Thank you for joining Contour's Q3 2020 earnings conference call. As a service provider for corporate earnings conference calls, we sincerely apologize to Contour's management team, those of you in the investment community and others for the inconvenience earlier today. This widespread issue was due to a technical outage with our telephone carrier systems. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eric Tracy. Thank you, Mr. Tracy. You may begin.
Thank you, operator. Good morning, everyone, and welcome to Kontoor Brands' Q3 2020 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 those reports. Amounts referred to on today's call will often be on an adjusted dollar basis, which we clearly define in the news release that was issued earlier this morning. Adjusted amounts exclude the impact of restructuring and separation costs, non cash impairment charges related to our Rockin Republic trademark and other adjustments. Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in today's news release, which is available on our website atcontourbrands.com. These tables identify and quantify excluded items and provide management's view of why this information is useful to investors.
Unless otherwise noted, amounts referred to on this call will be in constant currency, which exclude the translation impact of changes in foreign currency exchange rates. Constant currency amounts are intended to help investors better understand the underlying operational performance of our business, excluding the impacts of shifts and currency exchange rates over the period. Joining me on today's call are Kontoor Brands' Chief Executive Officer, Scott Baxter and Chief Financial Officer, Ruston Welton. Following our prepared remarks, we will open up the call for your questions. We anticipate the call will last about an hour.
With that, I turn it over to CEO, Scott Baxter.
Thank you, Eric. Good morning, everyone, and thanks for joining us. From all of us at Kontoor, I sincerely hope you and your families remain safe and healthy. We are pleased to share our Q3 results with you today, results that came in ahead of our expectations, driven by broad based improving performance across the Wrangler and Lee brands, channels and geographies. Ruston will take you through greater detail on the financials in a bit.
But before that, I'd like to share my thoughts on a few key areas. First, our strategies are working. Despite the impacts of COVID, as evidenced by the acceleration we are seeing across our business, I'll share some select proof points from the Q3. Next, I'm excited to announce the reinstatement of a dividend during the Q4. I'll provide some perspective on how our improving fundamentals coupled with strong cash generation have given our Board of Directors confidence in making this decision.
And finally, I'll offer context as to why the Kontoor model is well positioned for success going forward with investments driving digital transformation, category extensions and geographic expansion that will yield more sustainable and profitable growth over time. But first, as always, our results are a direct reflection of our great employees. I want to thank our colleagues around the globe for their incredible efforts, superior execution and continued dedication to excellence. No doubt, these are challenging and uncertain times, and we remain unwavering in our support of the health and safety of our colleagues. I know our team, no matter the environment, will continue to rise to the occasion.
Turning to our Q3 results, we are pleased to share that we saw strong fundamental improvement across almost all areas of our business with revenue, margins and cash flows all coming in ahead of our expectations. Ruston will take you through the margins and cash flow later in the call, but let me start by providing color on how our strategic initiatives drove improving top line performance in the quarter. Overall, revenues sequentially improved in Q3, down 9% compared with down 42% in the 2nd quarter. Importantly, the U. S.
Business saw accelerating trends during the quarter with both the Wrangler and Lee brands delivering positive growth in Q3. In the U. S, Lee increased 10%, while Wrangler was up 2%. And we are taking share broadly. According to NPD, both Lee and Wrangler brands saw accelerating U.
S. Share trends during Q3, ending the quarter with solid increases across both men's and women's denim. Both Europe and China saw sequential gains during Q3, consistent with the gradual improvement we highlighted last quarter. China will continue to be a focus for our strategic investments given the significant white space opportunity the region presents, including the launch of Wrangler, which remains on track for a soft opening this fall and broader launch in the spring of 2021. These broad based improvements are a function of the strategic initiatives we've been executing since the spin.
Let me touch on a few of these areas now. First, we continue to work to optimize our distribution strategy. This began at the spin with the necessary investment in quality of sales initiatives to enhance our wholesale business through the exit of select underperforming channels, markets and points of distribution. These quality of sales efforts create the optimal foundation in support of more sustained healthier top line growth in the future. Another component of our wholesale distribution strategy has been an increased focus on partnering with best in class retailers.
Many of these partners were deemed essential and remained open during the pandemic, including Walmart, Amazon and Target, as well as select Western specialty customers, and we believe these retailers are well positioned to continue their strong performance even assuming an uncertain environment. The second area of strategic focus, accelerating digital is a primary catalyst of our evolving distribution strategy. And while this is a global endeavor, our investments in our U. S. Digital platforms continue to yield solid returns with our digital wholesale and own.com in the region up 68% 43%, respectively.
And while we remain in the early stages of transforming our own branded sites, the 3rd quarter showed continued momentum for both brands with globallee.com up 27% and wrangler.com up 38%. We will continue to distort investments in developing our digital ecosystem as the consumer will be at the center of everything we do. We will leverage our evolving data analytics capabilities and unlock value from our new global ERP infrastructure to ensure Kontoor is a consumer led digital first organization. These investments should drive not only sustained top line growth, but more profitable growth as our mix improves in this accretive channel over time. Our third strategic focus lies within enhancing and scaling our innovation platforms.
As we've discussed in the past, the investments we are making in innovation span both product and advanced manufacturing capabilities. Our investments in design and processes, enhanced fit and fabrications, lighter and more durable materials all support an evolving innovation pipeline that will be appropriately segmented across a variety of distribution channels with a greater emphasis on value and premium specialty. And across channels, we know that innovation can support elevated pricing as we've seen in the recent Wrangler by Fred Siegel collection at Nordstrom, the emerging Wrangler ATG line and outdoor specialty and the launch of our Lee MVP and legendary programs with Kohl's. In one area of innovation where advanced technologies drive both product and manufacturing is sustainability. Last quarter, I said we needed to be louder with our great efforts behind sustainability and DSG.
