Greetings, welcome to the Kontoor Brands Q4 2025 Earnings Call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to Michael Karapetian, Vice President, Corporate Development, Enterprise Strategy, and Investor Relations. Thank you, Michael. You may begin.
Thank you, operator, and welcome to Kontoor Brands' Q4 and full year 2025 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 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 exclude the impact of the 53rd week and will be in constant currency, which exclude the translation impact of changes in foreign currency exchange rates. Joining me on today's call are Kontoor Brands President, Chief Executive Officer and Chairman Scott Baxter, and Chief Financial Officer and Global Head of Operations, Joe Alkire. We anticipate this call will last one hour. Following our prepared remarks, we will open the call for questions. Scott?
Thanks, Mike. Thank you all for joining us today. 2025 was a transformational year for Kontoor. We completed the acquisition of Helly Hansen. Wrangler delivered another year of healthy growth and market share gains. We made progress repositioning Lee and executed Project Genius. Driven by the strength of Wrangler and strong contributions from Helly Hansen, we achieved record revenue, earnings, and cash flow in 2025, while returning over $140 million to shareholders through our dividend and share repurchase programs. Our results highlight our ability to grow revenue and earnings over the near term while investing in the long term. I am particularly proud of the strong execution our team delivered in a dynamic environment. Sharp focus and clarity on our strategic priorities gives me confidence 2026 will be another record year for Kontoor.
Let's discuss our priorities, starting with Helly Hansen. Helly is a growth asset. In 2026, we will further integrate the business while taking steps to accelerate growth and profitability. Integration and growth are not sequential, they're parallel. In the seven months under our ownership, we have strengthened the leadership team, delivered better than expected revenue and earnings accretion, and leveraged our multi-brand platform to drive greater synergies, operational discipline, and cash generation. We are bringing a renewed sense of focus to Helly's strategy while leveraging synergy opportunities to accelerate investments across the organization. We are in the early innings of unlocking geographic category and channel opportunities that will begin to accelerate in 2027 and beyond. We will bring the strategic vision to life at the Investor Day on 2 September in Oslo, Norway.
We are excited to invite many of you to Helly's headquarters, where we will share the significant opportunity that exists under our ownership. Second, accelerate growth in Wrangler. 2025 marked another strong year for the brand. We expanded market share in our core bottoms business, drove double-digit gains in female, western, and D2C, and invested behind our product assortment to drive greater category and channel diversification. Wrangler is on an incredible trajectory, and I am confident this momentum will continue in 2026. Third, position Lee for improving fundamentals and a return to revenue growth. We have strengthened the identity of the brand, realigned product distribution, launched the most significant equity campaign in years, and elevated consumer perception. We have built the foundation needed to improve the performance of the Lee brand.
We expect further progress in 2026, with improved profitability and a return to growth in the second half of the year. Finally, finish Project Genius strong. When we initiated the project in 2024, we outlined how it would enhance our organization, create capacity for investment, and establish a world-class multi-brand platform. With half the project now complete, I can confidently say it is delivering. The strong profit improvement and increased investment capacity we expect in 2026 is a reflection of our Project Genius and the benefits it has created across the business. Our global sourcing organization has been optimized to drive greater efficiency in our vendor network. Our planning teams are driving greater inventory productivity, and our shared operating platform is creating immediate benefits for Helly Hansen.
We will complete Project Genius later this year, transforming Kontoor into a best-in-class global multi-brand organization while improving our overall financial profile. Let's review highlights from the quarter, starting with Wrangler. Wrangler finished the year strong, with revenues increasing 3%. We are seeing broad-based growth across categories and in our men's and women's bottoms business, which delivered its 15th consecutive quarter of market share gains as measured by Circana. Our female and western business continue to be standout performers, with both increasing at double-digit rate in 2025. Wrangler's innovative female franchise, Bespoke, more than doubled in the Q4 as we continue to scale this platform, and our denim bottoms business grew at a mid-single-digit rate. We leaned into this momentum in the Q4 through incremental demand creation investments, including activations around key events such as college football.
Our collaborations are also performing well, with Filson and Stranger Things generating well over three billion media impressions and strong consumer demand. The team is executing on all fronts. I am confident 2026 will be another exceptional year. Turning to Lee, revenue declined 6%. In the U.S., revenue inflected positive to 1% growth, driven by increases in both wholesale and digital. Digital continues to lead the way, fueled by our refreshed creative vision that is generating results and improving brand KPIs. This is translating to increased revenue on our own digital platform as well as our wholesale partners. 2026 will be a transition year for Lee as we address distribution challenges, including U.S. mid-tier, and position the brand for a return to growth in the second half of the year.
We have identified growth opportunities that are better aligned with Lee's refreshed brand positioning and are evaluating opportunities to optimize distribution in Europe and Asia. I am confident we are down the right path to position Lee for sustained success. Turning to Helly Hansen. The acquisition of Helly has exceeded expectations by every measure, and we are just getting started. In the Q4, revenue grew 10%, and earnings outperformed our plan by 50%. It starts with product, and 2025 was a record year. We won six Red Dot Design Awards, our most ever in a single year, and recently, we were awarded four ISPO awards, including a gold for LIFA Merino Knit Evo. Our innovation engine is fueled by our connection with professionals.
