Greetings, and welcome to the Kontoor Brands Second Quarter 2021 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Eric Tracy, Senior Director of Investor Relations. Thank you. You may begin.
Thank you, operator, and welcome to Kontoor Brands' 2nd quarter 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 may 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 defined in the news release that was issued earlier this morning. Adjusted amounts exclude the impact of restructuring and separation costs, business model changes 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.
Excluding the impacts of shifts in currency exchange rates over the period. Joining me on today's call are Kontoor Brands' President and Chief Executive call. At this time, all participants will be participating in the call. Following our prepared remarks, we will open the call for your questions. We anticipate this call will last about 1 hour.
Scott?
Thanks, Eric, and thank you all for joining us today. The momentum Contour experienced to begin the year continued in the Q2, with results coming in well above our expectations. Are participating in the quarter once again illustrates the power of the KTV model, which affords us the opportunity to not only deliver on our near term goals, in the future, but also to continue to invest in the strategic growth catalysts outlined at our recent Investor Day. A huge thank you to our colleagues all around the world and a special call out to the teams engaged in the implementation of our ERP platform during the quarter as their incredible efforts are helping to transform our organization. Hopefully, you had a chance to attend our recent virtual Investor Day, line of sight, where we communicated our strategic vision for catalyzing growth over the next 3 years.
During Horizon 1, we optimized our model and set the foundation for growth. As we execute on Horizon 2 strategies, we expect to leverage investments to drive more sustained profitable growth. We expect to accelerate revenue, primarily driven by focusing on the following growth catalysts. 1st, are enhancing and accelerating our core U. S.
Wholesale business 2nd, elevating our D2C and digital ecosystem 3rd, expanding the brands internationally, particularly in the China region and 4th, diversifying our product mix category extensions, including outdoor, workwear and T shirts. And to support this growth, we continue to invest behind critical TSR accretive enablers, including enhancing demand creation platforms, are scaling product and manufacturing innovation with sustainability and ESG as our guiding tenet, unlocking efficiency and productivity gains through the implementation of our global ERP and digital infrastructure and finally, leveraging our world class talent to build a purpose led, high performance and increasingly growth minded culture. And we have increased optionality within our capital allocation strategy, from the Q2 that demonstrate how these investments come to life and how our strategies are working. Overall, reported revenue increased 41% year over year or 37% in constant currency. Rustin will take you through some of the puts and takes in a bit, As revenue growth sequentially accelerated from the Q1 with broad based performance across our brands, channels and geographies.
In the U. S, despite the timing shifts associated with the ERP implementation somewhat tempering our growth rates, we continue to see improving trends with both brands posting strong growth during the quarter compared to last year. Our brands continue to benefit from the incremental we are making within talent, marketing, product innovation and design, all of which support elevated pricing and product, allowing us to win in our largest channel, U. S. Wholesale.
During the Q2, we continued to elevate are branded demand creation platforms. Influencers such as Georgia May Jagger not only connect the Wrangler brand with the younger female consumer, also fuels significant brand heat across distribution channels. Another great example of our enhanced marketing efforts are in the Q1 of 2019. The Q1 of 2019 was a result of the Q1 of 2019. The Q1 of 2019 was a result of the Q1 of 2019.
The Q1 of 2019 was a result of the Q1 of will see the 2nd fall inspired installment planned for September of 2021. The collection celebrates the best of both are in the exciting result achieved when you put a Western spin on a vintage surf. We launched with
have a heavy digital first approach
as well as paid social, influencers and amplified PR. We are estimating over 95,000,000 social media are looking to see the progress in the quarter. In this collab continues to highlight our diversifying distribution with products sold on branded sites and in Billabong stores and other specialty channels. And at Lee, during the Q2, we launched a collaboration with Streetwear brand, The 100. This collab masterfully blends the past with the present to achieve the perfect balance of classic workwear with a streetwear twist across denim, tees, could ease and outerwear.
The collections are selling exclusively through the brand's digital platforms as well as the 100 LA store. After the successful debut, a second collection is scheduled to drop later this year. And the pipeline of collaborations for both brands is only getting stronger. We look forward to sharing some incredibly exciting fall holiday partnerships with you in the coming quarters. From a channel perspective, we continue to see strong returns on our investments in transforming our digital ecosystem as evidenced by our Q2 performance.
Q2 saw great growth over last year, are participating in the Q1 2020. What was even more impressive compared with 2019 with both global and usowned.com increasing more than 80% in digital wholesale increasing more than 100%. As we outlined at our Investor Day, we remain highly under indexed relative to our peers in this accretive channel and we will continue to distort investments to drive towards our goal of 10% penetration over the next 3 years. We also continue to benefit from investments in new categories, such as outdoor, workwear and T shirts with nearly $150,000,000,000 in total addressable markets, these categories represent significant opportunity for the incremental business. The new categories also augment and diversify the collection beyond our core Denim Bottoms business and do so in a highly organic way.
