Earnings Call Transcript - KTB Q1 2024

Michael Karapetian, Vice President, Corporate Development, Strategy and Investor Relations

Thank you, operator, and welcome to Kontoor Brands' first quarter 2024 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 defined in the news release that was issued earlier this morning. Our outlook is presented on an adjusted dollar basis. 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 in constant currency, which excludes the translation impact of changes in foreign currency exchange rates. Joining me on today's call are Kontoor Brands' President, Chief Executive Officer and Chair, Scott Baxter; and Chief Financial Officer, Joe Alkire. Following our prepared remarks, we will open the call for questions. We anticipate this call will last about 1 hour. Scott?

Scott Baxter, President and CEO

Thanks, Mike, and thank you to everybody joining us on today's call. We are pleased with our better-than-expected start to the year. Compared to our outlook provided in February, we saw a broad-based upside from revenue, gross margin and earnings. Joe will unpack the details, but our relative strength in the quarter, combined with improving visibility gives us confidence to raise our full year guidance. I will step through the highlights in a bit, but first, let me start with the organizational announcements we made in March. As we discussed last quarter, we have commenced Project Jeanius to transform our organization. This multiyear project is focused on driving three things: first, creating a global best-in-class multi-brand platform; second, simplifying the organization to increase speed and efficiency; and third, freeing up investment capacity to accelerate growth and increase profitability. As part of these actions, Tom Waldron has been appointed COO. You've had a chance to hear from Tom during our year-end calls. He is an incredibly talented leader, who has led the return to growth and strong profitability for Wrangler. From 2019 to 2023, Wrangler has grown revenue at a mid-single-digit CAGR and expanded reported profit margins by over 300 basis points. In his new role, Tom will amplify our strategic playbook across both brands to drive improvements throughout the organization, from our commercial and go-to-market teams to global operations. We have also elevated Jenny Broyles to EVP and Global Brands President of Wrangler and Lee and Ezio Garciamendez to EVP and Chief Supply Chain Officer. Congratulations to both Jenny and Ezio, who have joined our executive leadership team. The team we have in place has a proven track record of success at every position, and I am confident will drive the next leg of our value creation journey. Now let me touch on highlights from the quarter. Wrangler's momentum continues with product and demand creation platforms that are elevating the brand like never before. While wholesale pressures are impacting the near term, as expected, the strength of our DTC business and point-of-sale outperformance are real proof points, Wrangler is winning with the consumer. During the quarter, Wrangler's global D2C business grew 8%, and we gained 60 basis points of market share in denim longs according to Circana. This marks the eighth consecutive quarter of market share gains for the brand. To support this momentum, Wrangler continues to diversify beyond denim. In fact, approximately half the business is now outside of denim bottoms, reflecting the success we have had expanding into new categories. Outdoor is a great example, which is now an approximately $200 million business. The investments we are making in the team and our product development capabilities are helping to drive further penetration in this large and growing category, leading to successes like the outdoor performance cargo, which is one of the fastest-growing pants in Kontoor's history. And Wrangler ATG is elevating the brand into newer channels of distribution such as specialty sporting goods supported by new launches like the ATG Chino and Cliffside Utility this fall, as we are on track for another year of double-digit growth in outdoor. We are also advancing our consumer insights and research capabilities, as part of our evolution to a more data-driven organization, allowing us to better align with changing consumer buying habits and behaviors. This behind-the-scenes work is a great example of how we are becoming a more efficient organization with targeted investments that generate higher returns. And finally, we have a strong pipeline of demand creation platforms and collaborations. Lainey Wilson's first collection launches later this year, and based on early reads, it's on track to become the largest global collaboration to date. We are also continuing our very successful collaboration with STAUD in the second quarter, which is helping to bring the right balance of newness, while reaching a younger female consumer. And we are amplifying the brand with events at the ACM Awards and Stagecoach, where we are the official denim sponsor. These are great examples of how we are building momentum throughout the year with demand creation investments that fit together and deepen the connection with our consumers. Turning to Lee. Similar to Wrangler, Lee experienced softness at wholesale, as retailers tightly managed inventory levels. As we discussed last quarter, the business was also impacted by conservatism on seasonals. That said, we are seeing green shoots from our innovation platforms and with our younger female consumer. On the men's side, we continue to advance our innovations focused on comfort. These platforms now account for two-thirds of our U.S. men's business and our genuine distinction in the market. And within female, our heritage collection and iconic rider platform is expanding the brand's reach, while being supported by new equity campaigns. This is translating to share gains and growth at point-of-sale. During the quarter, POS in the U.S. increased 2%, and market share in denim longs gained 40 basis points, as measured by Circana. Looking ahead, we have several initiatives that give us confidence. First, our improving product development capabilities are enabling category expansion. Our tops business has been a great success story, is on track to deliver strong double-digit growth for the year, and Lee Golf launches in the second quarter with innovative fabrications that are appealing to a broad range of male consumers. We are excited about the potential in this growing category, as part of Lee's office to outdoor evolution. Second, our innovation pipeline is getting the most significant addition in years. Lee x will launch later this year and combines elite comfort with world-class aesthetic. This will be a true platform that crosses denim and non-denim tops and bottoms at a price point that simply does not exist for this level of performance. And last but not least, we are getting sharper with our brand positioning in the marketplace. This foundational level work is a significant focus for the second half of the year and is part of the new multi-brand platform we are developing. We are conducting an end-to-end assessment to ensure alignment with our refreshed consumer segmentation, brand investments and product development. We are confident this will pay significant dividends in the years ahead. Before I turn it over to Joe, let me close with a perspective on the balance of the year. Since we spoke in February, point-of-sale has improved for both brands. We have continued to gain share. The wholesale channel has found better balance, and gross margin expansion exceeded our expectations. We also made further progress working down our inventory position, ending the quarter 24% below prior year levels. Combined with our better-than-expected profitability, we now expect to generate more than $335 million in cash from operations this year. As a result, our capital allocation optionality continues to improve, allowing us to return $48 million to shareholders during the quarter, including $20 million in share repurchases under our new $300 million authorization. Longer term, Project Jeanius planning is well underway with impacts expected to start in the fourth quarter. We have a line of sight to the higher end of the $50 million to $100 million of annualized run rate savings, none of which are included in our guidance. That will structurally raise our profitability ceiling, while significantly increasing our investment capacity to drive more profitable growth over time. While the near-term environment remains dynamic, we are operating from an offensive position. We are off to a better-than-expected start and have improving visibility to the balance of the year. I am confident we are on a path to drive strong value creation for all stakeholders.

