Earnings Call
Kontoor Brands, Inc. (KTB)
Earnings Call Transcript - KTB Q1 2020
Operator, Operator
Greetings and welcome to the Kontoor Brands' First Quarter 2020 Conference Call. As a reminder, this conference is being recorded. It’s now my pleasure to introduce your host, Eric Tracy, Senior Director, Investor Relations. Please go ahead, sir.
Eric Tracy, Senior Director, Investor Relations
Thank you, operator. Good morning, everyone, and welcome to Kontoor Brands' First Quarter 2020 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. Adjusted amounts exclude the impact of restructuring and separation costs, changes in our business model and other adjustments. Other adjustments during 2020 primarily represent costs associated with the company's global URP implementation and information technology infrastructure build-up. 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 at kontoorbrands.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 on a constant currency basis, which excludes the translation impact of changes in foreign currency exchange rates. Constant Currency amounts are intended to help investors better understand the underlying operating performance of our business, 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 Officer, Scott Baxter; and Chief Financial Officer, Rustin Welton. Following our prepared remarks, we will open the call for questions. We anticipate the call will last about an hour. With that, I turn it over to CEO, Scott Baxter.
Scott Baxter, CEO
Thank you, Eric. Good morning, everyone. Thanks for joining us. We at Kontoor Brands sincerely hope you and your families are safe and healthy and will continue to be well as we all seek to navigate these unprecedented times. We will go through our first quarter results in a bit, but before that I'd like to share perspectives on a few key areas. First, I'd like to provide context around the current environment and how and where our business has been impacted by the Covid-19 crisis. Next, I'll talk about the decisive actions we've taken during the first quarter to support the health and safety of our colleagues around the globe, as well as strengthen our financial flexibility and bolster liquidity. Many of these actions are consistent with our strategies since the spin-off and have now been either amplified or accelerated to more effectively minimize the impacts associated with the coronavirus pandemic. Finally, I'll highlight why we believe our model is advantageous not only to weather the near-term storms but also to position us for success in the rapidly changing economic and consumer landscape as we move into the new environment we anticipate following the crisis. So let me start by providing some thoughts on how the Covid-19 crisis has impacted our business. In Asia, the most pronounced impact has been in China, where significant demand softening began at the end of January and continued throughout the first quarter of 2020. At the peak of the crisis, approximately 90% of our owned and partner stores were closed. Currently, the China recovery continues to gradually build momentum led by the digital channel and all brick-and-mortar stores have reopened. Although the recovery process remains in the early stages, the sequential weekly improvement in recent brick-and-mortar comparisons we have seen is encouraging. The China recovery serves as a blueprint with some distinct nuances for our US and European businesses. In Europe, significant demand declines began to accelerate in the middle of March as many key markets went under stay-at-home orders and largely remain so today. Our distribution network remains operational for digital and hotel orders, but offices and stores in the region are essentially closed. In North America, significant softening and demand began during March; although demand remains soft today, many of our largest hotel customers remain operational. We continue to receive and ship orders from our distribution centers in the US, and while it's early days, wholesale orders have accelerated meaningfully over the last few weeks. To date, we have not experienced significant service disruptions with our customers given our global, diversified supply chain network. During the first quarter, we took several additional strategic actions regarding the well-being of our colleagues, which remains our top priority. As Covid-19 emerged in February and spread globally in March, we proactively implemented measures including closing our own retail stores first in China and then around the rest of the world. Our internal Covid-19 task force has implemented contingency protocols for working remotely as governmental stay-at-home orders emerged. Remote work policies will remain in effect until restrictions are lifted, at which time a phased and conditional approach will be implemented. Furthermore, across our corporate and regional offices, retail stores, manufacturing facilities and distribution centers, deep cleaning and sanitary protocols have been implemented to support the safety of company associates. Given Covid-19's impact, we also took personal decisions, including the announcement of temporary salary reductions for senior management and other key leaders. Unfortunately, as the Covid-19 crisis intensified, these impacts extended to our global team as we made the very difficult decision to reduce headcount in certain areas, implement temporary furloughs and additional salary reductions impacting many of our colleagues around the world in our own retail stores, distribution centers and corporate and regional offices. We are grateful for the commitment of our