In this quarter, we are doing just that, publishing our inaugural sustainability report as an independent publicly traded company. This report provides great insights into our accomplishments and progress over the last 18 months. But more importantly, sets foundational goals for our organization as we aspire to be a leader on sustainability and ESG within the apparel industry. These progressive goals connected to the 3 pillars of our platform. People, product and planet include saving 10,000,000,000 liters of water by 2025.
We were a first mover in this area with our development of the Indigood waterless foam dyeing process and we will look to scale this in the coming years to further reduce water use in the production process. Power 100 percent of our owned and operated facilities with renewable energy by 2025, source 100% sustainable raw materials for cotton by 2025 in synthetics by 2,030. And finally, we will only work with factories that support worker well-being or community development programs. Kontoor's approach to sustainable business activities is founded on our commitment to be a purposeful business. Within that context, we've affirmed our commitment to doing business responsibly and sustainably, balancing financial success while striving to meet the needs of the communities we serve and the planet we share.
We look forward to sharing progress towards achieving our sustainability and ESG goals in the quarters to come. And the final strategic area of focus I will discuss today is new business development despite the challenging environment we have been on the offense, aggressively investing behind business development, supported by enhanced demand creation initiatives. First, let me provide an update on our Lee Master Band program that launched in over 2,000 doors with Walmart in September. Although we are still in early days, we are encouraged by the reads we are seeing in the marketplace. The initial assortments are now largely set and in store point of sale is well underway and will be finalized over the next few weeks, which should help further catalyze sell through.
Importantly, we are using this initial launch as a solid foundation of which to build. As a reminder, the initial sell in of the LEAP program included men's and women's bottoms, primarily denim and select casual product. The offering will scale over time to include additional categories and beneficial to our retail partners and consumers. The collection represents a compelling value at elevated prices. We are really excited about the incremental SKU and category opportunities as well as the potential for door expansion over time.
And to support these new programs, we are taking the opportunity to invest in our brands by accelerating demand creation investment in the back half of the year. During the Q3, this included ongoing domestic collaborations with influential brands like A Life and the recently announced partnership with AppHarvest, a leading agricultural sustainability organization. Internationally, Lee also introduced collaborations with local artists for a pop up in Selfridges in London, which highlights our sustainability platform for a world that works. And in China, Lee launched a brand equity campaign titled Stand Tall, utilizing influencer Eddie Peng. Turning to the Wrangler brand, new business development with Wrangler Outdoor, including ATG continues to be a highlight in our growing portfolio.
Year to date, Wrangler Outdoor has added more than 300 new doors of distribution within the U. S, primarily in outdoor specialty demonstrating our continued wholesale diversification strategy. In internationally, the launch with Dressman's that we highlighted last quarter is just kicking off. We are pleased to announce today that based on its early success, the ATG line will be launching the women's collection in Cubist, a European women's fashion concept with over 300 doors. What makes this especially exciting is that this will be solely women's ATG product highlighting the breadth of quality across genders, channels and geographies and demonstrates how well the Wrangler Outdoor platform is being received in the marketplace.
And similar to Lee, Wrangler is also taking the opportunity to accelerate demand creation investments in the back half of the year. During the quarter, we continued to scale our successful wear with abandon campaign, ramped our social media spend, expanded our production and photography in house capabilities and partnered with a new digital advertising agency. Looking ahead to Q4, our strong marketing initiatives will continue. Ahead of the December 2020 Wrangler National Rodeo Finals in Arlington, Texas, we recently opened our full price pop up store in the heart of the Fort Worth Stockyards, an outdoor retail environment rich in Western heritage and cowboy culture. The 1500 square foot format includes an assortment of modern, outdoor and Western collections with laser customization technology on-site.
We will also introduce Wrangler collaborations with Rick and Morty on the adult swim channel and we just launched our Wrangler by Fred Spiegel collection at Nordstrom, all continuing the brand's enhanced approach to reach younger, more diverse consumers. So let me reiterate, despite the pandemic, we have been aggressive in our approach to amplify many of the strategies that were implemented at the spin, allowing us to capitalize on marketplace disruption. We continue to drive new business development at a pace not seen in years. Our brands are healthy and well positioned and we look forward to building on this momentum. Next, I want to turn to a key topic that I know is on many of your minds and that is the decision to reinstate a dividend.
As you've seen in our release this morning, our Board of Directors reinstated and declared quarterly cash dividend payable in December of this year. Let me be clear, this is a decision our board made with confidence. As you all know, at the outset of the COVID pandemic, our focus quickly and prudently shifted to support liquidity and financial flexibility, including the amendment of our credit facility with the temporary suspension of a dividend for at least 2 quarters and the opportunity to reevaluate during the Q4. After thoughtful deliberation, our Board has declared a quarterly dividend of $0.40 per share. Rustin will take you through greater detail on the rationale for the level at which the dividend was reinstated, but I'll share a few high level thoughts.