Joseph Alkire, CFO

Thanks, Scott, and thank you all for joining us today. Let me start by providing perspective on our first quarter results relative to the outlook we provided in late February. Our results were stronger than expected, driven by higher revenue, gross margin, earnings and cash flow. Our brands continue to drive market share gains in our largest points of distribution and POS and inventory levels at retail improved modestly late in the quarter. Gross margin expansion was stronger than expected, driven mainly by lower product costs and favorable mix. And when combined with further inventory reductions supported robust cash generation and capital allocation optionality, as evidenced by the $48 million of cash returned to shareholders through share repurchases and dividends in the quarter. Overall, we're pleased with our start to the year. Let's unpack the quarter in more detail. First, POS strengthened, as we progressed through the quarter, and we saw a better balance between sell-in and sell-through as inventory levels at retail modestly improved and replenishment order patterns normalized. If you recall, we did not assume an improvement in either POS or inventory levels in our outlook, as we continue to plan the business conservatively. So these results were above our expectations and drove the majority of the revenue upside in the quarter. Second, gross margin expansion exceeded our expectations driven by lower product costs and the structural benefits from mix. Relative to our assumptions, we also realized a smaller-than-expected impact from pricing, the majority of which is timing related and will begin to impact our gross margin more meaningfully in the second quarter. Lastly, we continued to drive strong cash generation through improved profitability and reductions in net working capital, including a 24% decline in inventory. We are opportunistically working through our excess inventory and driving improvements in supply chain execution through higher fill rates and more efficient demand supply matching. We continue to take a conservative approach to planning the year, but based on our better-than-expected first quarter results and improved visibility, we are raising our full year gross margin, earnings and cash flow outlook. Starting with Wrangler. Global revenue decreased 4%. The decline was primarily driven by U.S. wholesale, offset by growth in DTC, including 7% growth in digital and 10% growth in brick-and-mortar. Retailer inventory management actions continue to impact the business near term. However, underlying brand momentum remains strong, as evidenced by improving POS, ongoing market share gains and DTC strength. Nowhere is the brand's momentum more evident than in the success in diversifying into new categories. Wrangler's Outdoor business, led by ATG, continues to scale, as we advance our product development capabilities and reach new consumers. During the first quarter, Wrangler Outdoor grew 5%. Nearly 50% of the global Wrangler business is now in categories outside of denim bottoms. And we expect the non-denim business, including outdoor, tops and non-denim bottoms to grow at a mid-single digit rate this year. Turning to Lee, global revenue decreased 9%. As expected, reduced shipments in U.S. wholesale and a decline in the seasonal business negatively impacted the quarter. That said, revenue for the Lee brand was above our expectations. Similar to Wrangler, Lee is having success expanding beyond denim, particularly in tops. During the quarter, tops grew 20% and now comprise over 10% of the total business. We expect strong growth in these categories to continue for the balance of the year. Lee international revenue decreased 5%. In Europe, revenue declined 9%, driven by ongoing macro pressure. In APAC, revenue declined 2%, as the market recovery remains uneven, and we work to further improve the quality and health of our retail network. We continue to anticipate growth in APAC for the full year. Turning to gross margin. Adjusted gross margin expanded 270 basis points to 45.7% driven by the benefits of channel mix and lower product costs. This was partially offset by targeted pricing actions, which went into effect late in the first quarter. Relative to our expectations, we saw greater-than-expected favorability from mix and lower input costs in addition to a smaller-than-expected impact from pricing, resulting in adjusted gross margin exceeding our expectations by approximately 160 basis points. Adjusted SG&A expense was $195 million. Investments in demand creation, technology and DTC were partially offset by disciplined management of expenses and lower distribution in freight. And adjusted earnings per share was $1.16, consistent with the prior year. Now turning to the balance sheet. Inventory decreased 24% to $501 million compared to our initial expectations of a 20% decline. We remain intensely focused on improving net working capital to supplement our strong operating earnings growth and drive enhanced cash generation in support of our capital allocation framework. We finished the quarter with net debt or long-term debt less cash of $564 million and $215 million of cash on hand. Our net leverage ratio, our net debt divided by trailing 12-month