Within outdoor in our ATG line, we've established a brand positioning and value equation that is a true white space in the market, and we are beginning to scale distribution within outdoor specialty and sporting goods channels, both domestically and abroad. As examples, we are excited to announce 2 great new partners for ATG. We are currently testing with Academy Sports in the U. S. And InterSport in Europe, both brand enhancing incremental points of distribution for the ATG line.
We also have some exciting new sports specialty product introductions on the horizon. This includes our WranglerAngler line focused on the rapidly growing fishing market that is expected to launch in the coming quarters. In T shirts, a $100,000,000,000 plus addressable market, there are 3 key areas we are aggressively pursuing logo, in the same store. We are now in the same store as the new store in the same store. We are now in the store in realizing the significant opportunity ahead of us.
Leveraging the strong brand heritage of both the Lee and Wrangler brands, we believe there are clear pathways to create great product that will resonate with current loyalists and attract new consumers. We recently won new T shirt programs with both Wrangler and Lee with a key domestic retail partner including selling in over 1700 doors with store expansion to come in 2022. Our Workwear business is also experiencing great momentum with potential for strong expansion in the quarters and years to come. In the Specialty and Farm channel, we continue to see strong organic growth opportunities for our Wrangler Rigs product line. These retail segments have shown resiliency throughout the pandemic and we believe we can continue to scale with new products for men and women in this tier of distribution.
And finally, we expect to significantly increased our recently launched Wrangler Workwear program with the major U. S. Retailer this year. In fact, we will more than double our door count with this key domestic partner from spring 2021 to fall 2021 taking us into over 3,300 doors. This is a great testament to how additional investments in category expansion are generating incremental business development opportunities for our brands.
We expect growth from our outdoor, work and T shirt categories to add over $200,000,000 in revenue or Kontoor over the next 3 years. And finally, let me turn to how our investments in geographic expansion played out in the 2nd quarter. We continue to see improvements despite an uneven macro environment. Our European business saw significant year over year improvements, up over 2 50 percent in constant currency compared with 2020 and over 40% in constant currency compared with 2019, driven by digital and timing of shipments ahead of our European ERP go live. While we expect conditions to remain difficult in Europe, The evolution of our digital platform and new business development programs should help mitigate near term headwinds and position us for success in the region over the longer term.
And in China, our ongoing strategic investments continue to yield great results with reported 2nd quarter revenue increasing 20% year over year and up 10% in constant currency. Importantly, trends in the region accelerated throughout the quarter, Largely dictated by some phasing within wholesale. Digital in the region remained extremely strong, up 33% to last year and 67% to 2019 on a constant currency basis. With a premium lifestyle offering, strong collaborations and partnerships with key local influencers, the Lee brand continues to build on its leading denim position in the region. And the launch of the Wrangler brand in China continues to gain momentum, are exceeding our expectations to date, building momentum throughout the quarter and setting the foundation for scaled growth over time.
Before I hand it over to Ruston, let me close with a few comments about the balance of 2021. We continue to operate in a very fluid and uncertain environment that includes for this is in select locations, inflationary pressures and global supply chain disruptions. And as we have repeatedly said, are not immune to these macroeconomic challenges. However, as we highlighted at Investor Day, our operating model has been resilient. We believe consumers migrate to trusted, quality, value oriented brands like Wrangler and Lee in times of uncertainty.
And in fact, We continue to see solid momentum across both our brands. Accordingly, we intend to distort and amplify brand enhancing investments in the second half in areas like demand creation, digital and international expansion to accelerate momentum in 2022, Q1 2019, while leveraging our differentiated global supply chain to chase incremental demand and mitigate or minimize global disruptions where possible. We believe Contour resides in a unique position of strength as our accelerating fundamentals coupled with increasing optionality of our capital allocation strategy provides a powerful combination that should unlock significant value for our stakeholders. Ruston?
Thank you, Scott, And thank you all for joining us on today's call. As Scott mentioned, we are very pleased with our strong second quarter results that exceeded our expectations, and I look forward to walking you through the details shortly. Before we dig into the quarter though, I'd like to briefly recap 2 key financial strategies that we outlined during our Investor Day. First, we reviewed in detail what we refer to as our virtuous cycle. Specifically, this refers to our strategy to grow revenue and expand gross margins to create the oxygen in our P and L and allow us
will be able to deliver
strong performance in our brands and
capabilities to drive future top line growth while delivering enhanced operating margins. Our second quarter is a powerful illustration of how we are continuing to execute on this strategy to drive meaningful improvement in our fundamentals. Are participating in the near term performance while investing for long term growth is a cornerstone of our financial strategy. Accordingly, I'd like to provide an update on one of our key investment areas, our global ERP and IT infrastructure project. On our Q1 earnings call, we announced that we successfully went live early in the Q2 in our largest region, North America.
