Investors and traders may not see it this way just yet, but Kontoor Brands CEO Scott Baxter deserves a fist bump.
Kontoor Brands (KTB) is the jeans business — comprised of well-known brands Wrangler and Lee —that V.F. Corp. (VFC) spun off this past summer. V.F. Corp. — owner of powerhouse brands The North Face, Timberland and Vans — made the move as a means to bolster its profit margins and raise cash for potential acquisitions. Hey, jeans tend to be lower margin than $500 North Face jackets.
We get it.
V.F. Corp tapped one of its long-time executives, Baxter, to lead Kontoor Brands. Since then, Baxter has had to pretty much create a sustainable public company from scratch — despite having household name jeans brands and a ton of global distribution. That has meant hiring hundreds of people, laying out a path for Kontoor Brands that goes beyond NFL great Brett Favre hawking Wrangler jeans on TV. It also cleaned up distribution that has hurt profit margins.
It hasn’t been an easy gig, Baxter acknowledges in an interview with Yahoo Finance. But, light at the end of the tunnel is approaching.
“I tell people it was like having two of the busiest full time jobs you can ever have. One, a spin-off is a full 60 hour a week job working on all the complications of the spin, the meetings and decisions you have to make. Then you have these businesses that weren’t doing great, they weren’t focused. Then you come into a situation where you have to get a team together that will turn these businesses around quickly because you will be out there exposed on your own. That is another full time job,” Baxter explained. “Thank God the spin has happened. And now we have more hours to focus on doing what we need to do.”
Kontor Brands’ earnings front
But before that light is reached for Kontoor Brands and Baxter, its third quarter earnings, out Thursday, may have left some investors uneasy on the pace of transformation.
Kontoor Brands stock fell 9% (it had rallied about 48% from the June lows into the report) as sales fell 9% from the year ago. Sales in the U.S. and internationally declined 9% and 11%, respectively. Wrangler brand sales dropped 7%, with the segment’s operating profits down 6%. Lee saw sales and operating profits fall 8% and 16%, respectively.
Baxter says the sales performance reflects the team’s efforts to exit unprofitable business channels globally (notably in India). A sign of those moves working early on could be seen in Kontoor Brands’ gross profit margins, which rose 30 basis points from a year.
Another bright-spot was China, where Lee brands sales popped 8%.
Kontoor’s outlook for the balance of 2019 was mixed. The company reiterated its full year $2.5 billion revenue target, but guided to the low end of $340 million to $360 million, its prior adjusted EBITDA range.
Baxter breaks down his transformation plan for Kontoor into horizons. The company is currently nearing the end of horizon one — that has entailed setting the foundation of the business from the culture at HQ to where Wrangler and Lee could be found at retail. It also consists of testing entirely new points of distribution for the brands beyond the likes of discount chains such as Walmart and underperforming department store J.C. Penney.
“We just did a couple things here that would have never happened in the past. We just did a collaboration with Fred Segal at their store and now we are doing a big capsule collection. That wouldn’t have happened previously. This weekend in Nordstrom we are kicking off with a big collaboration in the new New York City store. Wrangler never made product for that channel. So here we are at Nordstrom in their premium experience with our laser personalization machine personalizing product for people. Those things just didn’t exist before,” Baxter said.
Baxter is mum on further partnerships, but he said they are coming. And along with that will come horizon two for Kontoor Brands, which will stress taking the brand into the lifestyle apparel category. Think Wrangler tops, for instance.
By then, perhaps a higher stock price too.