In 2025, we celebrated the fourth anniversary of International Ski Patrol Day, partnered with national ski teams in Norway and Canada, and deepened our connection with the ocean and sail communities as an official partner of The Ocean Race Europe. The connection to professionals distinguishes Helly from among our peers and will be foundational to the growth acceleration in the coming years. We look forward to sharing more at the upcoming Investor Day, which we will follow with a broader Kontoor Investor Day in the first half of 2027. Before turning it over to Joe, let me reiterate the confidence I have in our ability to achieve our 2026 plan, driven by intense focus on execution and strategic clarity.
Wrangler enters the year with momentum driven by market share gains in both denim and non-denim, accretive category growth within western and female, and incremental brand investments that are translating to strong consumer demand. Lee's turnaround is progressing, supported by a clearer brand identity, improving consumer perception, and double-digit growth in digital. Helly Hansen is performing ahead of plan, including better than expected revenue, earnings accretion, and cash generation. In 2026, we will grow the business, expand operating margins, and position the brand for breakout growth in 2027. Finally, we anticipate another year of strong cash generation that supports an accelerated deleverage path and our commitment to return cash to shareholders. While the environment remains dynamic, we are executing at a high level, and I am confident we are well positioned to create significant value for our shareholders. Joe?
Thanks, Scott. Thank you all for joining us. We delivered a strong finish to 2025, resulting in record Q4 revenue, earnings, and cash flow while deploying approximately $250 million of capital towards debt repayments, opportunistic share repurchases, and dividends. For the full year, revenue increased 18%, adjusted operating earnings increased by more than 20%. We generated over $450 million of cash from operations. Relative to the outlook we provided following the Helly Hansen acquisition, we outperformed our commitments across every measure. 2025 was a transformational year for Kontoor as we achieved the strongest financial performance in the company's history. Wrangler is executing at a high level. Helly Hansen is significantly improving our value creation potential. The Lee turnaround is progressing. Our Project Genius transformation program is having a significant impact on our results.
We're building a more performance-based culture with a greater emphasis on growth and more aligned incentives across the organization and the brands in our portfolio. We're entering 2026 from a position of strength with sharp strategic clarity, a relentless focus on execution, and a commitment to continue to drive strong returns for our shareholders. Let's review our Q4 results. Starting with Helly Hansen. Global revenue of $251 million increased 10% compared to prior year reported results. Growth was broad-based across both sport and work wear and in all geographies and product categories. On a full year pro forma basis, revenue of over $700 million increased 7%. Within sport, full year pro forma revenue increased at a high single-digit rate. Growth was balanced across wholesale, digital, and brick-and-mortar retail. Sell-through was strong during the fall winter season.
Retail inventory levels are lean, we're chasing demand across several of the brand's largest product franchises. Moving to workwear. Full year pro forma revenue also increased at a high single-digit rate. Growth accelerated to a mid-teen rate in the second half of the year, driven by greater focus on new customer acquisition and key account growth, as well as improving construction activity in Europe. We've seen this momentum continue in early 2026. The global workwear opportunity is significant. Helly's product and innovation pipeline is unmatched, and demand for premium workwear is increasing around the world, driven by a combination of structural factors and consumer trends we believe will support years of profitable growth at scale. Moving to China.
As a reminder, Helly Hansen's revenue results exclude the direct contribution of the China joint venture with our partner, Youngor, as the results are not consolidated under the equity method of accounting. On a full year basis, Helly's China business generated revenue of approximately $100 million, increasing 95% compared to prior year. As a reminder, the China JV for Helly was established just five years ago, so the business is just getting started and the market opportunity is massive. Including the China JV, Helly Hansen global revenue increased at a mid-teen rate on a pro forma basis for the full year. The economics of the 50/50 JV in our financial results are reflected in loyalty income and our share of the net income contribution as accounted for under the equity method.
The China JV generates a mid-teen operating margin, and we expect another year of strong revenue and profit growth in 2026. The acquisition of Helly is off to a strong start, and the integration is progressing well. While still early, we're driving significant benefits as a more synergistic brand owner with a streamlined organizational structure and a strong management team in place in Oslo. Q4 earnings exceeded our outlook by more than 50%, driven by stronger revenue growth, gross margin expansion, and operating expense leverage due in part to synergies, all cornerstones of our operating model. Operationally, we're driving increased discipline into the Helly business globally. On the front end, we're optimizing distribution and elevating Helly's premium position in the marketplace. We're investing more meaningfully in the commercial and product organizations and in areas such as consumer insights and innovation.
We're also scaling demand creation investments with an increased focus on brand building to drive increased awareness ahead of Helly's 150th anniversary next year. On the back end, we're strengthening the inventory management and demand planning capabilities of the business and investing in a more robust planning organization. We're seeing early returns on these investments, such as improved sales quality, higher gross margin, and an ability to capture more revenue opportunities. Leveraging our strong supply chain and operational capabilities, we're also driving a significant increase in working capital efficiency. More specifically, we've reduced inventory days outstanding by approximately 100 days compared to prior year. In the seven months under our ownership, Helly generated $100 million of cash from operations. As a result, we're ahead of our planned deleverage path, supporting increasing capital allocation optionality over both the near and long term.