Today, I'm pleased to announce that we also successfully went live early in the Q3 in Europe, our 3rd and final region. While still early days, particularly for Europe, these implementations represent significant milestones for Kontoor. And I want to thank the organization for their tremendous efforts on these major accomplishments. These IT investments have both short and long term in advance of the implementations. As expected, this resulted in net transitory pressure during our second quarter with certain North American shipments shifting into the Q1, while certain European shipments shifted from the 3rd to the 2nd quarter.
Since North America represents roughly 75% of our global business, the net pressure was most pronounced on our 2nd quarter results, are expected to have an impact on the full year.
In the long
term, the IT investments will enable us will run our operations globally as opposed to regionally, while delivering the efficiency improvements in Phase 2 cost saves that we have previously outlined. The investments we are making in the business, including technology, support our catalyzing growth strategy to deliver long term sustainable and profitable growth. Investments will scale thoughtfully throughout Verizon 2 in areas such as digital, innovation and demand creation to support growth in underpenetrated channels, geographies and categories. Based on early proof points, we will continue to look for ways to distort and amplify investments in these TSR accretive areas in the quarters ahead. The second key financial strategy I want to highlight is our enhanced capital allocation optionality.
In Horizon 1, we focused on 2 foundational capital allocation priorities, are delevering the balance sheet and paying a superior dividend. Accordingly, we've made considerable progress in paying down debt to help optimize our capital structure. In terms of the dividend, a superior dividend will continue to be a key element in the Kontoor investment thesis. Our organic foundational capital allocation elements. Strong fundamental performance has been and will continue to be an increasing component of our mid teens plus targeted TSR, fueled by the investments we have discussed today.
Over the next 3 years, we are expecting approximately $1,000,000,000 in cash from operations that will enable us to support a multifaceted capital allocation strategy. Accordingly, as Scott mentioned and you saw in this morning's release, we announced a $200,000,000 share repurchase program as a powerful example of this optionality. In addition to offsetting dilution, we believe share repurchases provide another attractive vehicle to return cash to shareholders superior dividend. We remain committed to strong total shareholder returns. We are pleased with how the virtuous cycle within our model is evolving and are excited about the capital allocation optionality materializing in the early days of Horizon 2.
Now let's turn to our Q2 review. I will focus my comments on key highlights and encourage you to refer to this morning's release for additional detail on the quarter. Also given the impacts COVID-nineteen had on prior year results, I will provide select references will be conducting a review of the Q1 2019 for additional context where appropriate. Beginning with revenue, Global revenue increased 41% on a reported basis and was up 37% in constant currency compared to the same quarter last year. Even with the controlled ramp up of our ERP post go live and timing shift of shipments discussed earlier, We saw top line upside to our internal expectations.
Strength in the 2nd quarter revenue was also partially impacted by the strategic actions announced in the Q4 of 2020 to rationalize our BF outlet fleet in the U. S, participants will continue the sale of 3rd party branded products in all domestic outlet stores and transition to a new licensed business model in India. Combined, these actions represented approximately 3 points of headwind in the quarter. Compared to adjusted revenue in the Q2 of 2019, global revenue decreased 19% on a reported basis due to these factors and continued COVID-nineteen impacts in select markets and channels. On a regional basis for the quarter, U.
S. Revenues increased 27% compared to the same quarter last year. Growth was driven by wholesale, new business development wins and continued strength in our Western channel. In addition, we drove continued strength in digital. As Scott mentioned, our digital penetration remains under indexed, and we will continue to amplify investments in this important channel.
These investments are yielding strong returns. Despite being adversely impacted by our North American ERP cutover activities, in the same quarter in 2020. U. S. Digital wholesale and usowned dot com increased 106% 89%, respectively, compared to the same quarter in 2019.
International revenues increased 106% on a reported basis and 87% in constant currency are in the Q2 of 2020. Growth was broad based across all regions, aided by easing lockdowns and timing shifts in Europe, Global revenue of our Wrangler brand increased 24% on a reported basis and 22% in constant currency compared to the same quarter in 2020. Wrangler U. S. Revenue increased 14%, driven by strength in our Western business, are participating in the Q1 2020.
At this time, all participants are participating in the Q1 2020 and owned.com increasing 82% and 25%, respectively. We are particularly pleased with the strength in our Western business, Wrangler International revenue increased 137% on a reported basis and 115% in constant currency. Digital, new business development wins with our ATG program as well as easing lockdowns and timing shifts in Europe contributed to the strong growth in the quarter. Compared to adjusted revenue for the same quarter in 2019, global Wrangler revenue decreased 14% on both the reported and constant currency basis. Lee brand global revenue increased 105% on a reported basis and 96% in constant currency compared to the Q2 of 2020.
Lee U. S. Revenue, which was more adversely impacted than Wrangler by retail door closures in the same period in 2020, increased are in the range of $1,000,000 driven by wholesale, new distribution wins and our digital businesses, with digitalwholesaleandown.comincreasing3% and 33%, respectively. Lee International revenue increased 91% on a reported basis and 73% in constant currency, driven by digital. In addition, the quarter benefited from the easing of lockdowns on our brick and mortar stores and timing shifts due to the ERP go live in Europe.