First, the dividend is a foundational element of our post spin investment thesis, our total shareholder return model and capital allocation priorities. Next, given our performance, the Board is reinstating an attractive, sustainable dividend that demonstrates confidence in the cash generating aspects of our operating model, while providing prudent financial resilience and flexibility in a dynamic operating environment. And finally, we anticipate our improving fundamentals will drive an increasing percentage of our evolving TSR model. While our priorities remain focused on paying down debt and paying a superior dividend, optionality will begin to emerge as we optimize our capital structure. You will hear more on this evolving capital allocation strategy in the coming quarters and at our Investor Day currently planned for this upcoming spring.
Let me close with this. I am confident that Contour is well positioned for future success, even in the face of an uncertain operating landscape. Despite one of the most challenging consumer environments in history, we have been on offense investing in several strategic areas that should drive competitive separation in the marketplace. The powerful combination of these strategic proactive actions that drive fundamental improvement coupled with our uniquely superior cash flow positions us for more sustainable and profitable growth in the future. We are confident that the investments we are now making across digital transformation, geographic expansion, scaling innovation, demand creation and new business development will come together to yield superior returns for all of Kontoor's stakeholders over time.
With that, I turn it over to Russ. Thank you, Scott, and good morning, everyone. As Scott mentioned, driven by our strong execution, our Q3 performance came in above our internal expectations and clearly demonstrates that the proactive strategies we implemented since the spin are gaining traction. We drove continued sequential improvement in our brand performance, enhanced profitability and generated significant cash, allowing for aggressive debt pay down while improving our overall liquidity position. Scott walked you through many of the strategic actions we are taking to further these gains.
So let me outline what I will cover for the balance of the call. First, I will discuss how we are enhancing profitability while continuing to invest in strategic initiatives. Next, I will walk through the progress we made in delevering the balance sheet, putting ourselves in the best net liquidity position since the spin and enabling us to reinstate a dividend. And finally, I will close with a review of our Q3 results and provide additional perspective on our expectations for the Q4 and full year. So let's get started.
At the spin, we kicked off a 2 phase program that would yield $50,000,000 in total savings. Phase 1 of our cost savings program included optimizing our global distribution network, exiting unprofitable and non core channels and relocating the Lee headquarters. These projects began at the spin and are complete, yielding $25,000,000 in savings over the back half of twenty nineteen and throughout 2020. As COVID began, we reexamined all of our spending and accelerated select strategic actions, including the move of the VF outlet headquarters to North Carolina, and the strategic review of our U. S.
Store network is well underway and will involve additional door rationalization and reformatting of select stores. Phase 2 of our cost savings program was predicated on our ERP implementation, and we remain on track to realize anticipated savings beginning in 2021. Despite the pandemic, progress on the strategic ERP investment continues with our first regional implementation successfully completed during our Q3 and the remaining regional implementations planned in 2021. We remain on track to deliver the balance of the projected savings. These actions came together with gross and operating margin improvement in the Q3.
As you saw in the release this morning, we drove healthy improvements in our overall profitability, with adjusted gross margin increasing 2 40 basis points versus the prior year. Gross margin is a key focal point for the organization and remains an important driver of our overall TSR approach. I am pleased to say the gains were broad based with increases in both Wrangler and Lee and in all geographic regions. Let's review the components in more detail. First, the aggressive actions we took to manage inventory early in the pandemic helped us to adjust the new demand signals and avoid the creation of excess inventory.
In fact, we were able to steadily improve our inventory health during Q3 and position supply to meet 4th quarter demand. These actions are driving a healthier mix of full price selling. Quality of sales actions and further supply chain initiatives also supported gross margin recapture. 2nd, we continue to see the benefits from structurally accretive mix shifts we have discussed as an important part of our evolving operating model, including accelerating growth of our digital businesses. We have talked about these measures supporting an improving gross margin trajectory, and they are doing just that.
I will touch on our forward expectations later in the call, but we see these benefits continuing in the Q4 and beyond. As we have discussed since the spin, our owned manufacturing provides a distinct competitive advantage to adjust production as conditions warrant, while minimizing service disruptions for our partners. The pandemic has resulted in a highly dynamic environment, and we continue to actively manage the supply demand balance. Given the abrupt onset of the pandemic, early in the quarter, we did experience select supply chain disruptions driven by lockdowns in certain countries. We work to enhance our supply position, which has improved throughout the quarter, and we believe our current inventory levels are appropriate to respond to the marketplace while supporting anticipated demand and new program wins.
3rd, you have heard us discuss taking a prudent approach to managing cost while supporting growth platforms. Earlier in the year, we engaged the global organization to rethink processes, leverage technology and challenge discretionary expenses. We also made the difficult decision to make temporary salary and merit based adjustments that impacted many of our colleagues. While I am very pleased to say we were able to restore these salary adjustments during the Q3, we also drove meaningful cost improvements in part from Phase 1 of the cost saving program previously discussed, with SG and A leveraging 230 basis points. These proactive measures are leading to tangible cost structure improvements that will allow us to reinvest back into the business.
We look forward to sharing more details in the quarters ahead. Despite an incredibly challenging environment, our adjusted operating profit increased 23% to $103,000,000 while our adjusted operating margin increased 460 basis points to 17.6 percent of sales. While we continue to invest in our key long term strategies, accelerate demand creation and support our global growth initiatives, our 3rd quarter results are solid proof points that the actions we are taking are positioning us for continued sustainable long term growth. Now to the progress we made during the Q3 to further solidify our balance sheet and improve our liquidity position. As we've discussed since the spin, strong and consistent cash generation is foundational to our operating model.
