Kontoor transitions from Wrangler

Chuck Hughes of Signage Industries watches last month as workers install the new sign for Kontoor, a spin-off of VF Corp based in Greensboro. Kontoor had just under $38 million in net income in the second quarter, down 37% from the second quarter of 2018.

Kontoor Brands Inc.’s first full quarter as a publicly traded company found the Greensboro jeans manufacturer with a significant year-over-year decline in net income.

However, investors focused on a significant earnings that beat analysts’ forecasts and a reaffirming of its fiscal 2019 financial guidance sent the share price up as much as 14.5% during trading Thursday.

Kontoor completed its spin-off out of VF Corp. on May 23, focused on the Lee, Rock and Republic and Wrangler brands.

The quarterly report released Thursday reflects Kontoor’s financial performance while part of VF for the second quarter of fiscal year 2018

For example, the jeanswear business within VF had $60.5 million in net income in the second quarter of 2018. As an independent company, Kontoor had just under $38 million in the second quarter, down 37%.

Diluted earnings were 67 cents. The company took charges worth 29 cents in the quarter.

The average earnings forecast was 68 cents by two analysts surveyed by Zacks Investment Research. Analysts typically do not include one-time gains and charges in their forecasts.

The share price closed up 13.8%, or by $4.10, to $33.78.

Stifel analyst Jim Duffy said Kontoor’s share price dropping as much as 32.1% since its debut “reflects investor aversion to the U.S. wholesale-centric jeanswear business, as well as confusion around the financial criteria for which to measure the business.”

Duffy has a 52-week share-price target of $37.

“We believe the pressure to be overdone, and appreciate the risk/reward offered by shares,” Duffy said.

The main reason for the year-over-year decline in net income was an 8% drop in net sales to $609.7 million.

Kontoor said part of the decline came from a major U.S. retail customer going into bankruptcy protection in the fourth quarter of 2018.

It chose to exit 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.

Wrangler sales fell 8% to $363.4 million, while Lee sales were down 5% to $206.9 million. Sales on the “other” category, primarily Rock & Republic and VF Outlet sales, were off 20% to $38.8 million.

U.S. sales declined 3% to $487 million, while international sales fell 25% to $123 million.

Meanwhile, Kontoor’s cost of goods sold was $374.2 million, down 6%, while selling, general and administrative expenses were $182 million, down 5%.

“The restructuring and cost-savings actions we’ve taken to simplify and stabilize the organization are paying off and are setting the foundation for improved profitability in the second half of 2019 and beyond,” Scott Baxter, Kontoor’s president and chief executive, said in a statement.

Duffy said that “against a backdrop of subdued expectations, Kontoor topped second-quarter estimates.”

“Brand trajectory is better than feared, and reaffirmed guidance into second half appears achievable. The Lee brand in particular held up well.”

Kontoor’s income tax expenses were $9.3 million, compared with $16.6 million a year ago.

The 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.

Baxter said Kontoor will benefit from owning its plants and supply chain to “help us keep ahead of the private label” in the marketplace. He said Kontoor will launch in September a global marketing campaign for Wrangler “the likes that has not been done before.”

Baxter also credited a social media push for Wrangler, including benefiting from being included in the lyrics of top-selling song “Old Town Road.”

Kontoor reduced its corporate debt by $50 million in the quarter, leaving it at about $1 billion on June 30. Baxter said the company’s board of directors is focused on maintaining its dividend payout and reducing debt before considering share repurchases and acquisitions.

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rcraver@wsjournal.com 336-727-7376 @rcraverWSJ

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