extraordinary people, and we look forward to welcoming our furloughed colleagues back. Also during the first quarter, we took action to help our communities by producing level one patient and disposable isolation gowns to assist hospitals that are dealing with the influx of patients as a result of Covid-19. The gowns are being produced at our plants with fabric donated by several suppliers and are being donated to North Carolina based hospitals. We are proud to support the efforts of many across the country in fighting Covid-19. We continue to look for ways we can help our communities and the people most affected by this crisis. We've also proactively taken significant financial measures to ensure near-term financial flexibility and strengthen liquidity, but also to position us for future success. And this future doesn't assume a return to pre-Coronavirus normalcy, but one in which we anticipate a prolonged Covid-19 operating environment for the balance of 2020, including our expectation of higher promotional levels and accelerated retailer door closures. While this crisis has undoubtedly impacted countless lives and disrupted businesses all over the world, including ours, we also believe we have an opportunity to help lead our industry in shaping the new future, and we are well prepared to do just that. So let me provide an overview of the financial actions we've taken to support our liquidity and greater financial flexibility. We renegotiated our credit facility, including amending covenants for future periods and drawing down $475 million on our revolvers in the first quarter prior to the amendment. In conjunction with our amended credit facility, we have temporarily suspended payment of a dividend, a topic I will spend more time on in a moment. We've taken reductions across variable and discretionary expenses as well as select capital expenditures. Let me be clear here though; we continue to invest behind long-term, high ROI areas including defending and enhancing our core business and driving new business development opportunities. Further evolution of our accretive digital and international businesses, as well as the implementation of our new global ERP. Rustin will provide greater detail on most of these actions a bit later, but I wanted to address one of these topics upfront and that is the dividend. In conjunction with our recently amended credit facility, we have temporarily suspended the dividend. Key is the word temporarily. The decision to amend the credit facility and suspend the dividend was not taken lightly, as we understand how foundational the dividend is to our long-term story. The payment of a dividend has been and will be an essential element of the Kontoor investment thesis in total shareholder return model. Our management team and the company's Board of Directors are committed to reestablishing a dividend as soon as appropriate. In fact, based on the terms of our new credit agreement, the current board will have an opportunity to reevaluate the dividend as early as the fourth quarter of 2020. We think that most in the investment community share this view; cash is king in the current unprecedented environment. While we recognize the temporary dividend suspension steps away from our long-term investment thesis, the decision to amend our credit facility and drive enhanced financial flexibility is the right one, particularly as we made the difficult decision to furlough many of our colleagues. You’ve seen us take meaningful transformational actions since our spin almost one year ago, from structuring to cost savings to quality of sales additions. All designed to create the foundation for long-term success. We believe these strategic actions and decisive amplified measures taken in response to Covid-19 not only help navigate the near-term challenges but set us up for success over the long term. This leads me to offer a reminder of why we believe the Kontoor model is advantageous both during and coming out of this crisis. First, our portfolio consists of two of the largest, most iconic global denim brands that offer consumers an outstanding value proposition. Second, we maintained a long track record of delivering strong financial performance and cash flows during challenged economic cycles. Third, we are partnered with some of the best in class retailers. Fourth, the restructuring and quality of sales initiatives we've implemented have driven operational improvement and distribution enhancement. Fifth, the strong growth in direct-to-consumer with a focus on owned.com and digital wholesale, as well as international afford accretive diversification. Finally, our supply chain, through owned manufacturing currently supports our position of strength and flexibility. Let me dimension each of these competitive advantages a bit further. Our portfolio is fortunate to own two of the most iconic global brands within apparel, Wrangler and Lee. These brands have over 200 years of collective authenticity between them. From the Great Depression to World Wars to inflationary cycles, these brands have lived through challenging global crises before. While this current novel coronavirus pandemic is unprecedented, we believe that these brands' histories, authenticity and connection to consumers bolstered more recently by investments in demand creation and innovation position our brands to endure. We believe now is the time to connect with our consumer like never before, and that during the first quarter we were doing just that. I'll share just two examples. First, we recently launched a new digital Wrangler campaign called 'Long Lived Cowboys' that