Kontoor Brands Inc.’s transition into a publicly traded company proved bumpy again financially for the Greensboro jeans manufacturer.
As expected, the company had another significant year-over-year decline in net income to $14.5 million for the third quarter.
However, adjusted quarterly earnings again beat analysts’ forecasts and the company maintained its fiscal 2019 financial guidance.
Kontoor completed its spin-off from VF Corp. on May 23, focusing on the Lee, Rock and Republic and Wrangler brands.
The report released Thursday reflects Kontoor’s financial performance while part of VF for the third quarter of fiscal year 2018.
For example, the jeanswear business within VF had $71 million in net income in the third quarter of 2018.
Diluted earnings were 25 cents. The company took charges worth 70 cents in the quarter: a non-cash 44-cent charge for a trademark write-down related to its Rock and Republic brands; and a 26-cent restructuring and VF spin-off charges.
The average earnings forecast was 87 cents by three analysts surveyed by Zacks Investment Research. Analysts typically do not include one-time gains and charges in their forecasts.
Investors chose to focus during early trading on the year-over-year 9% decline in net sales to $638 million.
The share price dropped as much as 10.5%. It closed down 8.6%, or by $3.28, to $35.
Scott Baxter, Kontoor’s chief executive and president, said the overall third-quarter performance was “in line with our expectations, as we continued to execute on our strategy of setting the foundation for long-term operational success.”
“We’re beginning to realize the benefits of the previously announced restructuring and cost-savings initiatives, while we continue to stabilize and globalize our organization.
“We’re improving the quality of our sales, including exiting (global) unprofitable points of distribution, changing business models and rationalizing underperforming SKUs,” Baxter said. “These actions create the building blocks for healthy, sustainable future growth.”
The company said in August it was exiting the Turkey market because of under-performance. Kontoor cautioned in May that it may exit markets in Europe and South America. It also shifted from a wholesale to licensed operation strategy in Argentina, Chile, Israel and Russia.
On Thursday, Kontoor said the next phase of its strategic distribution exit decision involved areas in India. The overall effect represented a 9-cent earnings charge.
“We want to specifically focus on the U.S., certain population markets in Europe and in China,” Baxter said. “We will dedicate our efforts to where our brands are well known with significant growth potential.”
Kontoor continued to feel the ripple effect from a major U.S. retail customer entering bankruptcy protection in the fourth quarter of 2018.
Wrangler sales fell 7% to $367.2 million, while Lee sales were down 8% to $232.2 million. Sales on the “other” category, primarily Rock & Republic and VF Outlet sales, were off 32% to $38.7 million.
U.S. sales declined 6% to $457 million, while international sales fell 11% to $181 million. Lee sales rose 8% in China, where Kontoor recently introduced Wrangler product.
“There was a stay-in-your-channels approach for these brands (within VF) in the U.S. and globally that we are evolving from as we clean up distribution and expand marketing,” Baxter said.
Meanwhile, Kontoor’s cost of goods sold was $382.2 million, down 10%, while selling, general and administrative expenses were $192.3 million, up 4%.
“With restructuring and cost savings initiatives taking hold, and quality of sales improving, we view the case for profitable growth in out-years as credible,” Stifel analyst Jim Duffy said Thursday.
Duffy cited the Lee sales increase in China as promising, and the overall Wrangler sales drop as a concern.
Kontoor’s income-tax expenses were $1.6 million, compared with $25.6 million a year ago.
The federal corporate tax-rate cut that went into effect Jan. 1, 2018, has had a ripple effect for U.S. corporations with significant international sales, including Kontoor, Hanesbrands Inc., Herbalife Ltd. and Unifi Inc.
The tax reform included taxes being put on some foreign earnings of U.S.-based companies that had not been taxed before. Companies have spent fiscal years 2018 and 2019 adjusting to the income-tax changes.
Kontoor continues to project $2.5 billion in fiscal 2019 revenue, which was at just under $1.9 billion through the end of the third quarter.
“Long term, we believe we can be much bigger than $2.5 billion annually, but we feel good about the current level,” Baxter said.
Kontoor maintains plans to spend between $55 million and $65 million on capital investments in fiscal 2019, including $30 million to $40 million on a global enterprise resource planning system with a focus on China and major population centers in Europe.