In 2026, we expect to unlock additional working capital benefits and drive another year of strong cash generation. Helly Hansen is a growth asset. The brand provides access to significant growth vectors in the attractive outdoor and workwear TAMs globally. The business diversifies our portfolio and complements our operational strengths. We expect Helly to be one of Kontoor's largest growth engines and a significant contributor to revenue and earnings growth in the years ahead. We're positioning the brand for accelerated growth in 2027 and beyond, and we look forward to sharing the specifics of our long-term strategic plan at the Investor Day later this year. Now turning to Wrangler. Global revenue increased 3%, driven by 10% growth in DTC and 2% growth in wholesale. In the U.S., revenue increased 3%, driven by 10% growth in DTC and 3% growth in wholesale.
Growth was broad-based, driven by strength in denim, female, and western. Following a softer October, trends improved in the combined November-December period, with POS increasing at a low single-digit rate, consistent with the year-to-date average. Wrangler International revenue was flat with prior year, driven by an 11% increase in DTC, offset by a 3% decline in wholesale. On a full year basis, global revenue increased 4%, driven by double-digit growth in female, western, and DTC, as well as consistent share gains in our denim and non-denim bottoms business. We expect the momentum of Wrangler to continue, and the brand is well positioned to drive another year of broad-based growth in 2026. Turning to Lee. Global revenue decreased 6%. US revenue increased 1%, driven by 8% growth in digital and 1% growth in wholesale.
We're encouraged by the momentum in our digital business, which increased 11% for the full year, supported by our brand realignment initiatives and incremental demand creation investments. Lee International revenue decreased 15%, with declines in wholesale offsetting mid-single-digit growth in our brick-and-mortar stores. In China, growth in our brick-and-mortar stores was offset by declines in wholesale and digital. As we've discussed in prior calls, 2026 will be a transition year for Lee, as the turnaround continues to progress as anticipated. We expect first half revenue to decline at a low single-digit rate, with second half revenue inflecting positively with improving profitability. Moving to the remainder of the P&L. Adjusted gross margin expanded 210 basis points to 46.8%. Excluding Helly Hansen, adjusted gross margin expanded 30 basis points, driven by the benefits of Project Genius and channel and product mix.
This was partially offset by increased product costs and the impact from increases in tariffs net of pricing actions. Helly Hansen was accretive to adjusted gross margin by approximately 180 basis points. Adjusted SG&A expense was $326 million. Excluding Helly Hansen, adjusted SG&A increased 11% compared to prior year, driven by increased investments in demand creation and volume-based variable expenses, including the impact of the 53rd week. These increases were partially offset by the benefits from Project Genius. Relative to our prior outlook, we made an incremental $8 million brand and demand creation investment primarily within the Wrangler brand in support of our growth initiatives. Adjusted earnings per share was $1.73, increasing 25% compared to prior year. Adjusted EPS was $0.09 above our prior outlook.
Organic EPS included approximately $0.10 of incremental brand and demand creation investments compared to our prior outlook. Helly Hansen contributed $0.44 per share compared to our prior outlook of $0.29. Turning to the balance sheet. Inventory at the end of the Q4 was $567 million. Total inventory decreased by $198 million, or 26% compared to the Q3 . The sequential decline in inventory exceeded our plan by $78 million as a result of stronger revenue growth, disciplined inventory management, and networking capital improvements at Helly Hansen. We finished the quarter with net debt of $1 billion and $108 million of cash on hand. Our $500 million revolver remains undrawn. On a pro forma basis, our net leverage ratio was 2.0 times.
During the quarter, we made a voluntary $200 million term loan payment ahead of our expected $185 million payment as a result of stronger operating earnings and cash generation. We've made voluntary term loan payments of $250 million since the closing of the Helly Hansen transaction. We're tracking ahead of our original deleverage plan and anticipate returning to less than 1.5 times net leverage by the end of 2026, while consolidating a significant increase in revenue, earnings and cash flow, and meaningfully improving our growth profile. During the quarter, we repurchased $25 million of shares. We are within our targeted net leverage range of one to two times, we'll look to opportunistically repurchase shares consistent with our commitment to return cash to shareholders. We have $190 million remaining under our current share repurchase authorization.
As previously announced, our board declared a regular quarterly cash dividend of $0.53 per share. Finally, on a trailing 12-month basis, adjusted return on invested capital was 29%, improving from 23% in the Q3. Before moving to our outlook, let me provide an update on tariffs. Our 2026 outlook reflects the impact of higher tariffs on all countries from which we source products, with the exception of Mexico, which remains exempt under USMCA. We have assumed a 15% reciprocal tariff rate effective 24 February on applicable inventory receipts on or after that date. We have assumed at least a 20% reciprocal tariff rate on applicable inventory owned as of the end of fiscal 2025 and up to 24 February 2026. We're currently evaluating the recent US Supreme Court ruling on tariffs and proposed trade agreement with Bangladesh.
We utilize U.S.-grown cotton in more than 80% of our products sourced from Bangladesh, which may qualify for a duty-free exemption under the trade agreement. Our outlook does not assume any refunds for tariffs previously paid, which remains subject to more specific guidance from U.S. Customs and Border Protection in the United States Court of International Trade. Trade policy is rapidly evolving, we expect the level and structure of tariffs moving forward to remain uncertain and difficult to predict. Let's review our updated outlook. Full year revenue is expected to be in the range of $3.40 billion-$3.45 billion, representing growth of approximately 9%, including an approximate 2% impact from the 53rd week in the prior year.