Compared to adjusted revenue for the same quarter in 2019, Global Lee revenue decreased 15% on a reported basis and 17% on a constant currency basis. And finally, from a channel perspective, we saw continued broad based strength compared to the same quarter in 2020. On a reported basis, U. S. Wholesale increased 29%, eat with own.com up 33% compared to prior year.
Now on to gross margin. Reported gross margin increased 760 basis points to 46.1 percent of revenue compared to the same period in the prior year. Favorable channel, customer and product mix benefited the quarter, As well as strength in the accretive businesses such as Western. We continue to see structural benefits from the fundamental we outlined at our Investor Day, mix shifts to under indexed and highly accretive channels and geographies, are in the process of providing a number of proactive supply chain initiatives and AUR mix supported by innovation and select pricing. As you would expect, given compares, the 2nd quarter also benefited from certain discrete prior year items.
As we discussed during the Q2 last year, gross margin was negatively impacted by COVID related headwinds, particularly from downtime in our owned manufacturing. In the current quarter, leverage of our owned manufacturing Given these transitory distortions, I want to provide additional context relative to 2019, which more clearly highlights the progress we have made
are against our gross margin strategies.
Relative to the Q2 of 2019, gross margin increased 7.50 basis on a reported basis were 610 basis points compared to adjusted gross margin, driven primarily by the fundamental factors previously mentioned. Now on to SG and A. Adjusted SG and A increased $39,000,000 on a year over year basis to $168,000,000 Increased demand creation, digital and higher volume related variable expenses were partially offset by better fixed cost leverage on improving revenue and lower bad debt expense than in the prior year. Adjusted earnings per share was $0.70 compared to a $0.22 loss in the same period in the prior year in line with the expectations and compared to $0.96 in the Q2 of 2019. Now turning to our balance sheet.
2nd quarter inventories decreased $30,000,000 versus the prior year to $403,000,000 or down 7%. The year over year decline reflects the Q4 2020 actions to reduce the fleet and discontinue the sale of 3rd party branded products in our domestic outlets as well as the business model change in India. Excluding VF outlet in India, inventory increased approximately 4% compared to the prior year in support of higher projected demand. Are $615,000,000 $176,000,000 in cash. Our net leverage ratio or net debt divided by trailing 12 month adjusted EBITDA at the end of the second quarter was 1.5x, within our targeted range of 1 to 2x.
And as previously announced, our Board of Directors declared a regular quarterly cash dividend of $0.40 per share, payable on September 20, 2021 to shareholders of record at the close of business on September 10, 2021. And now on to our outlook. As Scott mentioned earlier, we are not immune to macroeconomic challenges, including recent global supply chain issues experienced in most all industries. However, we believe our diversified global supply chain offers a distinct competitive advantage in scale and speed, and we remain focused on being agile and responsive while working to mitigate disruptions. Are participating in the market, and we intend to continue amplifying investments in the back half to support top line growth in 2021 2022.
To best position for the accelerating demand we see, We anticipate select elevated transitory costs such as freight in the back half of twenty twenty one. These transitory costs have been contemplated in our increased gross margin guidance. Based on the strength of the 2nd quarter and momentum of and demand for our brands, we are raising our fiscal 2021 outlook for revenue, in the range of $1,000,000,000 and adjusted EPS. Revenue is now expected to increase in the mid teens range over 2020 are in the range of $2,390,000,000 to $2,420,000,000 as compared to a low teens range in the prior guidance, including a mid single digit impact from the VF outlet actions in India business model changes. Gross margin is now expected to increase by 330 to 380 basis points to 44.5% to 45% as compared to 230 basis points to 2 70 basis points in the prior guidance.
The increase reflects are higher anticipated structural growth in more accretive channels such as digital and international. SG and A investments will continue to be made in our brands and capabilities. Due to the strengthening revenue and gross margin outlook, we expect to amplify are in the range of $1,000,000,000 in demand creation, digital and international expansion to support second half twenty twenty one revenue and accelerate momentum for 2022. These increases will be partially mitigated by ongoing tight expense controls in sustained structural post pandemic cost containment initiatives. Adjusted are expected to be in the range of $3.90 to $4 per share as compared to $3.70 to $3.80 per share in the prior guidance.
This EPS guidance does not assume the benefit of any share repurchases. Before closing, I think it is important to consider our updated fiscal 2021 outlook in context in the range of our historical results and our Investor Day projections. Relative to 2019, our updated fiscal 2021 outlook at the midpoint of our ranges imply revenue is projected to be at were slightly higher than adjusted 2019 revenue levels, excluding the mid single digit impact from BF Outlet and India. Gross margin is projected to be up nearly 400 basis points compared to adjusted gross margin in 2019. And adjusted earnings per share is projected to be above 2019 levels, even with amplified investments in SG and A.
