Monday, May 23, 2022
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Kontoor Brands spins denim success

Scott Baxter rebuffs fears that the revered Wrangler and Lee denim brands have faded.


VF Corp.’s spinoff of Kontoor Brands in 2019 felt a bit like the cool kids kicking the nerds out of a party. CEO Steven Rendle naturally wanted to exploit the growth of VF’s faster-growing athleisure and outdoor apparel brands such as The North Face, Timberland and Vans. So the company pivoted away from its iconic Wrangler and Lee names that are leaders in the denim jeans mass market, picking a variation of the word contour.

Rendle also wanted to pivot from Greensboro, which VF entered by buying Wrangler owner Blue Bell in 1986. Blue Bell’s history in the Gate City dates to 1904. That deal doubled the size of VF, which had become a big denim rival when it bought the Kansas City-based Lee brand in 1969.

With steady profit from denim acting as the engine, VF moved its headquarters from Wyomissing, Pa., to Greensboro in 1998 and diversified with a variety of clothing lines. Under CEOs Mackey McDonald and Eric Wiseman, who led the company for a combined 21 years, it became the largest U.S. publicly traded clothing manufacturer.

Rendle moved up in VF because of the rapid growth of The North Face brand, which tripled in revenue while he was president from 2004 to 2011. He succeeded Wiseman as CEO in 2017. Upon announcing Kontoor’s spinoff, he said VF’s headquarters would move to Denver, a bigger city with a reputation as an outdoor sports hot spot.

[/media-credit] Kontoor Brands CEO Scott Baxter

Two years later, the nerds are looking a lot more like cool kids, upsetting the narrative that denim was fading and lacked much growth potential. Shares of Kontoor had a total return of more than 100% since they started trading in May 2019, while the company has produced more than $600 million in cash flow. Shareholders have received an average 5% annual dividend yield, and loads of debt have been retired. Meanwhile, VF shares have returned less than 5% in that same period. Kontoor’s gains came despite an 18% decline in revenue in 2020, mostly due to the impact of COVID-19.

“I didn’t know that our people wanted to win this much, but we are competing so well,” says Kontoor CEO Scott Baxter. “We’ve had really nice success.”

Several factors have spurred the gains:

An unexpected crisis. No one in May 2019 knew that most of the world’s offices would shut down in early 2020 because of a global pandemic. Overnight, a lot of people’s apparel choices centered on comfort instead of dressing to impress bosses and clients. For many, nothing is more comfortable than denim.

A united, highly motivated staff. “We wanted to create a culture of empowerment, diversity, trust and taking care of each other,” Baxter says. It’s important not to exaggerate any rivalry with VF. There’s mutual respect. But the CEO says, “Our brands were being used for different purposes, and we were kind of living a cash cow experience,” referring to the corporate practice
of reinvesting profit from a core business into new, faster-growing areas.

A Chinese push. Wrangler was introduced in China last fall, and Kontoor improved its operations there. It now expects to boost Chinese sales to reach 10% of revenue by 2023, up from 7% now.

Marketing. Wrangler and Lee have long been staples at mass marketers such as Walmart and Kohl’s and continue to add market share there, Baxter says. Wrangler says it is the U.S. market share leader in men’s denim, casual pants and shorts, and woven shirts. But more recently, the company has enjoyed success at Nordstrom, Free People and other specialty retailers. More than 1,000 H&M stores globally now sell Kontoor apparel. Sweden’s H&M is a leader in “fast fashion,” selling inexpensive products tied to the latest trends.

A little luck. Jennifer Lopez showed up on the May cover of InStyle magazine, lounging on a beach wearing a white tank top and Lee jeans (specifically, its Ultra High Rise Tapered Jeans). Kontoor wasn’t involved in her clothing decision or the photo shoot, Baxter says.

LEADING THE CHARGE

Baxter, 55, a native of Sylvania, Ohio, attended the University of Toledo and later got an MBA at Northwestern University. He held corporate jobs at PepsiCo, Home Depot and Nestle before joining VF in 2007. He moved to Greensboro in 2011 to head the jeans business, then relocated to California in 2016 to oversee VF’s Americas West group, overseeing the outdoor brands. But he and his wife, Donna, never sold their Greensboro house, and he says he couldn’t wait to get back to the Gate City.

The spinoff has been a boon for Greensboro because Kontoor merged Lee’s Kansas City headquarters with the N.C. operation and added hundreds of jobs to fill roles previously covered by VF. “Our brands are working together under one roof and now in close proximity,” which Baxter calls a huge benefit after decades of operating separately.

To boost Wrangler’s appeal to younger females, the company hired Georgia May Jagger, the daughter of rock star Mick Jagger and supermodel Jerry Hall, as a model and spokesperson. Jagger, 29, had been a Wrangler fan and grew up in her mom’s home state of Texas, where the brand’s core rodeo market is part of the region’s culture, Baxter says. (Wrangler started promoting its jeans for rodeo cowboys in the late 1940s and won’t stop as long as Baxter, a big fan of the sport, is the boss.)

Rodeo isn’t a thing in China, but camping, hiking and other outdoor activities are gaining popularity. The company projects that Wrangler sales growth there will accelerate over the next two years.

It’s not that VF didn’t try hard in China, where Lee jeans are the market leader after 30 years. About 670 stores carry the products. But before the spinoff, it was losing market share, lacked a strong strategy and had “challenged profitability,” company leaders said at a May investor conference. Two years later, Baxter says things are humming with new leadership, better partners and franchisees, and “dramatically improved” profitability.

Closer to home, many office workers are heading back to their cubicles as the pandemic fades, which might suggest a tougher outlook. But Baxter thinks relaxed dress codes mark a tailwind for Kontoor. “Denim has become very acceptable in multiple places including work and going out in the evening,” he says. “People think they can create more when they are comfortable. Denim is versatile and people love it.”

Kontoor isn’t sticking just with what it calls bottoms, however. Its goal is to double sales of other apparel including jackets, T-shirts and work clothes over the next three years and add $200 million in revenue. Wrangler Workwear is a competitor of the Dickies brand, which VF bought in 2017 and retained after the spinoff.

While marketing gets much of the buzz, success in apparel manufacturing also requires skillful production and supply chain operations. Like virtually all companies, Kontoor is boosting spending on digital efforts. Direct-to-consumer sales through its websites and about 200 company-owned or concessionaire stores made up 12% of revenue in 2020.

The company is also seeking to raise efficiency by reducing the number of plants and countries in which it operates, officials said in May. As of 2020, Kontoor made about 36% of its products at its 10 manufacturing plants in Mexico and Nicaragua, with the rest coming from about 224 sites owned by global contractors in Bangladesh and other nations. Overall, five nations make up about 85% of production.

Making its own products costs more but allows for more flexibility and shorter lead times, according to company filings. For example, Kontoor’s own plants can produce denim jackets and have them on store shelves within three weeks versus 20 weeks when sourced from Asia, Karen Smith, an executive vice president, said at the investor meeting.
Only a few specialty products are made in the U.S., which isn’t likely to change.

“We’re happy with our supply chain,” Baxter says.

Kontoor is also happy to be the denim kingpin of “Jeansboro,” a name coined in 2015 to celebrate the Gate City’s denim history dating to the 19th century. It’s the second-largest public company based in Greensboro, ranked by market valuation, behind Qorvo, and it employs more than 1,000 people in Guilford County, plus more than 350 at a Davie County distribution center.

“We’re proud to call Greensboro home. We are absolutely committed to the community, region and North Carolina,” Baxter says. ■

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