For the first half of 2026, we expect revenue to be in the range of $1.56 billion-$1.57 billion, representing growth of 22%-23%, including the expected contribution from Helly Hansen. We expect revenue in the first half to be more heavily weighted to the Q2 . We continue to plan the business conservatively. For Wrangler and Lee, our outlook assumes no meaningful change in recent POS trends or retail inventory positions. Inventory levels at retail remain suboptimal. Our retail partners continue to be in a conservative posture with regard to inventory management and forward inventory commitments. For Helly Hansen, our outlook is supported by order book visibility, current demand trends, and expanding distribution within both sport and workwear. Moving to gross margin.
Adjusted gross margin is expected to be in the range of 47.2%-47.4%, representing an increase of 60 to 80 basis points compared to prior year. Our gross margin outlook reflects the benefit of Project Genius, favorable channel and product mix, and the contribution from Helly Hansen, partially offset by the increases in tariffs, net of pricing and other mitigating actions. Tariffs net of pricing represent a headwind to our gross margin rate in 2026. We've implemented price increases for Wrangler, Lee, and Helly Hansen as part of a holistic plan to mitigate the impact of the increases in tariffs. Our pricing strategies were thoughtful and developed in consideration of the fluid macro environment, the strength of our brands, our elasticity expectations in certain categories and channels, and the retail environment around the globe.
We remain fully committed to offsetting the impact of the increases in tariffs over a 12- to 18-month period through additional measures such as transferring production within our global supply chain, strategic supplier partnership initiatives, inventory management, and other proactive mitigating actions. For the first half of 2026, we expect adjusted gross margin to be in the range of 47.1%-47.3%. Adjusted SG&A is expected to increase approximately 12% compared to prior year, reflecting the contribution from Helly Hansen, as well as increased investments in demand creation and other strategic growth initiatives, partially offset by Project Genius and the impact of the 53rd week in the prior year. Adjusted EPS is expected to be in the range of $6.40-$6.50, representing an increase of 15%-16%.
For the first half of 2026, adjusted EPS is expected to be in the range of $2.25-$2.30. For the full year, we anticipate an effective tax rate of approximately 20%, reflecting synergy benefits as we integrate Helly Hansen into our global tax platform. For the first half of 2026, our effective tax rate is expected to approximate 23%. Finally, we continue to expect another year of strong cash generation. Cash from operations is expected to approximate $425 million. We'll leverage and expand our supply chain and AR financing programs to include Helly Hansen in 2026. These programs and capabilities will be a significant unlock for the business while supporting accelerated cash generation and deleverage.
Our outlook assumes voluntary term loan payments of $225 million, bringing total acquisition-related debt repayments to $475 million, or approximately 70% of the total debt incurred at the close of the Helly Hansen transaction in just 18 months. Moving forward, our capital allocation optionality is expected to increase significantly. We'll continue to evaluate options to enhance shareholder value by effectively utilizing our strong balance sheet and cash generation. Before opening it up for questions, a few closing comments. I'd like to reiterate the confidence we have in our business moving forward, the power of our operating model and the global multi-brand platform we're establishing. Our growth profile is fundamentally improving, supported by the strength of Helly Hansen, continued momentum at Wrangler, and our progress repositioning Lee.
We expect the benefits of our transformation initiatives to continue to scale, providing us with greater investment capacity and improved operational efficiency. We expect another strong year of cash generation, supporting an accelerated deleverage path and an increase in capital allocation optionality. Strategic clarity, a relentless focus on execution, disciplined capital stewardship, agility and resilience. These attributes are deeply embedded in the Kontoor way. When coupled with an increased emphasis on growth and a more performance-based culture, we're excited about the road ahead and the opportunity to unlock the full potential of Kontoor Brands. It has been a transformational year for Kontoor. On behalf of Scott, myself, our executive leadership team, and our board, we'd like to thank the organization for the passion, commitment, and success you continue to drive for Kontoor every day. This concludes our prepared remarks, and I'll now turn the call back to the operator.
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Ike Boruchow with Wells Fargo . Please proceed with your questions.
Hey, everyone. Congrats. Couple questions from me. First on Helly. I'm not sure if it's for Scott or Joe. Did you specifically give an organic growth rate for Helly this year? Kinda curious the thought process around 2027 really being a much. Sounds like 2027 is a much bigger year for the brand. Can you just kinda walk us through how we should be thinking about the brand's growth trajectory in 2026 and 2027? Just a quick follow-up on Helly. On China, Joe, appreciate the details. Any color on what the China business for Helly should be doing, with, you know, this year in 2026? Do you have any optionality to take that business in-house? Is that something you're considering? Just kinda curious on that too.
Thanks, Ike. I'll go ahead and get it started, then turn it over to Joe. From a Helly standpoint, we are making a significant investment in the team from a product standpoint in headquarters in Oslo, building out a significant and real team in the U.S., in North America, which we haven't had before. We've got some really strong leaders in that marketplace, but we need to surround that team with added talent and build, you know, a fully capable team, which is gonna be a big unlock for us from a brand standpoint going forward. How we've thought about it is, 2026, the first half, we haven't invested greatly from a marketing standpoint, but you're going to see it in a very significant way in the second half to build. We have seen from the consumer a real appetite for our product.
Now we're thinking about the right distribution in the U.S. marketplace going forward and making sure we seat that in the correct way, and really creating an atmosphere that there's a lot of opportunity for growth for a very long time for the brand in this marketplace, and then continuing to accelerate the rest of the world too. Hopefully that answers kinda how we're thinking about it here. Then, Joe.
