between the front and back halves. I want to highlight a few additional points as you think about the cadence that will affect both revenue and gross margin. During the first half, we expect growth to be driven by the US and tempered by international. In the US, we expect the momentum from strong POS share gains and D2C growth to continue. As Scott mentioned, while US shipments have slightly lagged sell-through in early 2023 as retailers normalize their order patterns, we are seeing great strength in our owned channels as evidenced by the 20% year-to-date US D2C comp growth mentioned earlier.

We expect international to be softer in the first half due largely to China. As Chris discussed, the region continues to recover from COVID-related restrictions, lockdowns and elevated inventory levels at retail. We are taking a thoughtful approach for both brands and working closely with our partners to reduce inventory levels in the first quarter, while ensuring the long-term brand health. Accordingly, we expect our year-on-year declines in China to accelerate from Q4 levels in Q1 before returning to growth in Q2. These proactive actions in China are expected to offset domestic growth with global revenue flat to modestly below 2022 in Q1 before returning to growth in Q2. During the second half of the year, we expect growth to be driven by international as China becomes more fully reopened and tempered domestically as macro conditions are expected to place increasing pressure on US consumer demand.

Gross margin is anticipated to increase 40 to 90 basis points to 43.5% to 44% and annually compared to reported gross margin of 43.1% achieved in 2022. For the year, we expect structural mix shifts to accretive channels such as digital and international moderating inflationary pressures on input costs and higher AURs to offset downtime and drive improved margin rates. However, as the margin components are expected to flow through the P&L at varying points the year, I want to provide a bit more context. First, the impacts from China mix will have the most pronounced impact on the first half, particularly in the first quarter. Second, we anticipate taking the majority of manufacturing downtime in the first half. And finally, as you would expect, the lag from moderating input costs will more meaningfully flow through the P&L starting in the second half.

Based on these factors, we expect modest year-on-year gross margin pressure in the first half of the year, with the first quarter most impacted before sequentially improving as we move through the year with second half margin up on a year-over-year basis. SG&A is expected to increase at a mid-single-digit rate compared to adjusted SG&A in 2022. As Scott mentioned, we are entering 2023 with strong POS momentum and will continue to support both brands through investments that offer the greatest TSR potential. This will include investments in areas such as digital and IT that support the long-term data transformation of the business, demand creation, as well as the normalization of compensation expenses. From a cadence perspective, we anticipate investments to ramp through the year with second half stronger than the first half.

EPS is expected to be in the range of $4.55 to $4.75 a share. Due to the combination of the factors just discussed, we expect EPS on a dollar basis to be more weighted to the second half of the year with the first quarter being the most challenged on a year-on-year basis. Finally, to help you build out your models, other expense is expected to be in the range of $5 million to $10 million. The effective tax rate is expected to be approximately 20% to 21% annually with quarter-to-quarter volatility driven by discrete items. Interest expense in the $33 million to $38 million range and average shares outstanding to be approximately $57 million before any additional share repurchases. Lastly, as we enter the third year of the catalyzing growth strategy we outlined at our Investor Day in 2021, I want to take a moment to reflect on the significant progress we have made despite numerous macro and industry headwinds over the last couple of years.

First, revenues have grown at a low double-digit CAGR over the last two years versus the high single-digit growth implied in our original algorithm. While macro events have had an impact, particularly in international markets, this relative outperformance is reflected in guidance approaching the $2.7 billion target despite these headwinds. Margin rates have been impacted by inflationary pressures, including cotton at the highest level since 2011. But the structural drivers, including mix shifts to accretive channels and geographies remain very much intact and we continue to see significant opportunity for gross margin expansion over time as conditions normalize. Furthermore, as evidenced in today’s earnings results and guidance for the year, we have considerable levers at our disposal to support continued earnings growth and our long-term TSR algorithm.

And finally, we discussed our capital allocation strategy evolving. — to reflect significant optionality, including introducing an opportunistic share repurchase program and increasing our dividend payout last quarter. The power of this optionality has allowed us to pursue and strategy, funding investments in both brands, including a new global ERP system, supporting our dividend, and buying back stock. Over the last two years, we have returned $337 million to shareholders. To close, I want to thank our incredible colleagues around the world. As I stated at the onset, I am very pleased with the way we finished the year, which is a direct reflection of their extraordinary efforts. The market and macro environment remains highly dynamic, which we have reflected in our expectations for 2023.

But as Scott mentioned, we are entering the year from a position of strength. This concludes our prepared remarks, and I will now turn the call back to our operator.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. Our first question is from Jay Sole with UBS. Please proceed with your question.

Jay Sole: Great. Thank you so much. I have a two-part question. The first part is, can you talk a little bit more about your fiscal 2023 revenue guidance and sort of the confidence that you have in that guidance where it gives you confidence in the guidance? And then secondly, it sounds like that Q1 has started out strong as well. Could you expand a little bit on that and give us a little bit more color on what’s driving the strong growth in Q1? Thank you.

Scott Baxter: Jay, I’ll go ahead and start, and then Rustin will jump in. Coming out of Q4, we had real strength in both of the businesses and hence strengthened the breadth of the portfolio so the geographies and the channels. And that gave us confidence coming into the year relative to how we set our plan for the year. But if you think about it, how we look at the business midway through the quarter, we’ve had really good POS. We talked about that. Our owned D2C, which is a good indication, has been very strong and also in its infancy. So it puts us in a really good place. Naturally, you know from a business standpoint that there’s a little bit of a lag between the POS and the shipments and people are a little cautious out there right now and how we’re thinking about the first year excuse me, the full year in the first half is that it will be strong in the first half domestically because we can see that right now might taper off a little bit how we set up the plan going forward.

But we think China will continue to get stronger throughout the year as the Chinese consumer comes back into the marketplace and China opens up. But I would tell you, this is a testament to the work that the teams have been doing to state really close to the consumer, stay really focused on the initiatives that we’ve laid out, and we are dialed in, we’re humble and we’re just working really hard to make sure that we’re delivering for all of our consumers and shareholders around the globe. Rustin?

Rustin Welton: Yeah. Thanks, Scott. Good morning, Jay. So just to add on to a couple of pieces, as Scott mentioned, obviously, a strong fourth quarter in the US, Jay, up mid-teens. And certainly seeing that continued momentum of POS, and Scott talked about the confidence we’ve had in the D2C, the US D2C comps up 20% year-to-date. Certainly, China will put a pressure on that first quarter as we work proactively with our retail partners to really improve their inventory levels. As Chris indicated, we are elevated at retail levels in China, and we want to make sure that we’re working with the partners to preserve the long-term brand health. So that China growth will — is expected to return to growth in Q2. So as you think about sort of the cadence of that first quarter, Jay, we’ve got kind of the POS lag, as Scott mentioned, kind of tempering the Q1 shipments with the strong growth we’re seeing certainly as we work to get China into the right position.

We’ll put some pressure on it. Globally, we expect revs to be flat to modestly down in Q1 before returning to growth in Q2. So hopefully, that gives you a little more sense of the cadence of the quarters in that first half.

Jay Sole: It does. That’s helpful. And maybe, Rustin, just if I can ask one more, just following up on your inventory comment. If you could just talk through the inventory positioning a little bit more? I mean, obviously, you mentioned inventory is up 64%. Can you just talk about how the downtime impacts your plan to address the inventory and how that downtime impacts maybe gross margin a little bit more specifically? Thank you.