Avner Ziv

(NYSE: KTB) released its first earnings report as a publicly traded company last week on Aug. 8, following its spin-off from former parent VF Corp (NYSE: VFC) on May 22. The owner of the Wrangler and Lee jeans brands is down roughly 29% from its spin-off pricing, and as I've argued recently, this is creating an appetizing scenario for dividend-seeking investors looking for a balance between safety and appreciable yield. Below, let's review key points made by CEO Scott Baxter during the company's first earnings conference call, which illuminate Kontoor Brands' strategy as it begins to manage its own destiny." data-reactid="11">Kontoor Manufacturers (NYSE: KTB) launched its first earnings report as a publicly traded firm final week on Aug. 8, following its spin-off from former guardian VF Corp (NYSE: VFC) on Could 22. The proprietor of the Wrangler and Lee denims manufacturers is down roughly 29% from its spin-off pricing, and as I’ve argued lately, that is creating an appetizing state of affairs for dividend-seeking buyers in search of a stability between security and considerable yield. Under, let’s overview key factors made by CEO Scott Baxter through the firm’s first earnings convention name, which illuminate Kontoor Manufacturers’ technique because it begins to handle its personal future.

Pale denim blue denims of various sizes on a retailer shelf.

Picture supply: Getty Photographs.

Innovation is vital after separation from VF Corp

[W]ith respect to innovation, as a stand-alone firm, we are actually positioned to extra successfully make investments behind, showcase, and scale new product applied sciences and superior manufacturing capabilities like by no means earlier than. Inside innovation, we’ll give attention to 2 major areas: product and manufacturing.

Within the quote above, CEO Baxter alludes to the truth that Kontoor’s earlier product and manufacturing breakthroughs have been constrained by its existence underneath VF Corp as a single entity amongst quite a few competing portfolio firms. 

Baxter cited two improvements the corporate is actively scaling as examples of Kontoor’s potential, unharnessed from a guardian group. The primary is a product within the Lee Denims line known as “Physique Optix.” This product was originated from a combination of supplies analysis, imaging applied sciences, and insights gained from cognitive science. In essence, contoured cloth and the strategic placement of seams and pockets leads to a product that theoretically flatters the wearer’s physique. 

The second innovation is a producing enchancment within the denims dyeing course of. Kontoor has launched a dyeing know-how referred to as “Indigood” that makes use of foam fairly than water as a provider for denims dye. The method is aimed toward boosting Kontoor’s bona fides amongst millennial shoppers, in addition to the corporate’s need to cut back its personal manufacturing waste. In response to Baxter, the method makes use of zero water, makes use of 60% much less vitality versus legacy dyeing strategies, and generates 60% much less waste. Kontoor claims the brand new course of will assist it save 5.5 billion liters of water by 2020.

An environment friendly provide chain with room for enchancment

From a provide chain and manufacturing perspective, Kontoor Manufacturers makes use of sustainable know-how and breakthrough innovation to deal with client wants, to reduce our threat publicity and enhance our working effectivity all whereas demonstrating our dedication to good company citizenship. We’re and can stay dedicated to accountable sourcing and sustainability initiatives. 

Throughout the earnings name, CEO Baxter made clear that Kontoor’s provide framework is steeped in ideas of sustainability and waste discount, as could be seen within the Indigood course of mentioned above.

However Baxter listed a number of native benefits of the corporate’s provide chain that may be sharpened additional by a devoted administration staff. These benefits embody proprietary lasering know-how, a vertically built-in provide construction, which is among the largest denim manufacturing operations on the planet, and a surprisingly massive manufacturing footprint in North America, based within the U.S. and Mexico. 

This final benefit might have value Kontoor some factors in revenue margin share in previous years, as its rivals have a tendency to pay attention manufacturing in China and different south Asian international locations to reap value benefits. However a localized provide chain provides the Wrangler and Lee manufacturers an edge in velocity in getting new fashions to market throughout the firm’s major geographical gross sales area — the USA.

A refined method to coping with import tariffs

In the present day, we now have very restricted tariff exposures in China with lower than 1.5% of our international manufacturing for exports to the U.S. We do have a large manufacturing presence in Mexico, which, as we acknowledged, is a definite aggressive benefit given its scale and velocity to market. And we’re optimistic that the pending USMCA [United States-Mexico-Canada Agreement] commerce settlement with Mexico and Canada will in the end be permitted. Nonetheless, because the commerce setting continues to evolve, be assured that we now have developed a large number of strategic options to implement, if vital.

One other benefit of constructing a major provide chain in North America is implicit in Baxter’s feedback on tariffs above: Kontoor has restricted publicity to the continued commerce battle between the U.S. and China, no less than because it pertains to manufacturing value.

Baxter went on to elaborate on the corporate’s technique relating to tariffs on items it produces in China and any potential import tariffs on its Mexican manufacturing, because the U.S. has additionally threatened to impose tariffs on gadgets manufactured south of the border. Baxter acknowledged that “the latest tariffs proposed act [as] an incremental tax on the U.S. client,” and that retailers will look to move on value will increase to shoppers within the type of increased costs.

price elasticity of demand around various products, and implement price hikes to retailers (and on jeans sold directly to consumers) judiciously and with restraint." data-reactid="45">For now, Kontoor Manufacturers intends to keep away from uniform value will increase on items in response to any escalated manufacturing prices. Moderately, the corporate’s quick plan is to check the value elasticity of demand round numerous merchandise, and implement value hikes to retailers (and on denims bought on to shoppers) judiciously and with restraint.

This sluggish and circumspect technique might trigger a little bit of margin deterioration ought to the U.S. comply with by with its newest proposed tariffs aimed toward numerous buying and selling companions. Nonetheless, over the long run, Kontoor is targeted on extending its buyer base, and it seems prepared to soak up some value stress as a way to keep and improve its international denims market share.

Asit Sharma has no place in any of the shares talked about. The Motley Idiot has no place in any of the shares talked about. The Motley Idiot has a disclosure coverage.

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