adjusted EBITDA was 1.6x within our targeted range. During the quarter, we repurchased $20 million of stock under our current authorization, and as previously announced, our Board declared a regular quarterly cash dividend of $0.50 per share. Finally, on a trailing 12-month basis, our adjusted return on invested capital was 25%. Now turning to our outlook. Revenue is still expected to be in the range of $2.57 billion to $2.63 billion, reflecting a decrease of 1% to an increase of 1%. We are encouraged by our better-than-expected start to the year and the improvement we saw in both POS and inventory levels at retail across the first quarter. So how are we thinking about the remainder of the year? First, we continue to plan the business conservatively with the majority of the year still ahead of us. Retailers remain in a conservative posture, and we are cautious on the environment, as the consumer, while resilient, remains under pressure around the globe. We continue to assume no meaningful improvement in overall POS or retail inventory positions for the balance of the year. Second, we have good visibility to category expansion and distribution gains, including expansion of our tops and outdoor businesses, as well as new innovation platforms in the second half of the year. And we expect ongoing growth in our DTC business, reflecting investments in our digital platform, improved product segmentation and a more robust demand creation pipeline. Taken together, we continue to anticipate first half revenue to decline at a mid-single-digit rate, followed by mid-single-digit growth in the second half of the year. Beyond the first quarter, we expect revenue growth of approximately 2% for the year-to-go period. Moving to gross margin. Based on our stronger first quarter results and improved visibility, we are raising our outlook to approximately 44.6% from our prior range of 44.2% to 44.4%. Our updated outlook represents an increase of 210 basis points compared to adjusted gross margin of 42.5% in 2023, excluding the out-of-period duty charge. In the first half of the year, we now anticipate more than 300 basis points of gross margin expansion compared with our previous outlook of more than 250 basis points. Our gross margin outlook includes the following assumptions. First, we will continue to benefit from the structural drivers of mix. This is expected to contribute approximately 30 basis points to 40 basis points to the full year. Longer term, we expect the benefits of mix to continue, as we scale DTC and international. Second, we have good visibility on input costs with costs locked into the third quarter on manufacturing and into the fourth quarter on sourced product. Our visibility for the balance of the year has improved. And when combined with the proactive actions to optimize our supply chain footprint, we anticipate over 200 basis points of benefit for the year from lower product costs. And finally, we assume a modest headwind from lower pricing promotions and the disruption from the Red Sea. Collectively, these inputs are expected to negatively impact our margin by less than one point. I have high confidence in our ability to drive gross margin expansion beyond our previous expectations over time, supported by Project Jeanius, but we'll share additional details on that in the coming quarters. SG&A is still expected to increase at a low to mid-single-digit rate. We will continue to make investments in demand creation, DTC and technology, as well as product development capabilities to support our growing innovation platforms and category expansion plans. Operating income is now expected to be in the range of $377 million to $387 million, reflecting growth of 8% to 11% compared to the prior year, excluding the duty charge. This compares to our previous outlook of $372 million to $382 million. EPS is now expected in the range of $4.70 to $4.80, representing growth of approximately 6% to 8% compared to adjusted EPS in the prior year, excluding the out-of-period duty charge. This compares to our prior outlook range of $4.65 to $4.75. Full year EPS growth will be negatively impacted by about 5 percentage points from a higher tax rate. First half EPS is now expected to increase at a mid-single-digit rate compared to our prior outlook for EPS to be consistent with prior year levels. In the second quarter, we expect EPS of approximately $0.85, representing 10% growth. Finally, we now expect cash from operations to exceed $335 million, primarily as a result of stronger earnings growth. This compares to our previous outlook of cash from operations to exceed $325 million. Before opening it up for questions, I'd like to reiterate the confidence we have in our ability to deliver our 2024 objectives. We are off to a better-than-expected start to the year. The fundamental profile of the business is accelerating, and our brands are winning in the marketplace and continue to drive market share gains. We are on track to generate significant cash from operations this year, which combined with our strong balance sheet, provides us with considerable capital allocation optionality. We are operating from a position of strength, and I am confident in our commitment to deliver superior returns for all stakeholders.