Finally, our updated fiscal 2021 outlook puts us well on track, if not ahead have planned to deliver on our 3 year financial targets outlined at our recent Investor Day. In closing, I would like to reiterate Scott's earlier remarks. We are very confident in our team and business and are pleased as we enter the second half of twenty twenty one with great momentum. This concludes our prepared remarks, and I will now turn the call back to our operator. Operator?
Our first questions come from the line of Jay Sole with UBS. Please proceed with your questions.
Participants. Great. Thank you so much. You just obviously raised the guidance today and the tone and some of the things you mentioned sounds like you have confidence In that raised guidance, but can you just talk us through a little bit more and maybe elaborate on what's giving you confidence to be able to raise the guidance today and looking forward while you might be ahead of your Investor Day plan.
Hey, Jay. How are you? It's Scott. Good morning. Are ready for questions.
Jay, when we look at it, it goes back to our strategy from the very beginning on how we started this and the amplification of the brands. That they hadn't been invested in. Well, now we're starting to see with this incredible investment that we're making supported by some really strong demand creation programs. My hats off to our global demand creation teams and we're starting to see the brands really come to life. What I'm most pleased with is how we're communicating with the consumers around the globe and how that's a two way communication that's really taking root.
And we think there's a lot more there as far as the future. There are some uncontrollables in the background, but you saw how well we handled that during the pandemic, which I thought was really important. We've got an incredible playbook. And we're really happy about what's happening here going forward. We've got some visibility in the future from a business development standpoint, from a category extension standpoint and geography.
So that's all reflected in our guidance. But just to sum it up is, we wanted to take this company public because we knew we really had something special in these brands and that's starting to come to life as we play out our strategy.
Understood. Maybe if I can ask one more just on that point. You mentioned the virtuous cycle of growth and the company seems to be funding a lot of that demand creation, Scott, that you mentioned with the strong gross margin gains. It sounds like you're talking about The top line could really accelerate the top line growth rate, I mean, could accelerate over the long term and even in the second half of the year. Is that fair?
And maybe just can you connect the dots for us on have these demand creation investments are really going to whether it's category expansion or new business wins like how that's really going to drive the top line to a growth rate above maybe what we've seen in the past.
Yes. Good morning, Jay. It's Ruston. I'll go ahead and take that. Yes, you absolutely are correct on the virtuous cycle.
It's something we talk about quite
a bit. Our strategy, to a cycle. It's something we talk about quite a bit. Our strategy really is to start to grow that top line revenue, which you've seen us do over the last several quarters, as well, with some of the efforts we've taken to obviously distort and accelerate growth in a more accretive channels, quality of sales restructuring actions, and that's creating that oxygen in the P and L that's really allowing us to distort investments in the brands and capabilities Scott talked about earlier to drive that future top line growth while delivering the enhanced operating margins. I think that's really important.
You've heard us talk a lot about earning our way to investing into these brands. And we're clearly doing that and you're seeing the investments start to manifest. And I think this quarter's results are a great illustration of kind of how that virtuous cycle comes to life. Are ready to take questions.
Thank you. Our next questions
come from the line of Erinn Murphy with Piper Sandler. Please proceed with your question.
Participants are ready.
Great. Thanks. Good morning. I was hoping you could speak a little bit more about the shelf space gains that you're securing across a number of new categories and retailers. And And if you could talk about the phasing of some of these new programs.
And then a follow-up for Ruston. I guess, relatedly, Why would that not imply a better than a 2% back half sales guide? I mean, by running the math, if we're at have been in the mid teens, it feels like the back half is around 2%. So just curious with some of the sell in why that would not be higher?
Participants are in the line with us. Good morning, Aaron. I'll go ahead and start. Yes, we're really pleased, Aaron. One of the things is the brands hadn't had a chance to go ahead and really flex what they can do.
And the consumer has really shown us a really big opportunity for us to go ahead into different categories and channels. And one of the things that we did is from the very beginning, we identified several categories,
outdoor, workwear and t shirts that
are really fundamental to what we are in the marketplace, outdoor workwear and T shirts that are really fundamental to what we do. And we have seen that as we've gone ahead and built and this is a great complement to our teams, built incredible products at a really great value with a trusted brand and brought those to these different categories that we've seen really good acceptance and we've seen really good shelf have a nice day to day basis. And that has been translating for a while as we talked about in several of our last calls. But now it's really starting to take hold. And we talked about Outdoor in our last couple of calls with some big programs internationally and domestically.
And now we're just layering on We had a customer that was going to come in with almost 2,000 doors. And because the program is so good, the product is so good and it's such a great value, going to come in at 3,300 doors in the fall. So another great example of how we're phasing that in. And then we've talked a little bit from a T shirt standpoint, a big $100,000,000,000 category, which complements our bottoms denims business really well for both genders globally, a category we should be stronger in. We hired a really good team there.
We're really excited about that. And we're going to address that in several different categories and areas within T shirts. And we've won a couple of big programs here recently, which we're really pleased about 1700 plus stores that will happen both in fall and spring. So as you can see, a lot of concentrated effort into these categories that we hadn't been in before, but are really complementary to what we do as a company.