Yeah. Hey, Ike. Good morning. For Helly on a full year basis, revenue increased about 7%. In the back half, Q3, Q4, under our ownership, revenue increased 10%-11%. There's a couple points of benefit in there from a currency standpoint. As we move into 2026, mid-single digit growth, mid-to-high single digit growth, that's what we expect for the brand. We've anchored everybody from an expectation standpoint on high single digit growth for the brand moving forward, and we think we have an opportunity to accelerate growth even beyond that. On China, look, we're very pleased with the performance of the China JV. We've got a strong partner in Youngor. We've got a strong management team on the ground in China that's executing very well.
Part of our acquisition thesis was a view that the China business was on the cusp of an inflection. That's exactly what has played out. This business is beginning to contribute quite meaningfully to revenue and earnings. As part of our integration strategy, we're connecting the Helly China business more closely with the brand centered in Oslo. We're reaping the early benefits of that stronger collaboration between those two teams. For 2026, we expect another year of strong revenue and earnings growth for the JV north of 50%.
Thank you. Our next question has come from the line of Bob Drbul with BTIG. Please proceed with your questions.
Hey, good morning. Just a couple questions from me. On the Helly integration, can you just talk maybe about what you've learned seven months in so far, sort of any surprises, you know, any disappointments? Then I think in the release, you talked about $8 million of incremental demand creation. Can you talk about sort of the overall spending level that you're thinking about for 2026, maybe by brand?
Sure. Bob, I'll go ahead and start. Thanks for the questions. From a Helly standpoint, you know, done a lot of these in the past, as you know, you've covered, you know, the different companies that we've been associated with and where we are now. This has been, hands down, without question, the best integration ever. Just I've never seen anything like it. From the execution from both teams, from the collaboration from both teams. You've heard me say it starts culturally, and these two teams meshed from the very beginning. We found the Helly team in a situation where they were kind of, you know, not a real integral part of their past company for a lot of reasons, and now they're an incredibly integral part of our company. We talk the same language, which they haven't had before.
That's apparel and product, and it's just been... I just can't get over how well this has gone, every single part of it. I think the most important thing is that you see what's happening in the business because of this really strong integration. Incredibly pleased about this and really excited about what the future looks like here for the team.
Good morning, Bob. From an investment perspective, we're driving double-digit increases in investment behind really all the brands and demand creation in product and consumer insights, D2C, all the areas you would expect. Those investments, that capacity is being funded in large part by Project Genius, which was precisely the point, right? We'll continue to appropriately balance and evaluate our opportunities to invest with our goal of accelerating growth, but also expanding profitability and returns on capital over time.
Great. On capital allocation, can you just talk about the, you know, the sort of plans or trade-offs here between buyback and deleverage?
Well, Bob, I'll tell you really how we're kinda thinking about it is our cash flow is so strong and improving that we feel very strongly that we can and will do both in the upcoming year. We think there's gonna be, you know, certainly an opportunity to buy some share backs and look forward to that. Obviously, we're out there with a statement right now that we're gonna take $225 million off of the table relative to, you know, deleveraging. Way ahead of the game on where we planned on being from a deleverage standpoint and plan on continuing to do that. Then, we'll be opportunistic, you know, from the standpoint of, share repurchase. As you saw, started that in the Q4. We saw an opportunity there, and we'll continue in 2026 on both.
Just in a position with our balance sheet that we can do both and can do them both pretty strongly.
Great. Thank you. Good luck.
Thanks, Bob.
Thank you. Our next question has come from the line of Jonathan Komp with Baird. Please proceed with your questions.
Hi. Good morning. Thank you. I want to follow up on Helly Hansen. I believe it was mentioned, you know, expanding distribution in both sport and workwear. If you could maybe share more thoughts on the initial thesis there, you know, the types of opportunities you see. Separately, just on the Wrangler business, could you maybe talk or rank order some of the organic volume drivers that you see looking forward? Thank you.
Thanks, John. Appreciate it. I'll go ahead and start with Helly. You know, we made the acquisition and part of the thesis was the opportunity in North America because we know the market so well, and we just don't have an incredible amount of distribution right now in North America or that large of a D2C channel. We think going forward, we know going forward with the product that we have and the knowledge that we have of the marketplace from past experience in this category, that there's a very large D2C expansion opportunity if done right. We're in the process of all of that planning right now. I want to make this statement really clear for everybody. There's a really nice opportunity to grow our wholesale business with the right partners, which we're doing.
You're actually gonna see some pretty significant rollouts in the second half of this year. We can talk about those. We'll talk about those in one of the upcoming quarters coming up. There's some really nice momentum from the brand. You know, from a consumer standpoint, they're really finding the brand now. We think there's opportunity to do that over a period of time. What I mean by that is we're gonna go ahead and build that momentum going forward. We're just not gonna go all in.
I think that from past learnings, we are not going to try to be everything to everyone and grab any point of distribution we can just because the brand is doing really well. We're gonna really cultivate the brand going forward.