Operator, Operator

Our first questions come from the line of Jim Duffy with Stifel.

Jim Duffy, Analyst

Good morning. I wanted to start, pardon my voice, fighting a cold here. I wanted to start by asking for more perspective on how the quarter and your thoughts on the year have evolved since late February. There are some moving parts. It sounds like you saw a further improvement in POS and retailer inventories in March, revenue and gross margin came in better for the quarter, but the full year doesn't pass through the revenue upside and the earnings increase was just a fraction of the Q1 earnings upside. So I'm curious, is there something you're seeing or hearing from channel partners that's making you more cautious on Q2 and the back half of the year?

Joseph Alkire, CFO

Hey, Jim, good morning. It's Joe. I'll start, and then Scott may want to provide some thoughts on the environment. So yes, we beat Q1. We beat the outlook by approximately $25 million, largely driven by improved POS and inventory levels at retail in March. This was largely driven by our major customers in the U.S. So this drove the majority of the upside in the quarter. From a gross margin standpoint, also above our expectations by about 160 basis points. That was mainly due to lower product costs and a small delay in the pricing actions that we're implementing, which is a bigger Q2 impact versus our original plan. Look, as we said in February, we're planning the business conservatively in light of the environment. We've got the toughest quarter behind us now, and the business fundamentals are positioned to accelerate across the balance of the year from here, which we're highly confident. And I'd say from a full year outlook, we raised the first half, we raised the full year largely, as a result of stronger-than-expected Q1. We increased our gross margin assumption modestly for the balance of the year based on our increased visibility. From an overall revenue standpoint, we've got good visibility into the improvements for the balance of the year, again, largely driven by new programs and distribution gains. But from my perspective, nothing that we're seeing in the environment is just being cautious on the outlook for the year.

Scott Baxter, President and CEO

And Jim, I would just add that the environment, it got modestly a little bit better than we thought in Q4. Really nice balance from our big customers from an inventory standpoint that worked itself well through pretty good. We remain optimistic for the rest of the year. We do have some programs that Joe mentioned, both channel and category that we're excited about that we've talked a little bit about. So a little bit conservative, but I want to make sure that we go ahead and hit our commitments going forward.

Jim Duffy, Analyst

I have a couple of related questions about the guidance. Joe, the progress in inventory during Q1 was significant. Can you discuss this in relation to the full year cash flow from operations guidance? There was a notable reduction in inventories, and you increased cash flow from operations by approximately $10 million. Does this imply some reinvestment in inventory later in the year? Additionally, could you provide an update on the seasonals business? Have the challenges from the seasonals business normalized? Are those challenges now behind you?