Participants Hey, Aaron. Good morning. It's Ruston too. I'll take the second part of your question about the sales improvement in the back half. You're correct in terms of when you look at the guide that we issued this morning, it implies a low single digit back half improvement relative to 2020.
But I also want to highlight, you have to take into consideration as well the strategic exits that we made will be in the Q4 of 2020, specifically to reduce the VFO fleet in half, discontinue the sale of 3rd party branded goods in all of our domestic outlets and then transition the India are in the market. All of those are weighted disproportionately a little bit more towards the back half because clearly Q2 was most impacted last year as it related to COVID. And so you need to take that into consideration that mid single digit annual impact from those strategic exits as well, a little bit more weighted on that back half. Hopefully that helps answer your question.
Are ready. Thank you. Our next question comes from the line of Adrienne Yih with Barclays. Please proceed with your questions.
Good morning, everybody, and congratulations. Great quarter. Scott, so I always like to ask you about sort of high level are in the range of 25% to 25% to 25% of the year.
Okay. And then just a follow-up on the Q1 2020 earnings call. At this time, all participants are in the range of 25% of the year. And then just a follow-up on the Q1 2020 earnings call. At this time, all
participants are in the range of 25% of the year. And then just a follow-up on the Q1 2020 earnings call. At this time, all participants are in the kind of blew out numbers over 2019. And so how are you seeing back to school denim shaping up? And then how do you foresee it as we go into kind of the back half of the year?
More importantly, how long can that trend last? And then for Ruston, really want to focus on, you talked about modest inflation, maybe hitting the AUC, but then the gross margins are so robust that it seems like either you're just your supply chain is working for you. So any commentary on how you're going to manage that? And then remind us that the Far East really is not impactful to you in terms of sourcing. Thank you so much.
Great. I'll go ahead and start, Adrian. Good morning. Nice to hear from you. So a couple of things.
Let's start with back to school. I have a school age child at home and we haven't bought school clothes for him for 2 years. He's £40,000,000 and 3.50 There's no way he can fit into in school clothes from 2 years ago, in addition to the fact that styles and trends have changed in those 2 years. So we think there's really
are going to be in the middle of
the year. Some pent up demand because kids just aren't
going to want to
go back to the clothes they were in and they aren't going to fit those. And there was no school back to school season at all last year. So We believe that's going to be really good for both us, the industry and also our consumers and our customers. So that'll be a good moment in time for us all as we return to normal. As far as denim goes, you've seen our survey that we put out, a little while ago, and we think that there is a positive just structural change sweeping the globe into casualization.
And we've seen it in all the major metropolitan markets across the globe, whether it be London, Paris, New York City, San Francisco, doesn't matter. They're wanting to be casual like they were at home. So they're reinvesting in a casual wardrobe, which I don't believe is cyclical. I believe it's here stay for the long term going forward. And then I would also complement that with, we like where we are and where we're positioned as a company because If you think about the evolution of our strategy, and we've only been around now as a public company for a shade over 2 years, we've been able to go ahead and build these great categories like outdoor were in T shirts that are very complementary that we believe are at the very beginning stages of being powerful categories for us the company over the very long term.
So as I think about the future, I think about denim, I think about the categories that we've entered and the opportunities that we have in front of us, I am really, really excited.
Excellent.
And
Adrian, it's Ruston. Good morning. I'll go ahead and take the second part of your question. In the first, let me touch upon kind of the last bullet that you mentioned, which was kind of Far East sourcing. So just as a reminder for everyone, Our supply chain, our global diversified supply chain, we really feel is differentiated for us and does offer a competitive advantage.
With a little over a third of our global production internally manufactured in this hemisphere and approximately 2 thirds that are sourced out of overseas, predominantly out of Asia. As we think a little bit about the second half gross heard me speak about a minute ago with Jay, just really creating that oxygen to be able to invest back into our brands. And over the last 4 quarters, you've seen triple digit growth from us in that expansion and really on a fundamental structural basis, being driven by that distorted growth in those accretive channels, the geographies and categories we've talked about, as well as pursuing quality of sales and restructuring actions, and we anticipate those structural benefits will continue will be in the back half of twenty twenty one and beyond. However, we do anticipate they will be moderated in part by some of the elevated transitory costs will be able to chase some of the incremental demand that Scott talked about and we talked about earlier. Certainly, the global supply chain disruption is well chronicled.
And as we've stated today and previously, we're not immune from that, but we are certainly pursuing the demand and the momentum that we've got behind our brands. And our second half gross margin outlook has taken those factors into consideration. All participants are in the range of $1,000,000,000. Your last point was really about inflation. And as we think about moving forward next year, we mentioned a little bit at Investor say that we anticipated that 20222023 gross margin improvement to be modestly more weighted towards 2023 As some of these growth catalysts that we're investing in like digital and international opportunities really scale.
