Kontoor Brands, Inc. (KTB)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide readers of our financial statements with a narrative from management's perspective on our financial condition, results of operations and liquidity as well as certain other factors that may affect our future results. This section should be read in conjunction with the Consolidated Financial Statements and related Notes included in this Quarterly Report on Form 10-Q.

The following discussion and analysis includes forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in “Cautionary Statement On Forward-Looking Statements” included later in Part I, Item 2 of this Quarterly Report on Form 10-Q, in Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and in Part I, Item 1A "Risk Factors" in our 2025 Annual Report on Form 10-K.

Description of Business

Kontoor Brands, Inc. (collectively with its subsidiaries, "Kontoor," the "Company," "we," "us" or "our") is a global lifestyle apparel company, with a portfolio led by three of the world's most iconic consumer brands: Wrangler®, Lee® and Helly Hansen®. The Company designs, manufactures, procures, sells and licenses apparel, footwear and accessories, primarily under our brand names. Our products are sold in the United States ("U.S.") and internationally, primarily in the Europe, Middle East and Africa ("EMEA"), Asia-Pacific (“APAC”) and Non-U.S. Americas regions. We also license the use of our brands in certain regions.

The Company's products are sold through wholesale and direct-to-consumer channels, primarily through mass merchants, outdoor and sporting goods stores, specialty stores, department stores, Company-operated stores, concession retail stores, independently-operated partnership stores, business-to-business through our workwear and uniform businesses and online, including digital marketplaces. In China, our Helly Hansen® business is operated through a joint venture arrangement.

Planned Divestiture of the Lee® Business

The Company commenced a sale process of its global Lee® brand and associated business (the "Lee® business") during the first quarter of 2026, with an expectation of completing a transaction during fiscal 2026. On May 20, 2026, the Company entered into a Stock Purchase Agreement (the "Purchase Agreement") with ABG-Storm LLC, a Delaware limited liability company, an affiliate of Authentic Brands Group ("Buyer"), to sell the Lee® business for $750.0 million in cash at closing with an additional $250.0 million earnout opportunity based on the future performance of the Lee® business over a five-year period. The assets and liabilities of the Lee® business are reported as held-for-sale in the Company's balance sheets for all periods presented. Additionally, the Company reported the Lee® business as discontinued operations in its statements of operations and statements of cash flows for all periods presented. Certain corporate overhead costs and segment costs previously allocated to the Lee® business for segment reporting purposes did not qualify for classification within discontinued operations and have been reported in continuing operations for all periods presented. Prior to the first quarter of 2026, the Lee® business was reported as a separate operating segment in our financial statements. Refer to Note 2 to the Company's financial statements in this Form 10-Q for additional information.

Sale of Assets of a Manufacturing Facility

During the three months ended June 2026, as part of the Company's Project Jeanius transformation program, we sold the assets of a manufacturing facility for a gain of $15.4 million which was recorded in "cost of goods sold" in the Company's statements of operations. Refer to Note 17 to the Company's financial statements in this Form 10-Q for additional information.

Acquisition of Helly Hansen

On May 31, 2025, we completed the acquisition of Helly Hansen (the "Acquisition"), and the results of operations have been included in the Company's financial statements since that date. The three-month period ended June 2026 includes the operating results of the Acquisition for the entire quarter compared to one month of operating results included in the three-month period ended June 2025. The six-month period ended June 2026 includes the operating results of the Acquisition for the entire six months compared to one month of operating results included in the six-month period ended June 2025. Refer to Note 3 to the Company's financial statements in this Form 10-Q for additional information related to the Acquisition.

Fiscal Year and Basis of Presentation

The Company operates and reports using a 52/53-week fiscal year ending on the Saturday closest to December 31 of each year. Accordingly, this Form 10-Q presents the second quarter of the Company's fiscal year ending January 2, 2027 ("fiscal 2026"), which is a 52-week fiscal year. For presentation purposes herein, all references to periods ended June 2026, December 2025 and June 2025 correspond to the fiscal periods ended July 4, 2026, January 3, 2026, and June 28, 2025, respectively.

References to fiscal 2026 foreign currency amounts herein reflect the impact of changes in foreign exchange rates from the prior year comparable period when translating foreign currencies into U.S. dollars. The Company's most significant foreign currency translation exposure is typically driven by business conducted in the Norwegian krone, the euro, the Chinese yuan and the Mexican peso.

31 Kontoor Brands, Inc. Q2 FY26 Form 10-Q

However, the Company conducts business in other developed and emerging markets around the world with exposure to other foreign currencies.

Amounts herein may not recalculate due to the use of unrounded numbers.

Macroeconomic Environment

Global macroeconomic conditions that continued to impact the Company during the second quarter of 2026 included geopolitical impacts, global supply chain issues, inconsistent consumer demand and ongoing fluctuations in foreign currency exchange rates, interest rates and inflation. Broader macroeconomic impacts also continued to influence consumer demand.

Geopolitical tensions in the Middle East arising from the U.S. - Iran conflict have increased uncertainty in global trade and transportation. Although we do not operate directly in the region of conflict, our supply chain and product availability are impacted by disruptions to commercial shipping routes, higher freight, fuel and energy costs and delays at our suppliers in the production or movement of goods.