Joseph Alkire, CFO

Yes, I'll start with the inventory, Jim and Scott can take seasonal. So yes, from an inventory standpoint, really good progress. The first quarter will be our largest year-over-year decline. We expect declines pretty much for the balance of the year, somewhere in that low double-digit range. This is contributing to the cash flow. But yes, as the growth inflects in the second half, we will lean back into some inventory. But for the year, as a whole, inventory will be a contributor to our cash. Overall, Jim, we still have about 130 days of inventory on the balance sheet. I would say steady state for us continues to be somewhere in that plus or minus 100-day range. So there's still a considerable amount of cash on the balance sheet that we'll release at some point. But in terms of composition of our inventory, we still feel pretty good somewhere in that 75% to 80% range is core. So the inventory is in good shape.

Scott Baxter, President and CEO

Then Jim, just a couple of comments on seasonals. After 20-plus years of riding the seasonal wave up and down and weather and all kinds of patterns and geographies, it's very typical. We've seen this play before. It's a little cool right now. But all of a sudden, here where we are and part of this area and this geography got really hot yesterday, supposed to get really hot this weekend, and we really like our position. We like our product this year. We like our distribution. We think we're in a really good spot. And just because it was a little bit cool at the beginning of the season doesn't really bother us. We've been through that before, so no issues.

Operator, Operator

Our next questions come from the line of Bob Drbul with Guggenheim Partners.

Robert Drbul, Analyst

And Scott, 85 in New York today. So it's happening finally.

Scott Baxter, President and CEO

There it is. There it is.

Robert Drbul, Analyst

I have a couple of points to discuss. Can you elaborate on the organizational structural changes you're implementing and how we should view them? Additionally, you mentioned new category growth and expansion. Could you specify which areas we should prioritize and which ones you are most optimistic about? That would be helpful.

Scott Baxter, President and CEO

Thank you for the questions, Bob. We always had a plan to consolidate to one COO. This was part of our strategy, and as everyone recalls, we completed our spin-off in just 10 months. The process was rapid and ambitious, and we might have reached this point sooner if not for the pandemic, which caused some delays. Once we finalized our ERP and recognized the need for an effective organizational model, we aimed for success as a standalone company. After being together for so long, it’s natural to have shared practices, and determining our future direction was key. We are confident about where we want to go. We launched Project Jeanius and completed our ERP just as we needed to establish the right organizational structure for success. This change enhances our decision-making process by positioning Tom as COO. His successful track record with the Wrangler team excites us about this elevation. Approximately two years ago, Tom took over our operations and supply chain, and he has excelled in these areas. Merging these responsibilities has played a crucial role in our achievements. Our decision-making is now more efficient and quicker, aligning with our Jeanius strategy as we evolve into the organization we envision. I want to highlight that we still operate with two distinct go-to-market teams. While both teams report to Tom, we maintain dedicated teams: a lead team and a separate Wrangler team. Ultimately, they collaborate at the backend, which also reports to Tom, allowing us to create synergy and streamline costs. This thinking underlines our approach to the market and our ambitions through Project Jeanius. And then from a category standpoint, yes, we've been talking a lot about the categories that we entered in over the last few years. When we spun, we entered outdoor, we entered tees. We entered work in a more significant way, although we were there in outdoor and work to a degree. But you think about like outdoor in the last 4 years, we've gone from $100 million to $200 million, and you talked about, which ones are still accelerators, outdoor is definitely an accelerator for us. We're just getting better at it and smarter at it, and we've hired some talent, and our product looks better. And with time, you learn some things and you learn about your consumer, and we really like the new product that's coming out here. So I feel really good about that. And our tee business has been accelerating really, really nicely. So we think about those two. Right now, work is a little bumpy for us. So we'll continue to work through that and get that in a place that it needs to be, but we still love that channel. It's a big channel for us, as a company already. And we think that it is just a business that we're going to be in for the long term, and it's got real structural tailwinds for us. So we're excited about that too. But that's kind of where I would focus and emphasize from those newer categories that we enter.

Operator, Operator

Our next questions come from the line of Brooke Roach with Goldman Sachs.

Brooke Roach, Analyst

Scott, you've talked a lot about the optimism that you have on new categories and the growth of the business in non-denim today, but I was hoping you could give us your view on the health and the outlook for growth of the U.S. denim market. Have you seen any benefit from some of the recent Western cultural moments? And are you seeing accelerating April POS as a result of the recent pricing changes that have been put in place at some of your key customers?