Hopefully that's a great message for everybody to think about the growth opportunities here for a very, very long time. From a Wrangler standpoint, really pleased with what the Wrangler team is doing. I'm very encouraged by D2C going forward and, you know, maybe we should try to talk about that in an upcoming call. I'm very encouraged by what I'm seeing in the Western business just from the incredible product that we're making in Western female, which has also been really accretive to us. Also in things like Bespoke and our female business in general. We continue to take Circana market share gains on a pretty significant basis, continue to grow the portfolio. I think we have a full offering for our consumers too, that are really attaching to the brand.
We think that the future relative to Wrangler and the growth opportunity for a very long time is very significant.
Great. We'll look forward to the details on Helly and the Investor Day in September. Thank you.
Yep. Thank you. Hope to see you there.
Thank you. Our next questions come from the line of Mauricio Serna with UBS. Please proceed with your questions.
Great. Good morning. Thanks for taking my question. On Helly Hansen, I think you also mentioned on your prepared remarks that you are looking to expand margins this year. Could you talk about the margins of the business on a full year basis last in 2025, and how are you thinking about that in 2026?
Yeah, sure. I'll take that. Good morning, Mauricio. Look, we're not gonna provide specific guidance by brand, but we do expect strong earnings growth from Helly in 2026. That's going to be driven by both gross and operating margin expansion. We expect to grow operating earnings somewhere in that low teen rate kinda range in terms of an increase over 2025. That's inclusive of synergies. That's inclusive of the investments we're making behind the business. We've got a full year of intangible asset amortization that was created in purchase accounting as well as the impact of tariffs. Beyond operating income, the integration of Helly into our tax platform, that's driving synergy below the operating income line. You're going to have lower interest expense in the second half of 2026.
That will be a tailwind that will continue into 2027 as we rapidly pay down the debt incurred with the, with the acquisition. In terms of shaping for the first half, remember, Helly historically generates operating losses in the first half of the year, particularly in the Q2 which is their smallest quarter of the year. In the first half, we also have interest expense, incremental interest expense from the acquisition that we did not have a year ago. The earnings contribution from Helly will be more back half weighted.
Very helpful. Then just a quick follow-up on gross margin. You know, you guided to an expansion this year. Could you maybe quantify, like, the benefit that you get, like, from the tariffs going to 15% from 20%, you know, as of, the impact that will be for you know, after February? Then, any sense of how much you could benefit from the-- if we do get like, that trade deal with Bangladesh and, the cotton is exempt, given you said that 80% of the cotton for the U.S. is, sorry, 80% of the product from Bangladesh uses U.S. cotton? Thank you.
A couple of things. We expect our gross margin to expand between 60 and 80 basis points for 2026. There's some pretty meaningful puts and takes within that. We expect Helly Hansen to be accretive by about 100 basis points. We expect Project Genius channel product mix to drive about 180 basis points. These benefits will be partially offset by higher product costs and somewhere between 160 and 180 basis points of pressure from tariffs, net of our mitigating actions. In terms of how that's gonna flow through, remember all the inventory we owned at the end of 2025, all the inventory that we received January, February, that inventory has a 20% tariff rate attached to it.
That's gonna turn through the P&L really through the first half of the year. Then the impact of the 15% tariff rate will start to influence the P&L as we get to the second half of the year. On Bangladesh in particular, you know, look, there's still a lot of uncertainty around the level and structure of tariffs. We expect trade policy to remain pretty dynamic and difficult to predict. We're awaiting specific guidance from CBP as it relates to the applicability of trade agreements announced prior to the Supreme Court ruling and subsequent actions by the administration. Of particular interest to us is the trade agreement with Bangladesh, which we highlighted. That trade agreement reflected a potential reciprocal tariff ranging from 0% to 19%, depending on the U.S.-grown cotton content of products sourced from Bangladesh.
More than 80% of the product we source from Bangladesh does include U.S.-grown cotton. Bangladesh is our largest country of origin from a sourcing perspective, so by nature, it's also our largest source of tariff pressure. We've not included any such benefit from a Bangladesh trade deal in our forward outlook as, again, the applicability of the trade agreement remains uncertain. It's material for us, potentially material for us, so we wanted to flag it for investors.
All right. Thank you so much.
Thank you. Our next question has come from the line of Brooke Roach with Goldman Sachs. Please proceed with your questions.
Good morning. Thank you for taking our question. Scott, can you dive a little bit deeper into how you're feeling about the U.S. consumer and demand trends in your core U.S. denim business? What contribution are you expecting from pricing? What actions are you taking in the mid-tier channel? How impactful are those opportunities as you balance a dynamic macro backdrop into this year?
Good morning, Brooke. Sure can. I think that myself and the team, and we've had quite a bit of discussion about this, feel really, really good about the North American market and the U.S. business. I think that the consumer here is incredibly resilient. If you think about the consumer as it relates to our channels and our products, it's just really, really strong right now. I think the macro backdrop here is only going to improve over time. I really do. I think that we're in an age here that things are really strong, really good, really transparent. We're gonna be able to go ahead and move forward with our business in a pretty significant way. I like the big wholesalers that we're aligned with, you know, that win with winners mentality.
I think we've got ourselves aligned in the proper way. Speaking to that, how we're aligning Helly Hansen going forward from a win with winners mentality and making sure that we're aligned with the right, you know, customers and the right consumers to make sure that that brand has a long trajectory of growth. From the standpoint of pricing, I think that we've always done. We listen to our consumers. We have really great relationships with our wholesalers, and I think we've always done a really good job of balancing that, and I think we continue to. I think one of the things is this market's been, you know, fairly fluid from a tariff situation, so we've had to be nimble from that standpoint.