we’re really proud of, which speaks to the perseverance of our organization through this difficult time. Equally important, it reaches our consumers in a highly authentic way. We encourage you to check out the campaign on many of the large social media platforms including Instagram, Facebook, and Twitter. Given most of the country’s stay-at-home orders, we created the 'Can’t Stop Country Music' series hosted every night at 5 PM on our Wrangler network and Wrangler brand Facebook pages, as well as on the artists' Facebook pages, with participation from country stars Cody Johnson and Jon Pardi. We were able to reach our consumers in a highly unique way, one that provides a bit of entertainment amidst the challenges associated with the crisis. Over 4 million viewers have already tuned into this personal entertainment experience. We will not go quiet with our consumer even during these times when it is important to stay apart, and we will continue to invest in the highest return areas that elevate our brand's authenticity in connection to our customers and consumers. Just as our brands have maintained a long history through a wider variety of economic cycles, so too has our operating model. Just looking back over the last decade or so alone, we've seen a great recession, the carbon bubble, key retailer bankruptcies, store closures, and destocking events. While we are certainly not immune to these macro-economic shocks, our fundamentals are resilient, most notably our ability to generate consistent and strong cash flow. Rustin will take you through more details later, but let me say this, we have stress tested our model. We believe we are taking the appropriate actions in support of strengthening our liquidity, driving enhanced financial flexibility, and bolstering cash generation through this uncertain environment. Equally as important as the strength of our model is the strength of the retail customers with whom we partner. We had, and will continue to win with winning retailers including our largest retail partners: Walmart, Amazon, Target, and Kohl's. These incredible partners are positioned as stable long-term winners within their respective channels of distribution. As demonstrated since the spin-off, we have aggressively invested in defending this core and are well-positioned to continue our highly productive collaboration with these outstanding wholesalers into the future. I'm excited to announce that we have significant program wins and distribution gains beginning in the second half of 2020. As you know, over the last year we’ve been implementing enhanced new business development strategies that are generating material new successes. Let me share two examples: First, as I’ve mentioned in the past, the Lee brand is under-distributed in the US. This fall, we have won distribution programs with key North American partners, including a sizeable program that launches in over 2000 doors during the third quarter. Second, our Wrangler ATG platform continues to build on its early success in the US, leveraging its value-oriented high-performance innovation to scale across regions. In the second half of 2020, we will be launching the program in more than 400 doors with a key European retailer. We are extremely excited to share the second half wins, but rest assured we are just in the beginning stages and we expect to share more in upcoming earnings calls. In addition to program wins, I also want to touch on the evolution of our digital business. Our digital wholesale business increased by 15% globally during the first quarter, and by 41% within the US. We have solid proof points that our investments in these channels are highly productive. We have been and we’ll continue to aggressively invest behind our digital business. While it’s still early days, the transformation of our owned digital ecosystem is well underway. We’re excited to announce the recent addition of our new VP of global digital, who brings over 20 years of progressively increasing experience with building branded digital platforms. With new leadership, we will take a step change in developing our best-in-class omnichannel experience for our consumers. We also recently went live with our new digital platform in Europe and will soon go live in the US as well. As you all know, the implementation of our new global ERP system and infrastructure will be a key enabler of our digital evolution. Finally, with respect to our model, let me speak to our supply chain—currently a distinct competitive advantage, particularly when faced with demand and supply shocks like the apparel industry is experiencing now. Owned manufacturing allows us to tightly manage inventory and positions us to most effectively react as conditions normalize. This is critical in supporting wholesale partners' need to service consumers when market conditions improve. Our vertically integrated manufacturing located in the Western Hemisphere allows us to scale production with shorter lead times as demand stabilizes. So how does this all come together? Our advantageous model, coupled with the decisive actions we’ve taken during the first quarter to support the welfare of our global team and strengthen our financial flexibility, highlight our adaptability as an organization and position us for future success. No doubt uncertain times remain, but we are confident in the strategies and actions we’ve taken since the spin-off and now amplified during the first quarter that should enable Kontoor to emerge from this crisis, well-positioned to best serve the future needs of our stakeholders. With that I’ll turn it over to Rustin.