Scott Baxter, President and CEO

Yes. Brooke, thanks for the question. No question. We have a significant business obviously, and it's critically important to us, and we call it our core business. And we see that denim is in fashion, has been in fashion, the casualization of the world. One of the things that was really interesting was that we went through this casualization when we went through the pandemic. And then when we came out, people said that we'll probably return to normal, and people dress like they used to. It just never happened. People stayed casual or are continuing to be casual. And we fit right into that in a really perfect way around the globe. So we feel really good about that. And then we do have some new distribution coming even in our core denim categories here for the second half of the year, which is pretty exciting with a big retailer that we've talked about. So you couple those two things. And then when you go to Western, the one thing I always think about and try to remind people is that we've been on a Western trend since 1947 when we brought out the first really great cowboy jean, our MWZ13. And we've been working that and loving that for a long time, and we are Western. If you think about Western, you think about the cowboy, you think about the mountains, you think about that lifestyle, the first thing you think about is Wrangler jeans and Wrangler tops. So we are a huge part of that business, and it just continues to grow, and it's been really nice. I believe it's quite meaningful for some people to be associated with the West and what it represents for our country. It's also intriguing that for the first time in a long while, we are starting to see an interest in Western culture in Europe, which is exciting for us. We are optimistic about this development and curious to see how it unfolds. We are noticing some positive signs in Europe, and in addition, we keep launching new products in our Western line. I don't know if everyone has heard the new Miranda Lambert song that features Wrangler jeans, debuting today. Miranda is the most awarded ACM winner of all time, which is quite remarkable. Such events are completely organic for us as a company, highlighting that when people think of Western fashion, Wrangler is their first thought.

Joseph Alkire, CFO

Now, Brooke, just on April specifically, we actually saw April POS soften a little bit versus Q1. Nothing dramatic, nothing that concerns us. It did improve sequentially over the course of the month. That's continued into the first couple of days of May here, and that's all reflected in our outlook. But it was a little softer than Q1.

Brooke Roach, Analyst

Great. And if I could just follow up on international. It appears that Europe wholesale continues to be a little weaker than we would have expected. I was wondering if you could discuss relative to your outlook for Europe and Asia provided in February. What are you forecasting for growth in both wholesale and DTC in those markets for the remainder of the year?

Scott Baxter, President and CEO

Yes. Brooke, I'll go ahead and start and then kick it over to Joe. But yes, you're right. Europe is still a little bit lumpy. The business there is kind of up and down, and we've been riding that like a lot of other folks. We're certainly hopeful that, that economy starts to pick up here over time. We are seeing some things that are beneficial. Our product is still resonating in a pretty significant way, and we've got a really good team on the ground there. And our new Project Jeanius work should help that from a global standpoint, as we go ahead and accelerate our global product development under one person. So I do have some optimism, but we do need to see the economy improve, and we're hopeful that, that happens and strengthens throughout the rest of the year. But truly, we think it's going to pick up a little bit more steam in '25 than in '24.

Joseph Alkire, CFO

Yes. Just in terms of this year, Brooke, we actually came through Q1 a little better than our plan, both Europe and Asia. Again, just to the point I made earlier, we planned the business pretty conservatively. So no real change in terms of how we're thinking about the business. Europe will be tougher than Asia. Asia, we still expect growth more in that mid to high single-digit range on a full year basis, much stronger in the second half. Within that, we expect stronger growth from D2C, which you've seen from both regions pretty consistently.

Operator, Operator

Our next questions come from the line of Mauricio Serna with UBS.

Mauricio Serna Vega, Analyst

Yes. I just wanted to confirm regarding the sales guidance that there wasn't any shift in shipments from Q2 to Q1. If that's the case, I'd like to understand why this hasn't been reflected in the full year sales guidance. Additionally, could you please provide some sort of explanation similar to what you offered regarding the gross margin outlook, specifically about the contributions from new distribution gains or channel expansion? I'm particularly interested in how much the launch of Wrangler denim in the second half might contribute to your sales growth.

Joseph Alkire, CFO

Hey, Mauricio, it's Joe. I'll start. So on the first half guidance specifically, we kept it the same. So no real change. We raised the outlook at least from a revenue standpoint, no change for first half or full year. I'd say we're just being a little bit cautious just given the environment, but no real change. We continue to not assume any real improvement or any improvement in either POS trends or inventory levels at retail. We held the year as well, down 1% to up 1% on the top line, and the growth we assume in the back half is really all non-comp distribution gains, category expansion, DTC in China. So from a top line standpoint, there's really no change to our outlook for the year. There's been some movement between the quarters, but nothing significant in the context of the full year.