This was clearly evident during the quarter as we drove an acceleration in operating cash flow. Looking at the 1st 9 months of the year, despite the challenges from the pandemic and ongoing investments in our IT infrastructure, we generated $130,000,000 in cash from operations. Importantly, this strong cash generation has led to an acceleration in debt pay down, while bolstering our net liquidity position. Since amending our credit facility in May, we have made $175,000,000 in discretionary debt repayments and project at least another $100,000,000 before year end. At the end of the Q3, our net debt was $752,000,000 a low watermark since the spin.
Additionally, we ended the quarter with $653,000,000 in cash and available borrowings under our credit facility, marking our best liquidity position since the spin as well. So stepping back through 3 quarters of 2020 and despite headwinds from the pandemic and the highly dynamic marketplace, we have meaningfully improved our capital position and see additional opportunity to further improvement in the Q4. I will touch on this again later in the call, but I encourage you to refer to the liquidity table we included in the release this morning for additional detail. Finally, as Scott mentioned, our robust cash generation has led to the reinstatement of a quarterly dividend at $0.40 per share. Let me provide additional perspective.
1st, we continue to operate in a very uncertain environment and believe it is prudent to maintain financial resiliency and flexibility with the reinstatement of a dividend. Accordingly, reinstating a dividend per share of $0.40 or approximately 70% of pre COVID levels allows the dividend to remain a key element in creating a strong and sustainable PSR that rewards shareholders, enables for continuing debt pay down and allows continued investment in the organic growth of the business. 2nd, the Board's level of reinstatement reflects confidence in the business, and we anticipate increases over time as performance and the operating environment warrant. The timing and amount of any increase will depend on the Board's continual evaluation of the multiple factors listed in our dividend policy as described in our filings, including but not limited to our financial condition, earnings, capital requirements, the terms of our outstanding indebtedness and other considerations our Board deems relevant. And finally, these actions reflect our performance driven TSR framework and importantly, optionality as we position Kontoor for improving fundamentals to drive an increasing percentage of our TSR, all while supporting shareholder friendly actions.
Now let's get to our Q3 review. Global revenue decreased 9% in the 3rd quarter compared with the same quarter in 2019. Revenue declines during the quarter were primarily the result of impact from COVID, offset by double digit increases in digital, new business development wins and a timing shift of Wrangler U. S. Shipments from the 2nd to 3rd quarter as we discussed on our last earnings call.
On a regional basis for the quarter, U. S. Revenues were flat compared to the same quarter in 2019. Impacts attributable to COVID were offset by growth in digital, new business development wins and the aforementioned timing shift. The U.
S. Represented 78% of our revenue in the quarter. Outside of the U. S, international revenues declined 31% in constant currency compared with the same quarter in 2019. Despite the decline, both Europe and China improved sequentially driven by digital wholesale and improving e commerce demand.
We anticipate continued sequential improvement during Q4 in both regions. Turning to our channels. Our revenue in our U. S. Wholesale channel, which represented 67% of our revenue, increased 3% compared with the same quarter in 2019.
Increases were driven by improving trends with key wholesale partners, the benefits of new business development wins and the previously mentioned timing shift. Our non U. S. Wholesale channel, which represented 18% of our revenue, decreased 34% compared with the same quarter in 2019, driven by impacts from COVID. We experienced sequential improvement in Q3 and anticipate continued progress during Q4.
Our branded direct to consumer channel, which represented 11% of our revenues, increased 2%, driven by strong gains in both wranglerandlee.com. Our owned digital business increased 32%, driven by 43% growth in the U. S. And 19% growth in China. Finally, let's turn to our brands.
Global revenue of our Wrangler brand declined 6% compared with the same quarter in 2019. Wrangler U. S. Revenue increased 2% in the period. Strength in digital wholesale and growth in our Western business led to the increase as well as the previously discussed timing shift.
Additionally, we drove accelerating growth in our owned.com business, which increased 44% in the quarter. Wrangler International revenue was down 40% compared with the same period last year. COVID related impacts continued to weigh on performance. However, we did see sequential improvement in key markets and ongoing strength with our key digital wholesale partners. Lee brand global revenue declined 8% compared with the same quarter in 2019.
Lee U. S. Revenue increased 10% in the period, driven by new business development wins as well as continued strength in digital wholesale and 40% growth in owned.com. Lee International revenue was down 26% compared with the Q3 of 2019. While ongoing headwinds from COVID, particularly in Europe, continue to weigh in the region, we saw sequential improvement from the Q2 combined with the strength in our owned e commerce business.
Now on to gross margin. As previously mentioned, total adjusted gross margin increased 240 basis points to 43.3%. The increase was primarily driven by the benefits of product cost as well as channel and product mix in the quarter. These increases were slightly offset by downtime in owned manufacturing. I will discuss our outlook for the Q4 momentarily, but we anticipate these drivers to largely continue through the balance of the year.
Adjusted SG and A decreased $28,000,000 on a year over year basis to 150,000,000 dollars As a percentage of revenue, SD and A decreased 2 30 basis points to 25.6%. Tight expense controls and benefits from restructuring actions more than offset fixed cost headwinds due to lower revenues as a result of COVID. Adjusted earnings per share were $1.33 in the 3rd quarter compared with $0.95 in the prior year. Now turning to our balance sheet. 3rd quarter inventories decreased $113,000,000 versus the prior year to $432,000,000 or down 21%.