I think that we need probably 30, 60 days for some more information to come out so that we can go ahead and make some good decisions. I think that you've come to see from us for, you know, a long time now that we make really good decisions relative to pricing, understand our elasticity because we have a lot of data here that we've had for many years. We understand, you know, what the ceilings are and what the floors are. I feel really good relative to how we're strategically thinking about that, both at a D2C level and at a wholesale level. From a mid-tier standpoint, certainly hope that they continue to, you know, do the things that they need to do to get stronger. New management in several of our big mid-tier retailers, which is wonderful.
New CEO leadership, which is bringing incredible energy, and that's what we're hearing. Have a lot of hope that that is gonna continue to get better with some new leadership, some new energy, some new ideas, new focus, and we'll be right there for them from that standpoint. I think if I can just encapsulate it, I think I would say that in my time as the CEO here since 2018, I don't know that I've ever felt better about the U.S. marketplace and/or our positioning in the U.S. marketplace. I would say that right now I'm as bullish as I've ever been.
That's great color. Just an update for Joe. Can you provide a level set of where we are on Project Genius achievements to date, the expected Project Genius contribution that's embedded in this year's guide, and the opportunities for future margin improvement from Project Genius as we look to 2027 and beyond?
Hey, good morning, Brooke. For Project Genius, we delivered gross savings of over $50 million in 2025. For 2026, we will approach $100 million of gross savings. The benefits will build over the course of the year, and we expect to reach a full run rate in the second half of 2026. The savings we expect to deliver in 2026 are significantly bigger than those that we achieved in 2025, again, as the program continues to scale. You can see these benefits pulling through really both in the gross margin but also the SG&A. These savings have allowed us to reinvest back into the business at a level beyond what we previously anticipated, and those investments continue to fuel our growth and momentum.
The $8 million that we announced, the incremental $8 million in the Q4 is a great example of that. Project Genius remains on track. We're executing really well. By the back half of this year, we will have delivered, you know, what we set out to do at the beginning.
Brooke, I'm gonna go ahead and tag on to Joe here a little bit. Relative to every time you run a big project like this and you transform, one of the things that became an attachment to this was that we are now moving and are really pushing forward with what we call a performance organization, which we had not put in place before. We have a world-class HR organizational team led by Pete and just an incredible team that he has put together. We are pushing to make our entire organization accountable, driven by performance and rewarded by performance. That all kicked off this year on January 1st, and we are really excited about what results and also the actions and behaviors that's gonna drive.
That is all an aftershoot of thinking about Project Genius, all that's come from Project Genius, how to make sure that we take those Project Genius learnings and everything that we're doing relative to Project Genius and continue to push it forward, but motivate our people the right way. It seems to be dovetailing really nicely together, and it's one of the things that I'm most excited about for us as an organization in 2026 and beyond.
Great. Thanks so much. I'll pass it on.
Thank you. Our next question has come from the line of Blake Anderson with Jefferies. Please proceed with your questions.
Hi. Good morning. Thanks for taking my questions. I wanted to start with tariffs. I might have missed this, but did you quantify the gross tariff headwind as well? Could you size up what are your key mitigating levers between pricing, cost savings, and sourcing been able to mitigate the tariffs? What gives you confidence you can mitigate those more fully over the next 12 to 18 months, as you mentioned?
Yeah. I'll take that. Hey, Blake. For 2026, the gross tariff impact remains over $100 million, right? It still presents a significant headwind to the business. We are getting a bit of a reprieve from the 15% reciprocal rate that will begin to impact the P&L in the second half of the year. Our mitigating actions are larger in the second half of 2026, and those will carry into the first half of 2027, by which time we expect to fully mitigate the tariff. That's the 12-18 months that we continue to talk about. From a lever standpoint, you know, it's really all of it, right? Pricing, we highlighted strategic supplier partnerships, right? Inventory management. This is what our supply chain is really good at.
We've got the ability to navigate situations like this, around the globe. We remain really confident in our ability to offset this as we get to the back half of 2026 and into early 2027.
Great. Thank you. Wanted to ask on Lee, you mentioned that remains in a transition year, but you expect inflection to growth in the second half. Can you elaborate on the key drivers of that inflection? What gives you confidence and any more color on the quarterly trends there throughout the year? Thanks so much.
Yeah, you bet, Blake. This is Scott. From a Lee standpoint, really proud of the work that the team has done relative to we've gone back, put a national ad campaign together that we haven't had for many years. We're much more engaged from a marketing standpoint, both digital and regular, so that really feels good going forward. Probably the single thing that I'm most happy about is product. You know, we've done a really, really nice job with product. It needed some upgrading, and we went ahead and have done it. I think that the product offering that we have coming out this year and into 2027 is the best that Lee has ever had.
Then you just co-join that with a really strong marketing campaign and just more energy from, you know, the marketplace and the team about this Lee turnaround and the product that they're seeing. I think all that just kinda coming together at the same time. You know, these things do take a little bit of time, but we have had some really nice green shoots, and we've been happy with that. We watch things like digital and how the consumer can respond to, you know, new offerings immediately, and that's been really strong. We've been really happy about that. Going into the second half, and you heard our commentary about where Lee will be, there's a growing level of confidence.
