Kontoor Brands Shares Soar After Q2 Earnings Beat, Sees Margin Expansion In 2H

Kontoor Brands, Inc. KTB shares are trading higher after Street-beating earnings performance in Q2 FY23. Adjusted EPS of $0.77 beat the consensus of $0.66.

The company reported Q2 sales of $616.01 million, missing the consensus of $625.50 million. Revenues were broadly flat Y/Y, driven by strength in DTC and International, somewhat tempered by decreases in U.S. wholesale.

Revenue in the U.S. fell 2% Y/Y, and International revenue jumped by 13%.

Global revenue from the Wrangler brand increased 2% Y/Y, and the Lee brand dropped 3%.

Adjusted gross margin decreased 250 basis points to 41% Y/Y, dragged by higher inflationary pressures on input costs, and impacts from proactive actions in managing internal production, including downtime.

Adjusted operating margin of 11.7% decreased by 280 basis points.

The company exited the quarter with $82 million in cash and equivalents and approximately $0.8 billion in long-term debt.

At the end of Q2, inventory was $627 million, up 17% Y/Y.

"Our aggressive measures to improve inventory in the second quarter, and expected further progress during the balance of 2023, will position us to exit the year with a healthy balance sheet and accelerating cash flow that affords significant capital allocation optionality as we head into FY'24," said Scott Baxter, President, Chief Executive Officer and Chair of Kontoor Brands.

Outlook: Kontoor Brands expects FY23 revenue to increase at a low-single-digit percentage Y/Y, consistent with the prior outlook.

The company reiterates FY23 Adjusted EPS of $4.55 - $4.75 against the consensus of $4.46. The company expects year-over-year EPS growth to be most pronounced in Q4.

The company now expects Q3 inventory to be lower Y/Y, with additional reductions planned in Q4. KTB sees Q3 revenue to increase at a mid-single-digit rate, above expected full-year growth.

KTB continues to expect gross margin expansion in the second half driven by geographic and DTC mix.

Price Action: KTB shares are trading higher by 18.7% at $48.23 on the last check Thursday.