Mauricio Serna Vega, Analyst

Got it. And then just a quick follow-up. Could you talk a little bit more about what you saw in China? Usually, you mentioned that on the release, but I didn't see any comments this quarter. And maybe also how should we think about the meaningful cash flow generation that you have for this year, how should we think about the optionality in terms of return to shareholders, in terms of dividends and share repurchases?

Scott Baxter, President and CEO

Hey, Mauricio, it's Scott. I'll start by discussing China. In 2023, we focused on collaborating with our partners to clean up our inventory, and I'm very thankful to our team for their outstanding work on this. We truly appreciate their efforts in achieving clean inventory levels. As you may recall, China emerged from the pandemic somewhat slower than other regions, and addressing these inventory challenges has been part of that process. Now, we're refreshing about 70% of our fleet there over the next two years, which is quite significant and necessary work. The teams are heavily involved, and we've invested considerable resources and insights into this effort. We're in a solid position moving forward. We're also exploring newer live streaming platforms that have proven to be powerful for engaging consumers, as that's where they've shifted. Overall, I'm pleased with our current state as we move past the challenges of 2022 and 2023. Some of our work includes fundamental improvements and developing great products. I look forward to what lies ahead. And then I'll go ahead and start cap allocation and kick it over to Joe. It is a fabulous position to be in. We're creating a lot of cash. The business is doing well. We've got options in front of us. You saw that we went ahead and bought back $20 million of stock this quarter under our new $300 million program that we have in addition to our dividend, a very significant dividend that we pay, and we're investing back in the businesses. If we want to do M&A, we're in a really good position to do M&A. Maybe I can make a few comments on that. From an M&A standpoint, I've said it before, I said it for years, we're not going to surprise you. Anything that we do you would immediately get. And anything we do, we would look to do something accretive, and we would look for a very, very fast paydown and payback. So count on that too, we're very prudent. Listen, we're really serious about making sure that we continue to do what's best for our shareholders and stakeholders. And right now, we're in a really good position. There's difficulty in the environment, there's difficulty in the sector, but we're not in that position. We're in a position of strength. So we can look at things from a position of strength, which is also really important. So we feel really good about where we are and the cash that we're generating, as a company. And we've done a really prudent job, as far as how we've gone ahead and giving it back to the shareholders.

Joseph Alkire, CFO

Yes, Mauricio, I would say from a priority standpoint, the priorities are unchanged. We want to prioritize reinvesting in the business first. We're committed to growing the dividend over time, and then you've got share repo and M&A. Our cash flow is accelerating. It's stronger. We raised the outlook. The balance sheet is strong. We repurchased $20 million of stock in the first quarter. We repurchased $30 million in the fourth quarter. So we're putting more capital to work. The M&A environment is active, as you know. We do think it's an opportunity for us, but we're going to stay disciplined. We like our strategic plan. And so, I'd say the bar is high relative to where we can invest in Kontoor today. So again, a lot of optionality given the position we're in, and Project Jeanius just further supports our flexibility going forward.

Operator, Operator

Our next questions come from the line of Laurent Vasilescu with BNP Paribas.

Laurent Vasilescu, Analyst

I wanted to follow up on Mauricio's question on China. Last quarter, the transcript called out that China will grow 25% in the fourth quarter and I believe China would accelerate. Curious to know how China actually performed for this quarter year-over-year? That would be great. And are you still expecting for China to accelerate throughout the year?

Joseph Alkire, CFO

Yes. Hey, Laurent, it's Joe. Yes. So China was down a little bit in the first quarter. It was a little ahead of our plan. We still expect growth for the full year. Digital increased at a double-digit rate. Brick-and-mortar was a little tougher. As you know, Lee has a larger presence from a brick-and-mortar retail standpoint and traffic trends were difficult in the quarter. Inventory levels just in the market are much improved versus a year ago. I'd say we're pretty much back at more normalized levels of inventory, and we continue to work on improving the health and quality of our retail partners. So no real change. It remains a pretty significant opportunity for us long term.

Laurent Vasilescu, Analyst

Very helpful, Joe. And then I wanted to ask about the 1Q adjustments. The footnotes call out, streamlining and transferring selection production within your internal manufacturing network. Maybe could you provide a little bit more color to the audience on what this means? And should we assume roughly $0.10 of adjustments per quarter over the next 3 quarters, so we can get to the model GAAP net income?