Rustin Welton, CFO
Thank you, Scott, and good morning, everyone. We have a lot to cover this morning, so let me outline the balance of the call. First, I will walk through how our actions to address our financial resilience unfolded as the impacts of Covid-19 accelerated across our business. Specifically, we will cover our employee, liquidity and financing actions and implications as we know these are top of mind issues. Next, we will review our first quarter results, highlighting direct impacts from Covid-19 where possible. Finally, although we will not be providing guidance at this time given the uncertain operating environment, we will provide thoughts on shaping the balance of the year. As outlined before, our priority was to support the health and safety of our associates around the world. We began our response as Covid-19 began to emerge with the actions Scott reviewed earlier. After addressing employees, we quickly turned to liquidity and financing. In March, we announced that we had drawn down $475 million from our revolving credit facility. We took this action as a precautionary measure to increase financial flexibility, strengthen our near-term cash position, and provide additional funding for working capital. With near-term liquidity secured, we began immediate no-regret actions to execute temporary operating and capital expense reductions and adjust near-term production to better align supply and demand. Given the uncertain nature of the environment, under various demand scenarios for 2020 we modeled, it's incredibly important to note that we projected adequate liquidity to provide operating flexibility. The strong cash generation aspects of our operating model, which we have discussed many times since the spin, are of paramount importance in challenging times. Our two iconic brands, with over 200 years of history, have weathered many storms, and we believe the compelling value of our trusted brands continues to be critical in an uncertain environment. Based upon the scenarios, we also evaluated the covenant under our credit facility. Under a prolonged Covid-19 scenario in 2020, including accelerated door closures in a heightened promotional environment, we did forecast the potential for future period leverage ratio covenant challenges within our original credit facility. Accordingly, well in advance of any potential issues, we began efforts to proactively amend our facility and announce the successful completion of these actions this morning. Key elements of the amendment include: one, covenant release in future periods with a focus on our net leverage ratio; two, minimum liquidity requirements to the end of the second quarter of 2021, or earlier if certain criteria are met; and three, suspension of dividend payments for the second and third quarters of 2020 with restricted payments, including dividends, permitted after the third quarter if certain criteria are met. An 8-K was filed this morning with additional details on the amendment. As Scott mentioned, in conjunction with our amended credit facility, our Board of Directors has temporarily suspended the payment of a dividend. In addition to the flexibility the amendment affords, we believe it was the appropriate action. Scott walked through some of the operating and capital expenditure reductions, but I want to assure you that we continue to challenge all operating expenses, from travel to non-business critical meetings, to samples and prototypes, to outside services. As part of this process, we have engaged and encouraged our associates around the world to rethink our traditional norms of doing business and share their thoughts on how we can streamline and improve operations. Let me share a couple of examples where we have leveraged technology and reimagined key business activities. First, in China we held our first virtual meeting through WeChat with our dealers that included online product assets, marketing highlights, and 24/7 support. Next, globally we shifted all sales meetings to a virtual format, where new products, marketing campaigns, and best practices are shared. Finally, in the US, we’ve conducted virtual design workshops and prototype sessions enabled by collaboration software. In addition to rethinking how we work in this new reality, we are also continuing, as we have done since the spin-off, to explore additional cost-saving and streamlining opportunities. This week, we are announcing the consolidation of our VF Outlet Headquarters from Reading, Pennsylvania, to our corporate headquarters in Greensboro, North Carolina. This difficult decision was not taken lightly, and we want to thank our Reading associates for their dedication and commitment. We anticipate the actions will be completed by the end of 2020, and over the next few months, we will further define our future structure, operations, and transition plans. Although we remain focused on streamlining our operations, we are committed to continued investment behind key strategic initiatives including, but not limited to, our global ERP implementation and the digital enhancements Scott mentioned earlier. Finally, I’d like to address our supply chain, as I know inventory is a topic of interest. Our supply chain remains a competitive advantage, particularly with respect to inventory management. As we minimize demand and supply and balances in this dynamic landscape, our vertically integrated manufacturing, which represents just over one third of our production, allows us to reduce production in light of decreased volume requirements, avoid the creation of excess inventory, minimize cash flow impacts, while providing the agility to meet demand and