The year over year decline reflects tight inventory controls and our strong culture for working capital management. Compared to the 2nd quarter, inventories were essentially flat. We are pleased with our performance in managing inventory in this environment and believe we are well positioned to support anticipated Q4 and holiday demand while continuing to improve inventory levels. We finished the 3rd quarter with $285,000,000 in cash and debt of approximately 1,000,000,000 dollars As previously discussed, due to our strong performance in the 3rd quarter and improving liquidity position, we made an additional discretionary repayment totaling $100,000,000 on our revolver in the 3rd quarter. Strong cash generation should support continued aggressive debt pay down during the Q4 of 2020.
And now on to our outlook. While the impacts from COVID as well as macroeconomic factors remain uncertain, we are providing full year 2020 adjusted EPS guidance and offer the following perspective as you think about the balance of the year. Revenue in the 4th quarter should experience sequential improvement from the 3rd quarter, with revenue anticipated to be flat to down modestly. 4th quarter adjusted gross margin is expected to be above 2019 levels of 40.9%, reflecting continued benefits from ongoing restructuring and quality of sales initiatives as well as higher anticipated growth in more accretive channels such as digital and improving mix within international. 4th quarter adjusted SG and A is expected to increase year over year, driven by strategic decisions to amplify investments in demand creation and B2C in support of both the 4th quarter and long term revenue.
Full year 2020 adjusted EPS is anticipated to be in the range of $2.25 to $2.35 per share. And finally, strong cash generation should support continued aggressive debt pay down expected to be at least $100,000,000 during the Q4. In closing, I want to reiterate the confidence we have in the business and the strategies we are executing against to drive greater shareholder value. While there is still much to do and despite the challenges of the current environment, we are pleased with the progress we have made executing our long term priorities, improving profitability and fortifying our capital position. We look forward to sharing our progress in the coming quarters and at our Investor Day currently planned in spring of 2021.
This concludes our prepared remarks, and I will now turn the call back to our operator. Operator?
Thank you. We will now be conducting a question and answer Our first question comes from Erinn Murphy with Piper Sandler. Please proceed with your question.
Great. Thanks. Good afternoon. So I guess my question is on the Lee rollout into Walmart. I'd love to hear if you could talk a bit more about how the business looked once it launched in August and into September.
And then if you I don't know if you could quantify how much was sell in and what you're seeing today in sell through. But then I think you also left the door open to talk about new categories into spring of next year and potentially even new doors. Can you just help us frame up how you're thinking about that rollout? And then I have another follow-up.
Sure. Erin, this is Scott. From the Lee rollout perspective, we're actually really pleased. Obviously, we're winning with winners and we're pleased with our partnership, a big expansion of our partnership with Walmart. But I think the thing that we're most pleased with is the fact that we rolled it out.
It's been accepted by the consumer extremely well. Our female business has done exceptionally well. So we're really pleased with that. I think one of the things that we've talked a lot about as a team and talked with our partner about is the accelerated pricing too. So we're at a really good price point that we haven't been at in our collections before.
So we feel really good about the fact that even at that price point, there's been really strong takeout. I think from an expansion standpoint, we wanted to get the program that's a really big program. So we to get it up and running. So we chose denim and casuals to start, but the program does call for expansion as we move into next year with seasonals and shorts. So we think it's got a really nice future ahead of it and we're really pleased to date with the roll up.
One of the things that I would mention and I want to talk about this, because we've had this question is, are we seeing any cannibalization relative to our Wrangler line? And I think the thing that I'm most pleased with that we're hearing from the team and our partner is that we're not really seeing any cannibalization right now. And that speaks volumes to me about the consumer that's coming in and the consumer that's taking out our product there. So really pleased with where we are to date on that program.
Thanks, Erin.
Yes, that's encouraging. And then just a follow-up on the dividend, obviously, very good to see it reinstated this morning. It is at a lower dollar amount. So can you just share kind of how you're balancing that with debt pay down? I don't know if you can speak specifically of what you're expecting to pay down in the Q4.
You said it would be aggressive. And then just remind us, where do you need to be from a net debt to an EBITDA perspective before you rethink about M and A? Thank you.
Sure. Let me go ahead and start and then I'll flip it over to Russ and then he'll answer some of the rest of the question. But we obviously amended our credit facility. So we had a 2 quarter abatement that we had to have. And I think the thing that I'm most encouraged about is that the employees of this company, I have so much confidence in this team and our Board of Directors have so much confidence in this team that the minute we were able to reinstate we did.
But the reason that we did it were for strong fundamentals. So we have improving performance, improving fundamentals, really strong cash generation, which Ruston will talk a little bit about. But I would tell you the single most important thing is taking a look at the future, thinking about our strategy, thinking about the talent that is joining this organization globally and where we're going to take this company. We're just at the beginning of a very early journey and a lot of good things are going to happen in the future. A lot of good things are happening now.
But we have great confidence in the people. We have great confidence in the strategy. We have really good confidence in the operating model. So it gave us really strong confidence to go ahead and reinstate that quickly. Preston, maybe you can go through some of the details.
Yes. Great. Good afternoon, Aaron. Just building on Scott's point, I think it really starts with confidence. And obviously, we wanted to reinstate at a healthy, attractive, sustainable dividend level.
So the Board of Directors certainly considered a number of factors in determining that level, including obviously the prior dividend level, sort of peer and S and P benchmarks, future earnings estimates and the current macro environment. And I think we're not targeting a specific payout ratio at this time, but we believe the dividend being reinstated at that $0.40 a quarter really balances kind of that Board of Directors confidence that Scott spoke about acknowledges the current dynamic operating environment and puts us into a position that given increased performance and a stabilization of the operating environment, we can increase that dividend over time. Obviously, the timing and the amount of any increase will really depend upon the Board's evaluation on a number of factors, certainly including our financial condition, our earnings, capital requirements, levels of indebtedness, etcetera. So, we're not going to get into the timing of that, but we see that opportunity for expansion over time. You mentioned a little bit about how we're thinking about balancing aggressive debt pay down.