Joseph Alkire, CFO

Yes. Hey, Laurent, yes. So in the first quarter, what you saw on the gross margin line was a little bit of a spillover from the fourth quarter restructuring charge we took on the supply chain. That was really exiting our manufacturing in Nicaragua and consolidating into Mexico. I'd say the majority of the one-time costs in the first quarter were more Jeanius related. As we highlighted last quarter or disclosed last quarter, we'll have some one-time costs related to that program, as we activate it over the next couple of quarters. But I'd say going forward, outside of Project Jeanius and the impact of which we'll disclose appropriately, I'd expect our one-time cost to be pretty minimal, if any. So you should start to see a much cleaner picture for the business going forward.

Operator, Operator

Our next questions come from the line of Will Gaertner with Wells Fargo.

Frederick Gaertner, Analyst

I would like to discuss the lower product costs and their sustainability beyond this year. You have analyzed their impact this year, so could you share what we can expect once we move past these lower product costs?

Joseph Alkire, CFO

Yes. Hi, Will. So we said about 200 basis points benefit for the year from lower product costs. That's more front half loaded than back half. As we get to the fourth quarter, we'll start to lap those. But for the second half as a whole, our outlook implies over 100 basis points of gross margin expansion. So that's 2024. I'd say just as you think about the gross margin algorithm going forward, we basically have our structural mix, which we think is somewhere in that 30 basis points to 40 basis points range. I'd say for everything else, FX cost, pricing, over time, that tends to neutralize for us. That's been our model historically. And I’d say there's no structural reason why that would change for us going forward. But we do have Project Jeanius, just as we think about evolving our supply chain. That will layer on some additional opportunity on the gross margin side, but more to come on that over the next few quarters.

Frederick Gaertner, Analyst

Great. Can you discuss the reasons behind the share gains? Are you expanding into new doors at current retailers, or is it new retailers? Are you securing shelf space for core products, or is this primarily due to category expansion?

Scott Baxter, President and CEO

Yes, hi Will, this is Scott. I'll share what makes a great product. Our team is designing and creating amazing products that our consumers desire. Coupled with our new Lainey Wilson collection and the ongoing collaboration with STAUD, these elements are attracting consumers to our brand. It's an exciting time with a lot of enthusiasm about both brands, contributing positively to our company. The formula is straightforward: create exceptional products, market them effectively, and treat consumers well. We price our products fairly, offer a lot of value, and people love our brands. It's a winning combination for us.

Frederick Gaertner, Analyst

Are you expanding into new sellers or focusing on existing locations? Could you provide more details on that?

Scott Baxter, President and CEO

Yes. Sure. We've expanded into some new retailers for sure. And then in the second half of this year, we do have some new business that we've talked a little bit about, which is part of the reason that we're going to have a little acceleration in our revenue, and that is happening both at existing customers and also at new customers. And some of our new areas that we talked about earlier, like outdoor and tees are really working and they're picking up new distribution, too. So it is a combination of all of those.

Operator, Operator

Our next questions come from the line of Paul Kearney with Barclays.

Paul Kearney, Analyst

Most of them have been answered, but maybe can you talk about the investments you're making for the back half innovation and channel launches? Where are you allocating marketing? And how should we think about that spend longer term on the SG&A line?

Scott Baxter, President and CEO

We have done a really nice job of accelerating our marketing spend since the spin, and we continue to do that. The most important thing is that we have been very strategic about how we approach this moving forward. A key focus for us has been our new consumer insights initiative. The development of our new ERP system has allowed us to enhance our consumer insights group for both Wrangler and Lee, which was not very strong before. A great example of this is our recent discovery that our Lee male consumer is playing and watching more golf than the average consumer. As a result, we introduced a new Lee golf pant short, which has just launched in the market and is performing very well. This illustrates how we are identifying new opportunities and leveraging our new ERP system while investing in consumer insights for the future.

Operator, Operator

Thank you. There are no further questions at this time. I'd now like to turn the floor back over to Scott Baxter for any closing remarks.

Scott Baxter, President and CEO

Folks, I just wanted to thank you for all your questions, and thank you for your interest in our company and certainly appreciate that, and have a wonderful beginning of the summer. And we'll look forward to touch base with you in July about mid-summer and getting you up to date on our progress and everything we talked about today. But again, thank you for your participation today, and we'll talk to you soon.

Operator, Operator

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect at this time. Enjoy the rest of your day.