Kontoor Brands, Inc. Common Stock 2026 Q2 Earnings Call

Thank you, operator, and welcome to Kontoor Brands second quarter 2026 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 these reports. Amounts referred to on today's call will be on an adjusted dollar basis, which we clearly define in the news release that was issued earlier this morning and is available on our website at kontoorbrands.com. Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in today's news release. These tables identify and quantify excluded items and provide management's view of why this information is useful to investors.

Unless otherwise noted, revenue growth rates referred to on this call will be in constant currency, which exclude the translation impact of changes in foreign currency exchange rates, and reported results and our outlook are stated on a continuing operations basis unless otherwise noted. Joining me on today's call are Kontoor Brands Chief Executive Officer and Chairman, Scott Baxter, and President and Chief Financial Officer, Joseph Alkire. Following our prepared remarks, we will open the call for your questions.

Scott? Thanks, Erinn, and thank you all for joining us.

I am pleased to share our second quarter results and the progress we have made advancing our strategic priorities. Through the first half of the year, we've elevated the portfolio, positioned the company to accelerate revenue and profit growth, and increased our capital allocation optionality. Simply said, we've reached an inflection point in our value creation journey driven by our primary initiatives. Build Wrangler momentum from a position of strength and sharper focus following the Lee divestiture, integrate and accelerate Helly Hansen, and finish Project Genius strong. To accelerate our ambitions, I am pleased to share that Joe has been appointed to an expanded role of President and CFO. He knows our business and has been instrumental in driving our transformation. Let's begin with Helly Hansen. In June, we celebrated our one-year anniversary together.

When we announced the transaction, the goal was clear: drive greater value for our shareholders and structurally increase our TSR potential. To ensure we deliver on our commitment, we established a value creation framework built on four pillars. Accelerate revenue growth, achieve mid-teens operating margin, increase capital allocation optionality, and establish Kontoor as an employer of choice. How are we doing? First, revenue is tracking ahead of our acquisition plan, with results exceeding our expectations in every quarter under our ownership. This has continued into the first half of 2026, with pro forma reported revenue growing at a low double-digit rate compared to our high single-digit outlook. We have had opportunities to grow faster, but we are committed to doing this the right way by creating a healthy foundation that supports years of sustainable growth.

We are making investments in talent and separating the sport and workwear commercial organization under Bora's leadership. These are distinct businesses with their own set of opportunities. In North America, we are creating two GMs to drive increased focus. We will replicate this globally over time. This is something the Helly Hansen team has discussed for years, and under Kontoor, we are making it happen. Second, expand operating margin. Through the first half of 2026, operating margin expanded approximately 600 basis points to 7%, driven by gross margin expansion and expense synergies. This is our multi-brand platform in action. We are leveraging our supply chain and technology platforms to provide greater scale advantages for both organizations while driving greater back-end efficiency. At the same time, better inventory management is increasing the mix of full price selling on our digital platform, resulting in higher AURs and reduced promotional activity.

This is an area where we add great expertise and has been a meaningful contributor to improved profitability. We remain committed to expanding operating margin while increasing investment capacity. Over the last 12 months, we have done just that. As we move to the second half of the year, we will deploy these resources to drive accelerating growth. Third, increase capital allocation optionality. Last year, Helly Hansen generated $100 million in cash from operations, driven by improved profitability and net working capital. We are ahead of our planned deleverage path, allowing for greater optionality even earlier than expected. Year to date, we have returned more than $130 million to shareholders, including $75 million of share repurchases. And finally, establish Kontoor as the employer of choice in the industry. Attracting and retaining top talent will ensure long-term success. We continue to be impressed by the Helly Hansen organization.

There is depth at all levels. At the same time, we are investing in both existing and new parts of the organization to support accelerating growth.

We are very encouraged by the talent pipeline and recently hired a GM of North America to lead our sport business. We look forward to introducing him at our investor day next month in Norway. By every measure, our first year together exceeded our expectations. We are on track to complete the majority of integration activities by year-end, apart from the systems migration, but we know the most exciting days are still ahead of us. Turning to Wrangler. For the first half of 2026, global revenue increased approximately 3% on a reported basis, in line with our expectations. It starts with building on the momentum we've created in our core bottoms business. We have incredible opportunities in female, direct-to-consumer, and non-denim categories, but we will not lose sight of Wrangler's identity.

In the second quarter, as measured by Circana, we drove over 100 basis points of share gains in our core bottoms business. With female, our success continues. First half revenue grew 20%, with trends accelerating in the second quarter. Our investments in talent, product development, design, and demand creation are working. Lee spoke as the number one female style at select specialty retailers, and new collaborations and brand activations are elevating the brand in the marketplace. Within Western, first half revenue grew low double digits. Western sits at the heart of Wrangler's DNA, and we have never been stronger. To support this momentum, we will continue to invest behind our product innovation and demand creation platforms to solidify our position as the authority in the category. Turning to Lee. The divestiture is progressing well.

We have cleared a number of important milestones and are on track to complete the transaction in the fourth quarter. Our teams are working well together, and the process with Authentic Brands Group has been smooth and efficient. I want to thank the Lee organization and Authentic Brands Group for their professionalism and dedication to supporting the brand during this important transition. We intend to use the majority of net proceeds from the divestiture to fund a new $400 million ASR, with the remainder to voluntarily pay down debt and further strengthen our balance sheet. This is a hallmark of our operating model and will further support strong returns for our shareholders. Finally, let me provide an update on Project Genius. While we could not have predicted the challenges the industry would face over the last few years, we push ourselves to take initiative from our front foot.

We launched Project Genius to create investment capacity to accelerate growth while expanding profitability. We are in the final stretch and are firmly on track to exceed $100 million in gross savings. Genius has been essential to the operational agility we have demonstrated over the last few years. Importantly, it has solidified a continuous improvement mindset within our culture that will yield benefits for years to come. Before turning it over to Joe, let me underscore the confidence I have in this team and our ability to achieve our 2026 plan. We are entering the second half of the year focused on our largest priorities: build Wrangler momentum from a position of strength and sharper focus following the Lee divestiture, integrate and accelerate Helly Hansen, and finish Project Genius strong. These are the initiatives that will generate results going forward and deliver strong returns for our shareholders.

As we move beyond 2026, we have adopted an always-on cost excellence mindset that will enable us to continue to fund our growth initiatives as we continue to transform our business. We are off to a strong start in 2026, and I would like to thank our global teams for their continued dedication and steady execution.