Certainly very proud of the fact that over the past two quarters, we've made discretionary debt repayments of $175,000,000 I think that speaks to the strength of our operating environment our operating model, particularly in this environment. And as we indicated in the script and on the release this morning, we anticipate an additional debt repayment of at least $100,000,000 in the 4th quarter. You also asked a little bit about reaching our optimal capital structure. At the time of the spin, we said that we were targeting a gross leverage ratio less than 3 times, Aaron. Certainly, we're getting after the debt pay down.
Our capital allocation priorities for Horizon 1 here remain the same. That aggressive debt pay down and certainly paying that superior dividend that was just reinstated with confidence this morning. So we'll continue to evaluate that as we work our way through 2021, but really focused on the fundamentals of the business and paying down the debt. And Erin, one last thing. Thank you, Rusty.
One last thing is we'll spend some time on this in our upcoming Investor Day in the spring, which we're really looking forward to everyone joining. I think it's going to be a great day where we can really share with you what we're thinking and how we're thinking about business long term. So thank you, Erinn.
Great. Thank you.
Thank you. Our next question comes from Alexandra Walvis with Goldman Sachs. Please proceed with your question.
Good afternoon. Thanks so much for taking our questions here. My first question, you noted your intention to amplify investments in demand creation and digital in the Q4. Can you elaborate a little bit more on that? What investments are you making?
And are those a pull forward on previous investment plans or are they new opportunities that you're taking advantage of?
So how are you, Alex? It's Scott. I'll go ahead and start and Russ and I will take that together. So we have a lot going on in the Q4. But I would tell you a lot of that just is future build too.
So I don't like to think of things as a short term perspective. I like to think how we're going to build these brands over a very long period of time. And we've done some really nice things from a new business development standpoint, as you know, with Dressman's and Walmart and Cubist and more in the hopper to come in the future. And we've got to go ahead and support those programs going forward. So we're going to go ahead and do that.
We're supporting these really cool co labs that we're doing with the likes of Fred Spiegel and A Life around the globe, which we're really excited about. And one of the things that we talked a lot about at the very beginning, and you probably remember this all too well, Alex, is we talked about these two brands haven't been invested in a long time. And that we talked a lot about the fact that we love these brands. They're great brands, incredible history and that with a little bit of investment, with a little bit of strategy, with a lot of marketing, we can really make something special out of these. And I think the team, we owe a debt of gratitude to our incredible team and our marketing teams and our global teams on how we're bringing these brands back to life in a really significant way.
So as I think about the opportunities that we have to invest back in these brands, I think about the casualization that's happening around the globe and how that plays right into our strategy. I think about our all terrain gear, our outdoor line that's expanding and growing rapidly and we talked a little bit about the new business development today. And I think about the investments, the really smart investments we're making in digital and how they're paying off and how we're starting to build a really capable digital team and you can see that really starting to come together and our ERP system that will be coming on board next year and how those two things will come together in a really, really elegant way. So building these brands, investing back into these brands, getting them to an optimal level so that we can feel comfortable within the marketplace that we're spending the right amount of money against these brands. I would say the really important thing is that we do it the right way.
We get a nice return for these and we grow as business grows. Justin? Yes. Thanks, Scott, and good afternoon, Alex. Just a couple of points to build and maybe further dimensionalize Scott's comments.
We spend Scott and I do a significant amount of time talking about obviously this dynamic operating environment that we find ourselves in and we really believe that strong trusted brands that offer consumers compelling value that is really enabled by an agile supply chain will win in this environment. And Scott talked a little bit about our belief on our brands. We believe we have 2 of the most iconic brands in the world with over 200 years of trusted history amongst consumers. We have a diversified world class supply chain. We're sourcing or operating from over 275 factories in 20 countries that has enabled us to continue to supply the market and really believe we offer a quality product at compelling value in all of the channels of distribution that we have.
And so, the decision to sort of distort demand creation and D2C investment during this Q4 is important, as Scott said, to support a lot of the strategic initiatives that we've launched, but really to set us up for long term growth on the top line and acceleration, not just through holiday, but in 2021 and beyond.
Great. That's super clear. And then my second question was on inventory, down over 20% in the quarter. Can you share expectations for how you expect that to grow going forward? And any comments on the health of inventory, both on your balance sheet and on the channel would be super interesting too?
Yes. Thanks, Alex. I'll start and flip it over to Russ for some detail. But we feel like we're in a really good position. I would tell you, in my time here, 10 years with this business, we've never come out in the fall and the seasonal period as clean as we have.
So really have a lot of confidence in that. We're really good about that. And then the way that we're going ahead and matching our supply and demand model going forward. And I think one of the things that's a great advantage right now is our world class manufacturing capabilities. I think that just has really played really well in the environment that we're in right now.
So we feel like we're in a really good place. And I think one of the things that's really, really important here is you have to create product that people want to buy. And our teams and our product teams are doing a great job of designing and making products that people want to be seen in. So I just I can't thank them enough. Our Board can't thank them enough and can't be as I'm just super proud of what we've done here in a short period of time and what our teams have done.