support new program wins as governmental restrictions permit. We are also actively working with our supply partners around the globe to minimize inventory and service delays. While select countries continue to have operating restrictions in place, our diversified supply chain network of internally manufactured and sourced products reduces risk. Today, we have not experienced material interruptions with our customers or in our supply chain. Now let's get to our first quarter review. Unless otherwise stated, results will be on an adjusted basis. Given the unprecedented times, our revenue review will be modified to provide additional detail that we believe is important to give context as to how performance evolved during the quarter. Although it is not possible to clearly delineate the Covid-19 impact and we are not attempting to do so by sharing further breakdown within the quarter, we believe it provides meaningful perspective in light of the environment and will therefore take this unusual step for this review. Global revenue decreased 20% on a reported basis in the first quarter compared with adjusted revenues for the same quarter in 2019. Headwinds from foreign currency represented one point of the decline. As expected, driven by restructuring and quality of sales initiatives, February year-to-date global revenue declined mid-single digits compared to the prior year, with approximately one third of the decline from China, where the impact of Covid-19 was most pronounced. In March, as pandemic efforts accelerated on a global basis, revenue declined in the high 30% range compared to the prior year. On our last call, we also talked about our ongoing quality of sales actions that began in 2019, as well as planned declines in select dilutive lines of business. The quality of sales actions to improve our long-term operating performance that began in 2019 was the right thing to do then, and they are clearly proving to be the right moves in this environment. These initiatives included business model changes and actions taken to exit underperforming countries and other global points of distribution, including select channels in India. Coupled with planned declines in diluted business, such as reduced sales of certain lower margin lines and lower distress sales, these actions pressured first quarter revenue in the mid-single digit range outside of the Covid impact, consistent with our expectations. On a regional basis for the quarter, US revenues were down 14%. Through February, revenue declined in the low single digit range as anticipated given quality of sales actions. March revenue declined in the high 20% range. These declines were partially offset by growth in digital, with US digital wholesale increasing by 41%, and our dotcom digital increasing by 7%. Today, most of our largest online and brick-and-mortar retail partners are open, placing orders, and receiving shipments albeit at lower volumes. Despite lower sales volumes, we estimate that approximately 70% of our North American customers based upon 2019 sales volume remain open with at least reduced hours. The US represented 75% of our revenue in the quarter. Outside of the US, international revenues declined 32% in constant currency. Breaking down performance versus prior year by month, January international revenue increased in the mid-single digit range. As the effects of Covid-19 were more fully realized in China, February international revenue declined in the 30% range. Finally, as the effects from the pandemic continued in China and were more fully realized in Europe and other international markets, March revenue declined in the high 50% range. As Scott mentioned, our China recovery has continued to make progress in April. Digital continues to lead the way with positive growth in both March and April. All wholesale partner and owned stores have reopened and are experiencing week-on-week improving comp performance. Beyond Covid-19 impact, the first quarter international decline was affected by planned exits, business model changes, quality of sales actions, and foreign currency, which combined pressured international revenue by high single digits. Turning briefly to our channels, our reported revenue in our US wholesale channel, which represented 66% of our revenue, was down 13%. The decline was primarily driven by Covid-19 impacts. As mentioned, US digital wholesale remains a bright spot increasing 41%. This performance reflects our long-standing partnerships with leading digital wholesale platforms and the investment we’ve made into this important area. Our branded direct to consumer channel, which represented 10% of our revenues, declined 17%, due in large part to the owned brick-and-mortar door closures. Our owned digital business increased 1% driven by 7% growth in the US. While the impacts of Covid-19 have been far-reaching, we continue to see positive results from our investments in our digital platform. The implementation of our global ERP system will be a significant enabler in developing our digital ecosystem. Finally, let’s turn to our brands. Global revenue of our Wrangler brand declined 17%, including one point of headwind from foreign currency. Wrangler US revenue declined 14% in the period. The impacts from Covid-19, planned lower distressed sales, and the planned exit or reductions of select non-core programs were the primary drivers of the US decline. These declines were partially offset by growth in digital, both owned and wholesale. Wrangler international revenue was down 27% reported during the quarter, driven by Covid-19 impacts, the actions taken in India, and business model changes in Europe. Lee brand