And so we're really proud about the guidance I mean, sorry, the gross margin we're delivering this year and would just draw you to are in the conclusion in my remarks that the gross margin in our outlook here is projected to be up nearly 400 basis points compared to adjusted gross margin in 2019. So clearly a focal point for us and will remain so going forward. Thanks, Adrian.
Thank you. Our next questions come from the line of Bob Drbul with Guggenheim Securities. Please proceed with your questions.
Hey, guys. Good morning. Congratulations. Nice work.
Thanks, Bob.
I guess I have two questions. The first one is with the announcement of the share repurchase program, Does that imply just in the near term that M and A is off the table? I know you talked a little bit about your capital allocation. Just wondering if you can maybe address that as you think about Horizon 1 and the Horizon 2. And then I think the second question I have, I'm not sure if you
gave it, participants are interested
in the Q1. But some of the buckets in this gross margin expansion, I don't know if you could sort of break it down a little bit more, just around where you see How it delivered in the Q2, but also when you look at this outlook for the rest of the year, the biggest buckets, etcetera, would be helpful. Thanks.
Hey, Bob, it's Scott. Good morning. Thanks for the questions. From the share repo standpoint, I think it all boils down to as we
talked about in the Investor Day,
we're creating a we're creating $1,000,000,000 in cash over the next 3 years. So as we've talked about from an optionality standpoint and as we phased into we think that's just a component of our allocation here as we go forward. It's part of our options and everything is still on the table and will be as we move forward and we'll continue to update the team and everybody going forward. So we feel real good.
Good morning, Bob. I'll take the second part on the gross are in the 2nd quarter, and you've certainly seen this trend continue for the last several quarters as I've talked about. This was our 4th consecutive quarter with triple digit margin improvement, has been a focal point for us, are certainly focusing on those structural drivers, really being favorable channel mix, geographic and product mix. Those are kind of the largest drivers, I would say, Bob, of that. And certainly, as we're continuing to invest in these under indexed categories and geographies as we've talked about, we see that continuing.
Certainly, Q2 did dip in trading.
Please proceed with your questions.
Good morning. Thank you for taking my questions. Just I want to follow-up on the marketing spend, I guess, and the gross margin. But really, In the quarter, did you spend more in your demand creation investments than you anticipated? Participants or did you get a better return can you measure the return on those investments?
And then in the guidance of the increased in the back half will
go ahead and take that. Certainly, we'll talk to the marketing spend in the quarter, but make it a little bit more general comments for you. Certainly, Sam, with all the engagements we've had, we're a total shareholder return driven organization. And as we look at investments, Scott and I, that we can make into the brands and into the business capabilities, we measure everything that we do on a TSR return basis on both a near term and a long term perspective. Say.
Certainly, we've been distorting investments into things like digital from a marketing perspective. And I think you certainly saw the results of that play out this quarter. We talked a little bit about to growth in the quarter, but on a 2 year stack basis, both digital wholesale and our owned.com, very impressive ready to take the next question and answer session. Thank you, Steve. Thank you, Steve.
Thank you, Steve. Thank you, Steve. And now that we are live on the ERP side, in both North America and Europe, certainly an opportunity we see to distort amplify those investments in the back half here that not only helps deliver the back half of 'twenty one, Sam, but really accelerates the momentum moving into 2022, which is really important for us.
No, I do understand that. I'm looking really for it sounds like based on your guidance that you're going to probably delever your SG and A in the back half of the year, got good leverage in the front half of the year, and that's telling me that just sort of automatically some of those investments on a relative basis just won't give you the kind of same return. So I'm really trying to figure out how much of the beat in Q2 was better return on those investments. And Are you sort of guiding it the same way you guided Q2 relative to those investments up You know what I'm saying? Could you guide the year and then do better?
Because it sounds to me like you're getting a better sort of near term result than you may have put into the numbers Despite the fact it's helping the long term and it was intended to help the long term.
Yes. And Sam, I would just say that we measure are looking at the returns on both the near term and a long term basis. And clearly, as we distort investments, on the marketing side specifically, all participants We are looking more to accelerate the brands and the strength that they're demonstrating in this quarter to continue to accelerate in future quarters. So it's not just the next quarter, we're looking for the longer term as well. And obviously, as you've seen, the investments that we're making in the brands
are participating. Thank you. Our next questions come from the line of Brooke Roach with Goldman Sachs. Please proceed
with your questions.
Thank you. Good morning and thanks for taking our question. Scott, Reston, OWN digital continues to deliver momentum. Can you talk to the areas where you're seeing the most success, whether that's within a particular customer segment, conversion or new customer acquisition?
Yes, certainly can. So Brooke, I think you have to start at the beginning of the journey. We were so under indexed in digital And it wasn't just from the standpoint of physical. We've now brought ourselves up to speed from an ERP standpoint, put in the right in the infancy stage. Then when we started the company, we went ahead and had to hire the right teams and we started do that in a pretty robust way.
