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Yahoo Finance’s Myles Udland, Brian Sozzi, and Julie Hyman speak with Kontoor Brands CEO & President, Scott Baxter, about the company’s latest earnings and the state of the retail industry.
MYLES UDLAND: All right. We're just about one year into working from home, and so for myself and probably many others, that means it's been about one year since we've regularly worn hard pants. But the parent company of Lee and Wrangler out with earnings this week, reporting revenue actually up 1% over the same quarter last year. Joining us now to discuss is Scott Baxter. He is the president and CEO of Kontoor Bands.
Scott, great to talk with you this morning. Let's start with that fourth quarter-- able to report a slight increase. Year-over-year obviously, the full year you guys saw the top line down a bit, but what does that kind of fourth-quarter momentum say to you about where the brand sits as you head into hopefully a year of normalization?
SCOTT BAXTER: Well, good morning, Myles, and thank you for having us on today. You know, it feels really good. You know, we've talked a lot about-- we had two strategies, a horizon one strategy and a horizon two strategy, which we combined. And horizon one was to go ahead and set the company up for success as a publicly traded company and pay down debt and pay a strong dividend. And then as we went into horizon two, that was to start growing the company. And so I think you saw the first signs of us evolving into a horizon-two company with a little bit of growth quarter over quarter.
We're really pleased. You probably saw that both the Wrangler and Lee brand had really strong quarters globally, which, you know, really makes us pleased. And It just lets us know that our strategy that we stuck to even during the pandemic-- it was working pre-pandemic, and now it's working post-pandemic as far as breathing life into these brands and investing in these brands in a pretty significant way going forward.
BRIAN SOZZI: Scott, something struck me on the earnings call last night from Urban Outfitters. They noted they're seeing an uptick in apparel from people now wanting to go back out or planning trips later in the year after they get vaccinated. Have you seen anything in your business that suggests people are starting to rebuild their wardrobe really after a year of not shopping?
SCOTT BAXTER: We are. And you just nailed it, Brian. There's a little bit of pent-up demand, and I would tell you that that demand is global. You know, right now we're already seeing that shift in China in that China has been a little bit ahead of the curve, so our business as you saw last quarter was good in China. And we're introducing Wrangler this quarter in China. We did a soft introduction here in December, and now we're going to do-- digitally, and now we're going to do a brick-and-mortar introduction here in the spring.
And then we're seeing that people are ready to come back into the marketplace, you know, whether that be entertaining, traveling, doing things with their family. And for us, it really is a really good opportunity because, you know, you can imagine. Being a jeans company, being an outdoor company, being a work company-- those are three of our big categories-- we really are where the consumer is going to be in the future because the casualization of the globe is happening. It's happened, and it's accelerating really quickly. And we sit in a really good place globally relative to how people and where we're going to meet the consumer on their journey.
JULIE HYMAN: Certainly these journeys that we're showing in the video of people wearing your products are things that people want to be doing right now more than ever-- getting outside and traveling. Something that stood out to me in your report had to do with margins. Your margins expanded by 180 basis points. And when you talked about why, one of the things you talked about was favorability in product costs. Can you translate that for us? Does that mean you were raising prices or that you saw lower input costs or both?
SCOTT BAXTER: You know, it's a couple of things actually. You know, one of the most important things from our strategy, and a lot of people don't know this about us, but we own 36% of our internal manufacturing. So during this time as there were some structural challenges with the supply chain globally, we were actually in a really good position with a significant part of our supply chain, a significant part of our make, that we owned. And we were able to control that and flow goods into our marketplaces easier and better than most people because of the global supply chain bottlenecks. So that put us in a good position.
But I would also tell you something that's really important is, and this is a shout out to our design and our merchant teams, we're making really good product. And we cleaned up a lot of things around what we called quality of sales initiatives. So we are really winning with winning retailers and then winning in our digital platform. So as you combine all of those efforts, you can see that our gross margins are expanding, and we're using that to invest back into our brands.
BRIAN SOZZI: I'm getting a little concerned about port congestion-- starting to see a lot of retailers begin to mention this. Do you think we're looking at an apparel shortage in the spring here as goods just sit on docks?