global revenue declined 24%, including a point of headwind from foreign currency. Lee US revenue decreased 9% driven by the previously mentioned Covid-19 impacts and transformational factors. We remain encouraged by the underlying progress of the Lee US business, including the previously mentioned new program wins. Through February, our Lee US business was up high single digits. Lee international revenue was down 38% with a point from FX. Nearly half the decline was driven by China as much of the country was placed on lockdown for the majority of February and March. Now on to gross margin; total adjusted gross margin decreased 320 basis points to 38%. The decline was primarily driven by the following factors. First, inventory provisions based upon higher levels of excess and distressed goods and lower anticipated recovery rates represented a 340 basis point headwind in the quarter. Next, lower international revenue led by China also adversely impacted the geographic mix by 210 basis points. Finally, the cost of downtime in our plants, as we reduced production to align supply and demand and tightly manage inventory, represented a 40 basis point headwind in the quarter. These declines more than offset the underlying structurally accretive mix shifts and proactive measures we have discussed as an important part of our business model and total shareholder return drivers. Adjusted SG&A as a percent of sales increased 310 basis points to 33.6%. The year-over-year increase was driven primarily by increased allowances for credit losses due to Covid-19 and fixed cost deleverage due to revenue declines. These increases were partially offset by tight expense control and restructuring benefits. We delivered adjusted earnings per share of $0.27 in the first quarter. Now turning to our balance sheet and cash flow. We ended the quarter with $479 million in cash and cash equivalents, which was a $373 million increase from year-end. As mentioned, we drew $475 million on a revolver during the period which drove the increase. Excluding the revolver, cash decreased $102 million in the period driven by working capital, global ERP, IT infrastructure investments, and our dividend payment on March 20th. Approximately half of the decrease was due to working capital. So I want to provide a little additional context here. Our business has historically experienced seasonality in our working capital needs. Specifically, we tend to have higher accounts receivable balances in our first and third quarters of the year due in part to elevated international shipments as products for new seasons are introduced. Further, inventory in the US tends to peak during the third quarter as we prepare for holiday shipments and moderates in the fourth quarter as shipments occur. Thus, the first and third quarters tend to be the largest uses of working capital, while the fourth quarter tends to be the largest source of working capital. In the first quarter of 2020, our working capital use was $49 million compared to a use of $71 million in the first quarter of 2019. Finally, I will close with some shaping for the balance of the year. As we previously announced and as a result of the uncertainty and significant business impacts caused by Covid-19, we have withdrawn our 2020 guidance provided on our fourth quarter call in March and will not be providing an updated outlook at this time. While we're not providing formal guidance, additional perspective and assumptions are as follows. We believe we are continuing to take the necessary proactive steps to accommodate a prolonged Covid-19 environment. We anticipate negative impacts on revenue, operating income and EPS will be most pronounced in the second quarter of 2020. As we think about the second half of 2020, we are not guiding the impact Covid-19 will have on our results. However, we do anticipate and would highlight that outside of Covid-19, underlying revenue and gross margins in the second half are expected to benefit from new programs and distribution gains, moderating top-line headwinds as actions taken in 2019 in our anniversary and increasing realization of accretive restructuring, cost savings, and quality of sales actions taken in 2019. Finally, due to predictions of a prolonged economic downturn, we have performed stress testing for a variety of financial demand scenarios during 2020. We believe the actions taken are expected to support liquidity requirements and provide operating flexibility. Although it has only been a little over 60 days since our last earnings call, we had much to cover on today's call and appreciate the opportunity to walk through the many actions we have taken. In closing, I just want to reinforce how confident we are that these are the right steps at this time to position Kontoor for continued success in the new environment. This concludes our prepared remarks and I will now turn the call back to our operator.
Operator, Operator
Our first question today is coming from Bob Drbul at Guggenheim Securities. Your line is now live.
Bob Drbul, Analyst
Hey, guys. Good morning. Hope you guys are well. Got two questions for you. I guess the first one just on the dividend. Can you maybe just elaborate a bit more in terms of the discussion around resuming the dividend sort of in Q4, what does have to happen? Can you just talk us through that maybe a little bit more? And I think the second question is on some of the new programs that you do expect. Similar question, but you know, the visibility and the confidence in some of those new programs, if you might just walk through that a little bit more in depth? I think those would be helpful for us. Thanks very much.