I don't think that we're getting ahead of ourselves but we're feeling really good about the progress that Lee has made, the track that it's on, the product, the advertising, all of the above. Just much, much better than it was, you know, a year to two years ago.
Got it. Thank you so much.
You bet, Blake.
Thank you. Our next question will come from the line of Peter McGoldrick with Stifel. Please proceed with your questions.
Morning. Thanks for taking my questions. Yeah, first on Helly Hansen. I wanted to ask about your comments about new distribution. Can you help us think about the reception among the key retailer base and how those retailers are supporting the rollouts that you mentioned in the second half?
Yeah, I sure can, Peter. This is Scott. I'll pass it over to Joe after. From my vantage point of doing this, you know, with another big outdoor brand for a very long time, I think that what we're seeing from key retailers is that they'd like to have another option. They'd like to go ahead and have another big, strong, growing brand in their portfolio. You know, I think there's just right now, a little bit of fatigue with some other brands, and this is exciting. It's new. It's really good product. We're really dialed in. You heard us talk about some of the awards that we've won, and that brings footsteps into retailers, and it brings excitement in.
We are in a really great period right now where the. You know, the opportunity, the phone calls aren't outgoing, they're inbound, where people are asking, you know, "Hey, we'd really like to, you know, talk to you about, you know, you being part of this here going forward." And we have the opportunity to be a little bit selective, which is really nice. And you're gonna hear some of that.
Like I mentioned earlier, we're happy to go ahead and expand on that a little bit at one of the upcoming calls so that you know what to expect in the second half going into 2027. That's happening pretty significantly here in the U.S. . Also, I should mention that our European team has done a fantastic job with that too, and our Canadian team.
You're just seeing that there's an uptick in Helly. There's a real uptick in people that are talking about how great the product is. Then some of the things that we've done relative to how, you know, we outfit some certain mountains and have some relationships with ski providers and ski mountains and what have you, and put it on the experts, and the coaches and all the volunteers. I think that's really helped the brand too, relative to the brand strength. Just creating kind of an aura around the brand, which is really nice. Like I said, I've been here before and seen this all happen, learned some lessons along the way, and we're gonna make sure that we implement those lessons as this brand starts to really blow up.
I think our team's done a really nice job with that. I am excited about, you know, we did buy the brand because not all, you know, this isn't specific, but one of the reasons we bought the brand because it was a really big opportunity here in North America, and our team is getting after that right away. You'll hear from us too, you know, we're about to, you know, fill some very strategic North American positions that we haven't had before, that if you wanna play, you know, in this category and in this channel, you have to have those types of positions, and we're about to do that. Lots of really good things, lots of big momentum. Much more to come from a Helly standpoint, so stay tuned.
Certainly we're really looking forward to, having everybody over to Oslo in September and, you know, having an investor day where we can really talk about the brand and you can meet the team and see the people and see, you know, some product and what's coming up, what's upcoming. Lots of good things happening with Helly and, looking forward to the September date too, in a pretty significant way. Joe, anything that you would add?
I would just add, you know, the workwear opportunity around the globe is significant, right? This business has grown pretty consistently at a high single digit rate over time. This business is primarily a European business today, but the global opportunity for workwear is significant, including in the U.S.
That's really helpful. Then there are some encouraging comments about Helly Hansen's integration, and I was hoping you could help us think about the key remaining integration milestones, any cost synergy targets for 2026 and when you expect to reach the full run rate of synergies.
I'll take the synergies. You know, we continue to have direct line of sight to significant synergies across the business. That list is growing the deeper we get into it, and we're working very collaboratively with the leadership team in Oslo. We have now identified synergies of more than $40 million. We were at $25 million before. These will come in the areas primarily sourcing, logistics, distribution, you know, technology tax, all the things that you would expect, as well as some back-end operating efficiencies. We've got synergies baked into 2026. We will reach full run rate in terms of the $40 million as we move into 2027.
I'll tell you, Peter, this is kind of a fun one, but we talk a lot about collabs. I sure would like to see a collab between Helly and some of our other brands. That'd be kind of fun from a synergy standpoint.
Love it. Look forward to that. Thank you.
Thanks, Pete.
Thank you. We have reached the end of our question and answer session. I would now like to hand the call back over to Scott Baxter for any closing comments.
Thank you everyone for joining us today. As you can see that there's a lot of effort and energy coming from Kontoor Brands. A huge thank you to our global team. You know, I think you can count on us to keep our heads down, working really hard and continue to drive this business forward. You know, just again, wanted to thank the entire Helly team, you know, and welcome them to our corporation. It's been a lot of fun, a great integration that just haven't seen the likes of it in my career. I think that you can count on us to continue to work hard in this marketplace and take advantage of the opportunities that we have.
One or two things that I would like to mention is we do have the upcoming investor day, we'd like to, you know, hopefully see a strong showing for that so that we can spend the day together and really talk about the Helly brand. We thought, because there were so many questions about that we'd do that first and really focus on it 'cause it's such a focal part and an important part of what we're trying to do here. We'll follow that up very quickly, very quickly in 2027 back here in the U.S. with a full KTB Investor Day. We'll hit that kinda, you know, bam, one right after the other. Thanks again for your questions and also your support.
Really appreciate it, and we'll look forward to seeing everyone in September, but we'll look forward to talking to you at the end of the Q1 in our call. Thanks, everyone. Take care.
Thank you, ladies and gentlemen. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time, and have a wonderful day.