We hired the right leader. And then we had to start thinking about how we communicate in a powerful way with our consumers. And we started to do that with some really good programs and then we started to build better product into different categories like we've talked about today to make our site more robust and more exciting from a content standpoint for that consumer to come into and join the journey with us going forward. So at the beginning of that journey, we saw some really good We've seen really good gender momentum across the globe, both male and female, and we've seen really good category momentum. So what I mean by that is are in the same store.
Our outdoor line, for instance, has done really well. And then there's one other thing that I think is really interesting. Our consumer is now starting to come to us because, one, they like the story And they like what they're seeing and hearing and they're very pleased with the product. But in addition to that, we've done some really incredible collabs. And those collabs are highlighted on our digital presence too.
So if you think about our big Wrangler Billabong collab that we have going on right now, As we head into back to school, that's done really well. And if you think about Lee and our 100s collab and some of the things that they've done recently, Those have done really well. So combining all of those assets together and being at the very early stages in building better products and expanding categories, we really like how the consumer is communicating with us going forward in our digital space. Ruston, would you add anything there?
Yes. I think you said it well, Scott, the only thing I would add, Brook, as well is that we've continued to make investments in our capabilities. And so certainly were under indexed. We're at about 5% of revenue now. We see that opportunity as we laid out at Investor Day moving to 10% penetration.
And all the areas, Scott mentioned in terms of product and consumer, very, very relevant. We've also made investments on the technology side, are going on to new platforms in 2020 in both North America and Europe, and I think you're starting to see those results participants manifest in our P and L here. So lots of early days, lots of momentum and lots of opportunities still to go, Brooke.
Participants are ready to take questions.
Great. Thanks. And if I could just ask one quick follow-up. Can you talk a little bit about what you're seeing across your key U. S.
Wholesale partners, may be both in terms of program momentum at recently launched new initiatives or new business versus some of your legacy partners with more established programs such as Western versus department store, off mall department store participants are in the
queue. Thanks, Brook. I'll go ahead and take that. Yes, we're like we mentioned in our pre prepared remarks, we're really pleased with all the programs that we're launching across the board. I think it goes back to We Win With Winners.
We've talked about that a lot. We are really pleased with how we've placed ourselves in that line of communication and with the big customers that we have across the globe, and it's been all part of the strategy from Horizon 1. Are ready. So from a strategic standpoint, we are really running our playbook and we're pleased
with it right now. Are ready to
take questions. Our next questions come from the line of Jim Duffy with Stifel. Please proceed with your questions.
Thank you. Good morning, guys. Great execution. Congratulations on getting the ERP implementation through. Russ, I want to build on others' questions on the gross margins.
Sorry to do so, but Just working through the annual guidance, it looks like it implies roughly a 44% gross margin for the back half of the year. That's more than 200 basis points below the run rate in the first half of the year. Can you just maybe itemize some of the factors that would cause it to be such a big step down. And you mentioned pricing in your prepared remarks. I'm curious if you could speak are interested in the balance between pricing and input cost inflation and how we should think about pricing as a tool to leverage brand vitality and manage the margins.
Yes. So let me go ahead and start here, Jim, on the gross margin side. Absolutely, you are correct. It implies kind of our guide, 43%, 44% gross margin in the back half. And a couple of things that I would highlight.
Certainly, our first half was around 46. That was are definitely a high watermark for us in the back half of last year. We were more around the 43% range. So certainly, are continuing to strengthen and improve there. Couple of things as we're thinking about the back half, we mentioned in our prepared remarks and a couple of times here, Some of the global supply chain disruptions and the fact that we're seeing increased demand.
And so from our standpoint, We do see elevated transitory cost in the second half to meet some of that demand, and we've certainly reflected that in the gross margin are in the range of $1,000,000,000. Also, as Scott mentioned and you've heard us talk numerous times, still a lot of uncertainty out there in the marketplace and very, very fluid. So all participants We certainly have taken that into consideration as we've guided gross margin here in the back half as well. So
I'll flip it over to Scott. And Scott, if you want to the second part of that with the question around inflation and pricing, that'd be great. Thanks, Jim. Jim, good to hear from you. Jim, we're being real strategic with our pricing as we go forward.
We're investing in the brands, as you know, and we're also investing we haven't talked a lot about it on this call, but from an innovation standpoint, are pretty significantly to go ahead and keep our brands 1st and foremost in front of the consumers' minds. So we really like where we are. One of the things that we've talked participate in the Q1 of 2019. Jim, being a value play with a great brand behind it with high, high quality and innovating and coming into different channels only helps us going forward. So that's the investment that we're making to go forward and make sure that we're putting ourselves, our brands and our company in a really good place.
Are
in the process.
Thank you. There are no further questions at this time. I would like to turn the call back over to Scott Baxter for any closing comments.
Just a quick thank you to everybody for taking the time to spend with us today. It's much appreciated. Look forward to spending some time with you all are here sometime in the next month or 2 and then obviously look forward to talking to you again in the next quarter. But thanks again for your time this morning. Have a great day everybody.