Scott Baxter, CEO
Sure, Bob, I’ll take those, and Rustin will add in some color as we go along. But I think it’s important to know, on the dividend, that this was temporary; it’s part of our covenant amendment and it’s still absolutely foundational to our long-term investment thesis in our total shareholder return model, so that hasn’t changed at all going forward. I think everybody’s in the same situation; cash is really important right now in the business. However, as we’ve stated, we’re committed to reinstating that dividend at the appropriate time, and we can do it as early as Q4. The thing that most want to see in this industry, and the world, is a sustained improvement that allows us to move forward past what we’re all going through right now. But I do think there’s one other component that’s critically important to the whole dividend discussion, and that is that we take our culture very seriously here at Kontoor Brands. Unfortunately, and I mentioned in my comments, we had to furlough some folks, and we don’t take that lightly at all, executing temporary pay reductions and doing some really tough things to ensure that our business is sound and moves forward in a constructive way. We didn’t feel it was right to go ahead and pay a dividend while we were making those tough decisions. Rustin, anything to add to that?
Rustin Welton, CFO
No. I think the only thing I would say, Bob, is we did file an 8-K this morning with the amendment around the credit facility, and to Scott’s point, the board will have an opportunity to re-evaluate that dividend as early as the fourth quarter of 2020, based on performance and certain criteria. You can certainly review that in the 8-K, or we can discuss it at a later date around that release. Thanks.
Scott Baxter, CEO
To your second question, you know, Bob, one of the things that I’m most proud of as CEO is how the team has managed through this process. If I just step back in time and think about when we transitioned our business and spun off just a year ago, the date is coming up here real quickly in a couple of weeks. We were a maintenance business for the company that owned us, and at that point in time we had to start a lot of things from fresh, from the start, I guess, and one of those things was putting together a comprehensive strategy for our business moving forward. We really thought long and hard about how this world is going to change and what’s going to happen, and while we never thought that something like this was going to happen, when we sat back and thought a lot about our strategy here recently, we feel very fortunate about what we did as a team. A couple of those things are really important. One of the things that we spoke about was winning with openers, and if you think about what we’ve gone through over this period, we’ve aligned our sales with the highest quality retailers in the world like Walmart, Amazon, Target, and Kohl's, and we feel good about that positioning right now. We talked a lot about category expansion, particularly in the outdoor space with our all-terrain gear; it’s taken off nicely in North America and will expand globally in the second half of this year. I must commend the team for their efforts with the Lee team and the new business development team, who work hard on behalf of all Kontoor Brands. They’ve done an outstanding job. The second half of this year will show some good programs coming in, and one big program in particular that we’re proud of. We believe it’s worked well because of the collaborative approach we’ve employed with our brands and retail partners. We have emphasized digital strategy for a long time, which has been critically important during this crisis. We’ve had to forego additional physical stores but focused on digital, and that decision has paid off well. Overall, we are managing through this tough time and are encouraged by the early signs we’re seeing in May.
Operator, Operator
Our next question today is coming from Erinn Murphy from Piper Sandler. Your line is now live.
Erinn Murphy, Analyst
Great. Thanks. Good morning. I hope you are all healthy and safe. A couple of questions for me as well, maybe just following up, Scott, on the last thing you were saying. I'm curious if you could speak to kind of what sales looked like exiting the quarter here in North America and then in April, if you can comment on kind of quarter today just given you guys are in a unique position that some of your channels are actually open. And then the second question probably more for Rustin on inventory. Can you just talk about which quarter you expect inventory to peak in? And then maybe a little bit more on your inventory management actions—how you're thinking about outlets? Can you liquidate US inventory and China? Just curious on some of the actions you're thinking of taking going forward. Thanks.
Scott Baxter, CEO
Sure. So, Erinn, let me start with China, a very important market for us. We've seen nice progression; I would call it moderate progression every week, which to me is the most important thing. I don't think any of us thought that this was going to return to normal in a 30, 60, or 90-day period. What's happened is we’re monitoring and I'm pleased to say we've seen the consumer come back. Our digital business is coming back and customers are re-engaging with our brands as all stores and partner stores have reopened. It's critical for our strategy over there. So, I’m pleased with what's happening from a recovery standpoint in China, but again, I’m more pleased with the fact that it has been steady, and not something that's been spiking. I’d take you through some of the factors that have been tough for us at the end of March when things got really difficult for many folks. We weren’t any different. What we’ve seen, particularly in the last week of April, is an increase in orders, and we’re pleasantly surprised about that strength. I’m excited about how things are progressing. Now, as many countries are starting to open up, we have a lot of states reopening and many more coming soon. We’re closely monitoring how others do because we rely heavily on retailers who are already achieving good sales but also on those that are starting to reopen. We need to ensure we do right by our associates and our customers during this period. Overall, we’re continuing to invest in the brand, our digital space, and ERP, which will support future robust operations.