SCOTT BAXTER: You know, I think some folks will be OK. I'm certain that there are going to be some bottlenecks. They are already out there right now. One of the things that we did-- and this is a great example of having a really experienced supply-chain team and owning your own operations-- about a year ago, year and a half ago, our team had the foresight to start looking at the ports and seeing which ones were starting to backlog. And we went ahead and spread our distribution out up through the East Coast so that we could help flow our goods into this marketplace a little bit easier knowing that those bottlenecks were happening on the West Coast.
So we put ourselves in a really good position there. But again, that comes from having a supply chain that's been around a long time and just having fantastic leadership in our supply chain and thinking around the corner. So we feel like we're at a pretty good position.
MYLES UDLAND: And, Scott, I wanted to just ask you quickly about style, about fashion and how that's started to change. I mean, some of that video we showed is-- those are younger people wearing a much different fit of jean than I was wearing when I was that age, you know, maybe 10 or 15 years ago. How is that changing the way you guys are thinking about your mix and working with retail partners?
SCOTT BAXTER: Yeah, let me give you a couple of great things that have happened recently that, you know, kind of line up with that question. So we just introduced a collaboration. You know, the new face of our Heritage Women's Collection is Georgia May Jagger, the daughter of Mick Jagger and Jerry Hall. So she's the face of our women's collection for Heritage. It's a really, really nice collection. It's a sophisticated, higher-end, higher-price-point collection, so we're collecting and working with new consumers.
You know, our Lee brand just did a global collaboration with H&M in 62 countries in over 1,100 doors, and again attracting younger consumer with that collection. So for us, you know, a big part of our strategy was how do we go ahead and invest in these brands, and it's a couple of things. So it is, you know, a little different consumer for sure.
But for us it was also categories. So our All Terrain Gear, our outdoor line, has grown significantly, and that's an outdoor customer, our work-wear line. You know, our western line continues to really do well in the western marketplace, so-- and then it was also geographies. Introducing Wrangler in China was a significant milestone for us as a company. So as we think about our strategy evolving, we think there's a real channel opportunity, a geography opportunity, and obviously a customer opportunity for these brands as we invest back in them.
JULIE HYMAN: And finally, Scott, just quickly, one of the odd advantages of all of us being at home or in our offices is that we get to see people's backgrounds and where they're working and living.
SCOTT BAXTER: Yeah.
JULIE HYMAN: I've got to ask you about those dolls. I'm really curious about-- I assume--
SCOTT BAXTER: Yeah, sure.
JULIE HYMAN: --items were wearing--
SCOTT BAXTER: Sure.
JULIE HYMAN: --jeans and stuff.
SCOTT BAXTER: I'm going to move over so you can see them. So about 100 years ago, there was a famous marketing person in our company for Lee, and what they wanted to do was they were trying to save money on samples. And I'll try to make this really quick. So they started taking dolls out with miniature samples to the customers so that they didn't have to produce full-sized samples. And that doll was a Buddy Lee doll. And he's become iconic through the years, and we've used him in advertising and marketing through the years. And these are some of the earliest versions and some of the most valuable Buddy Lee dolls, which by the way on social media and marketplaces sell for a lot of money.
But these are out of our collection that we have in the company. We have a large collection of them, and these are some of the most valuable ones. And I leave them here in my office, and I like to look at them every day and think about our history and our heritage and think about how long the-- you know, the Lee brand has been around for well over 100 years, and it's just fascinating to think about how we did things then and how, you know, an iconic image like that has a lot to do with our company. And Buddy Lee has a 100th birthday actually this year, so you'll see more of that in 2021 with Buddy's birthday.
MYLES UDLAND: All right, well happy birthday to Buddy. Really interesting--
SCOTT BAXTER: [CHUCKLING]
MYLES UDLAND: --stuff there, Scott. It is-- as Julie mentioned, there's always things that are not related to the topic at hand that you feel inclined to ask people about in work-from-home. So really interesting stuff there. Thanks for playing ball on that. Scott Baxter is the president and CEO at Kontoor Brands. Scott, appreciate you taking the time this morning.