Ruston? Yes. I think Scott did a great job, Alex, of dimensionalizing that for you. I'll just give you a little bit around the figures. So we were down 21% in the quarter.
That was about $113,000,000 year over year, down to $432,000,000 That was relatively flat with where we ended Q2. So just to sort of highlight and reiterate maybe what we talked about on the last call. As of Q2, we were down about $105,000,000 in inventory year on year. And really $80,000,000 of that came in the back half of last year as we were working down inventory with the balance $25,000,000 coming in the second quarter. So again, inventory is flat Q2 to Q3, feel like we're in a great position as Scott talked about and just really happy with the quality of the inventory that we have on hand.
So thanks, Alex.
Thank you and all the best.
Thank you. Our next question comes from Robert Drbul with Guggenheim Securities LLC. Please proceed with your question.
Hi, guys. Good afternoon. Just a couple of questions from me. I think first for Scott, can you talk a little bit about the denim category maybe across channels in terms of what you're seeing in sort of the trends throughout the different price points, etcetera, maybe even globally? And then the second question for Ruston, can you talk I think you talked about gross margin being sustainable into the Q4.
Can you just talk about the into 'twenty one and where you see gross margins over the next few years from where we are today? Thanks.
Sure.
Yes, Bob, I'll take first one and then Russ will take the gross margin. Really love the category that we're in. We love this business. I think the category is just absolutely terrific right now. There's a casualization that's happening globally and we're sitting right in the sweet spot of it.
And I think one of the things that's been exceptional for our business and our strategy is, if you know this business and you've been around it for a while, Bob, we have actually played in a narrow range from a category standpoint for a long time. And now that we've ventured out in our own as a publicly traded company, one of the things that we talked about was playing in a higher range and making sure that we were taking care of all consumers. So for us, whether it's our business in Asia or some of the business that we've built here in the United States recently with Nordstrom's and some other folks, playing in those higher channels in the new Walmart Lee business at a higher price point, it really gives us a distinct advantage to play in multiple channels and to be a bigger player in the category itself. So from a casualization standpoint, from a global standpoint and from just how we're building and thinking about our segmentation, I am really pleased where we are. Great.
And Bob, I'll take the second part here on your gross margin question. Obviously, really pleased with our gross margin in the Q3, up 2 40 basis points, strongest margin we've seen since the spin. And as we talked about in the prepared remarks, we really see those drivers around product cost improvements, channel mix and product mix largely continuing in the 4th quarter. Again, expect that to finish above prior year levels. As we start to think about 2021, you've heard us Bob talk quite a bit since the spin about how sequencing matters.
And the first thing that we really did coming out of the spin was get after margin expansion, and certainly got after the cost save program and the quality of sales initiatives to really recapture some of the margin that had been lost in this business, pre spin. So that gross margin expansion remains a critical focal point for the organization, because it really enables us to invest into our brands while enhancing the operating margin. And I'm not going to provide specific guidance on the 'twenty one gross margin today, but I will tell you that gross margin expansion will remain a critical strategic imperative for us as we move forward. It really is the oxygen we breathe into the P and L that allows us to make a lot of the strategic investments that Scott's talked about while improving the operating margin. So thanks for the question, Bob.
Thank you, sir. Thanks, Bob.
Thank you. Our next question comes from Adrienne Yih with Barclays. Please proceed with your question.
Great. Thank you very much. Good afternoon. Scott and Ruston, I think this quarter really reminds us of what a strong business you run. You're obviously a low to mid teen margin business after the spin and that's one of the better ones in the space.
So I guess when I look at the 17.6%, this is my question. We haven't seen anybody in the midst of COVID expand margins, let alone expand them by 4 60 basis points. And so it seems like this is a step function change that horizon 1 has moved to horizon 2, certainly next quarter when you start to see that sales growth. And so I guess I'm asking for some longer term guidance, maybe that's going to come on the LRP on the Analyst Day, but this business seems very different, much more profitable. And I'm wondering if there's a one time nature to 3Q or you don't want to put the cart before the horse and maybe there's some happy medium as you are on that path to Horizon 2?
Thank you very much. Sorry for the
Yes, Adrienne. Hey, good afternoon. It's Ruston. I'll go ahead and take that. So certainly proud of our Q3 results here.
I'd be remiss if I didn't begin with stating that we're obviously in a very dynamic operating environment and really pleased with the sequential top line growth in the Q3. We see that continuing into the 4th. Obviously, the gross margin expansion, driven in part by sort of the distorted growth in digital, is a welcome sign for us. I talked a little bit in some of the prepared remarks that the SG and A, we did take some actions in the middle of the quarter to reinstate some of the actions we had taken at the height of the pandemic in terms of temporary salary reductions, etcetera. So you'll have kind of the impact of that moving forward now that we're back to sort of normal operating levels.
But I think you asked the question about the 17.6% and sort of how we think about it moving forward. Certainly a high watermark at the 17.6% and we talk quite a bit about wanting to distort demand creation in B2C Investments. And again, that's to solidify that 4th quarter top line, but really talking about starting to inflect in 2021 and beyond. So as we think about sort of capital allocation horizon 1, horizon 2, we're really focused on what we can control and that is improving the fundamentals of the business. So again, two priorities here in Horizon 1, that aggressive debt pay down that will continue here in the Q4, reestablishing sort of a superior dividend, obviously an important element.