Rustin Welton, CFO
Yes. Thanks, Erinn. Good morning. I'll take the second half of your inventory question here. Let me step back. In my prepared remarks, I did mention a little about the seasonality we've historically seen in our working capital trends. Q1 has been a quarter where we build inventories. Typically, the fourth quarter is holiday shipments, and we end the year in good inventory positions. Q1 inventory did increase about $30 million, which is up about 7% from where we ended the year. For perspective, last year we increased about $45 million or about 10% in Q1. We’ve been pretty focused on inventory management and highlighted that this was going to be a big focus for working capital improvement for us in 2020. In terms of trends, we project inventory to increase in Q2 and peak in Q3, consistent with our historical patterns. I would also highlight that we’ll peak in Q2, especially as we have some of the new programs coming in, along with holiday sales. You spoke a bit about liquidation and inventory management. Fortunately, we have a lot of core products that can carry over season to season. We don’t handle a lot of fashion goods at risk, so we’re having those conversations with retailers who are open to hold on seasonal merchandise. On the liquidation side, we do have about 80 outlet stores in the US to manage excess goods at higher recovery rates. We are laser-focused on managing inventory and will continue to be over the next few quarters. Hopefully that provides context to your questions.
Operator, Operator
Our next question today is coming from Alexandra Walvis from Goldman Sachs. Your line is now live.
Alexandra Walvis, Analyst
Good morning and thanks so much for taking the question here. Thank you also for all the color on the call so far. I wanted to ask a question about digital sales. So a very strong growth rate through the quarter. Could you comment on the cadence of digital sales through the quarter? I'm most interested in whether it's accelerated as some of your partner stores closing and your own stores and then any comment within that digital sale for us of which wholesale digital part is performing particularly well and thinking about the distinction between your own e-commerce platform and any other wholesale e-commerce? And then my second question is on the gross margin and the puts and takes of that going forward. Should we expect that 200 basis point tailwind to continue through the year? And on the other hand, how big could be the impact of downtime and manufacturing facilities moving forward?
Scott Baxter, CEO
So, Alex, I'll start, and then Rustin will share the answer with me. We think of it as the owned piece, partner business, and wholesale. We’re really pleased with how our businesses transpired there. Given how critical digital has initially been during this time, we anticipate that migration is going to continue and it's only going to pick up as we move forward. We’ve made some proactive steps to ensure that we’ll be ready for the consumer. We launched a new digital platform in Europe, and we’re excited to be launching a new one in North America very soon, which will enhance the customer experience. Our partner business is strong, and our wholesale digital and consumer business are additionally robust. We’ve invested a lot of time and energy to fortify that space, and have continued to do so in the future. Our decision to deploy resources toward digital instead of building physical stores is proving to be the right call. Importantly, we brought on a new global leader with tremendous experience in digital platforms. I hope that helps provide insight. Now I’ll turn it over to Rustin.
Rustin Welton, CFO
Yes, thanks Scott. To wrap up Alex's query on digital sales, certainly the first couple of months prior to Covid-19 impacts showed strength in this channel, as we’ve seen in prior quarters as well. I would note that March was softer as we were impacted globally. However, in April, we did see a pickup in growth. Regarding your second question about gross margin, I’m not going to guide specifically on gross margin but indicated earlier that we expect revenue and profit to be under additional pressure in Q2. Downtime impact on our margins will increase, as we took steps to align supply with demand through production cuts. Additionally, while geographic mix pressure may continue, we are optimistic that structural improvements cited earlier will help offset those impacts. With the actions we took to focus on quality of sales and our long-term partnership strategies, we’re confident in our gross margin trajectory moving forward.
Operator, Operator
Thank you. We’ve reached the end of our question-and-answer session. I’d like to turn the call back over to management for further closing comments.
Scott Baxter, CEO
Thank you to everyone for participating today. We appreciate your support of Kontoor Brands and wish all of you safety and health, you and your extended families. We’re all in this together, and we’re going to get through it together. We look forward to spending time with you on our next quarterly call and talking to some of you in between. Thank you everyone, appreciate it. Please stay safe.
Operator, Operator
Thank you. This concludes the teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.