And then just really being able to organically reinvest into our brands and our business. We feel like we've put ourselves in a healthy financial situation with the best net debt and liquidity position we're in since the spend here at this quarter. And our priorities will continue over the near term. So certainly next year as we get into the Investor Day that is currently planned in the spring, we'll talk a little bit more about how we see that capital allocation evolving as we move into Horizon 2, but we really like the fact that we should see increased optionality to drive further TSR bolstering actions in the future as we continue to improve the fundamentals. And that's really where the focal point is in this dynamic environment we're operating in.
Great. And then, Scott, if I may, would you comment, give us some more details on China, what you've been seeing there, the improvement and then the Wrangler launch? Thanks very much.
Sure, Adrienne. We've been seeing nice fundamental improvement in China that we've been talking about here now for a couple of quarters. So we'd like to think that that's going to continue with the consumer there. They are getting back to what we would call closer to normal. The Wrangler launch is happening in a soft way.
We're seeding the market right now as we speak. And then when the operating environment is at what we would call normalization in the spring, which we hope it will be, have no reason to believe that it won't, we'll do a full launch. And then that way we can do collaborations and programs and marketing things that we can do with people and have groups together and just be more inclusive and have a better launch timing relative to what we want to do with the brand. So small and seating now and then the full program this spring. Thanks,
Andrew. Great. Thank you very much.
You bet.
Thank you. Our next question comes from Sam Poser with Susquehanna. Please proceed with your question.
Thanks for taking my question, gentlemen. This is sort of an all over the place question, but the it sounds to me like through COVID and the launch at Walmart with Lee, it sounds to me like your brands are getting better defined. And despite the fact that sales in total have been tough this year, has this pandemic sort of allowed you to slow things down and better define your businesses for arguably more robust growth going forward than it might have been otherwise?
Yes, Stan, this is Scott. I'll take that. It's allowed us to go ahead and segment our brands. So if you think about what we've done with both the Lee and the Wrangler brand globally, we've really segmented them. I think one of the benefits of the spin off and one of the things that we talked about was the fact that the brands have stayed in a lane.
And now these brands within we've talked a lot about the history of these brands. These brands have permission to go to other places as our competitors have. And what we're seeing is with some marketing, some really good product and bringing them to other channels, the consumers love these brands. So that's what gives us really good optimism about the future of our model, Sam.
And just to clarify the question, I want to say to you that you might have tried to grow maybe a little bit more aggressively had there not been the crisis. And because of the crisis, you were arguably able to be more methodical about it to make the brands even stronger than they may have been without the crisis. That's what I'm getting at. I understand your answer, but slightly different question.
No, completely understand. We certainly have taken advantage of dislocation in the marketplace. And one of the things that we've tried to do is treat these brands in a really good way and in a real strategic way on how we look at them going forward. I think one of the things, Ken, that's really important about your question and about our business is we are taking a very long term view of bringing these brands back to the forefront. So agree with what you're saying.
Yes. And I would also add, Sam, Scott's talked for several quarters now just about the criticality and new business development for us and really gaining those wins. And we've also talked about how it's going to take time. And if you think back to the beginning of the year pre COVID, we talked about an acceleration in the back half. And really, it was some of these wins, whether it's a Dressman's, a Lee at Walmart, a Cubus that Scott's talked about now, really getting after sort of placing these brands a segmented way as Scott talked about in new points of distribution.
Thank you. Our final question comes from Jim Duffy with Stifel. Please proceed with your question.
Hi, Jim.
Hi. This is actually Peter McGoldrick on for Jim. Thanks for taking my question. It seems like you're really seeing the ball in revenue, which is stabilizing, gross margins are working for you, which could sustain into future years. Recently, this is a low teens operating margin business on an even lower gross margin.
Can this return to the low teens plus operating margin in the near term, net the DTC investments and reversal of salary reductions? I know there's some seasonality that we're looking at very near term, but we're guiding mid teens in for the second half. And then just as a follow-up, I was curious on demand creation. How should we think about that? Is that a pull forward given the strength in the Q3?
Or is there an emerging opportunity that might not have existed previously?
Yes, it's Ruston. I'll go ahead and take those. As we think about sort of the P and L, I'll go back to the comment I made coming out of the spin, we really focused on cost savings and quality of sales, because it really all starts with gross margin enhancement. And that was important for us. We sequenced that at the start of the spin, and we really think about that as creating oxygen for the P and L.
So as that gross margin expands, it's going to allow us the ability to invest back into the brands as you're certainly seeing here in the Q4 via demand creation and D2C, while also improving the operating margins. So we see an opportunity to do both over time with that gross margin expansion, and that's why it's such a focal point for us as an organization. As we think about the 4th quarter demand creation, I'll go back to my comments a little bit ago where, particularly in this environment, you really need strong trusted brands. And certainly, we feel good about our distribution and winning with the winning retailers. And to Scott's point earlier, we really want to support some of these new business development wins.
And it's really an opportunity for us to do that, not just in holiday and in support of the Q4. But again, moving forward, we're under indexed, as Scott talked about in demand creation a little bit earlier in the call, and really see an opportunity to continue to expand that over time and certainly get behind the brands to drive a stronger top line growth as well. So thanks for the questions. So folks, I wanted to quickly say a thank you for your flexibility today. We apologize for the inconvenience we caused everyone, but really appreciate you jumping back on a call, having that flexibility and being patient with us.
Also wanted to thank you for the support of our company. It's much appreciated and wish all of you a happy and healthy rest of the year and holiday season. And again, we'll look forward to spending some quality time with you next year in our Investor Day and we'll talk to you sometime in between. But thanks again everyone and appreciate the flexibility today. Have a great day.