As discussed below, the U.S. government tariff regime remains fluid. The ongoing impact of tariff rate changes and uncertainty regarding the outcomes of trade negotiations is contributing to macroeconomic volatility. Interest rate pressures have moderated in recent quarters and inflationary pressures remained elevated during the second quarter of 2026, primarily due to energy costs and ongoing tariffs. Retailers continued to conservatively manage inventory levels as a result of this uncertain macroeconomic environment.

The Company has responded to ongoing macroeconomic conditions by controlling expenses, instituting pricing adjustments for our products, investing in our brands and executing our Project Jeanius business transformation. Additionally, the Company continues to evaluate mitigating actions, including the transfer of production within our global supply chain, transformation of our supply chain capabilities, supplier partnership initiatives and inventory management. While we anticipate continued uncertainty related to the macroeconomic environment during the remainder of 2026, including the potential impact of further tariff rate changes, we believe we are appropriately positioned to successfully manage through operational challenges and cost pressures should they arise. We continue to closely monitor macroeconomic conditions, including consumer behavior and the impact of these factors on consumer demand.

Other Recent Developments - U.S Tariffs

Beginning in 2025 and through 2026, the U.S. government continued to enact significant changes to its tariff regime which impacted rates on virtually all imports. In February 2026, the U.S. Supreme Court issued a ruling that tariffs imposed under the International Emergency Economic Powers Act ("IEEPA") on goods imported into the United States were unauthorized, effectively invalidating IEEPA tariffs that had been in effect since the second quarter of 2025. Immediately following the Supreme Court ruling, the U.S. government initiated new tariffs under Section 122 of the Trade Act ("Section 122 tariffs"), which expired in July 2026 and have been replaced by new tariffs under Section 301 of the Trade Act.

In March 2026, the U.S. Court of International Trade ("CIT") issued an order directing U.S. Customs and Border Protection ("CBP") to process refunds of the IEEPA tariffs. In April 2026, the CBP released a new system to process IEEPA tariff refunds, allowing importers to submit refund claims. In the first quarter of 2026, we concluded it was probable that we would recover the IEEPA tariffs previously paid and recognized a net receivable under the loss recovery accounting model of $53.7 million, on a consolidated basis. During the first quarter of 2026, we reduced cost of goods sold by approximately $49.0 million, representing the expense for IEEPA tariffs on inventory sold to customers since the tariffs were enacted in the second quarter of 2025, including $29.0 million relating to 2025 tariff payments. During the third quarter of 2026, the Company began to receive refunds and expects to collect all remaining amounts by the end of fiscal 2026. There continues to be uncertainty and legal challenges to current and prior tariff regimes, including a ruling in May 2026 by the CIT that the Section 122 tariffs are also invalid, which is under appeal by the U.S. government, along with an appeal of certain CIT orders related to the refund process for IEEPA tariffs. We continue to monitor U.S. tariff-related developments and ongoing legal proceedings.

Business Overview

We are focused on delivering long-term value to our stakeholders, including our consumers, customers, shareholders, suppliers and communities around the world, by accelerating growth, expanding operating margin, increasing capital allocation optionality and establishing the Company as the employer of choice in the industry. Additionally, the integration of Helly Hansen provides focus towards our growth-oriented brands, with an emphasis on geographic and category expansion. The planned sale of the Lee® business further emphasizes our focus on functional and activity-based brands. The Company continues to execute on Project Jeanius, a multi-year comprehensive end-to-end business transformation focused on simplifying processes, optimizing systems and enhancing our global operating model with the goal of creating significant investment capacity through gross and operating margin expansion. In addition, our capital allocation strategy allows us the option to (i) invest in our business, (ii) pay down debt, (iii) provide for a superior dividend payout, (iv) effectively manage our share repurchase authorization and (v) act on strategic acquisition opportunities that may arise.

During the second quarter of 2026, the Company incurred integration-related costs of $12.7 million related to Helly Hansen, comprised primarily of professional and other fees, which are reported in "selling, general and administrative expenses". We expect t

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide readers of our financial statements with a narrative from management's perspective on our financial condition, results of operations and liquidity as well as certain other factors that may affect our future results. This section should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part IV of this Annual Report on Form 10-K. Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Form 10-K for the fiscal year ended December 28, 2024, for discussion of the results of operations for the year ended December 28, 2024, compared to the year ended December 30, 2023.

The following discussion and analysis includes forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in “Special Note On Forward-Looking Statements” included in Part I of this Annual Report on Form 10-K and in Part I, Item 1A "Risk Factors" in this Annual Report on Form 10-K.

Description of Business

Kontoor Brands, Inc. (collectively with its subsidiaries, "Kontoor," the "Company," "we," "us" or "our") is a global lifestyle apparel company, with a portfolio led by three of the world's most iconic consumer brands: Wrangler®, Lee® and Helly Hansen®. The Company designs, manufactures, procures, sells and licenses apparel, footwear and accessories, primarily under the brand names Wrangler®, Lee® and Helly Hansen®. Our products are sold in the United States ("U.S.") and internationally, primarily in the Europe, Middle East and Africa ("EMEA"), Asia-Pacific (“APAC”) and Non-U.S. Americas regions. We also license the use of our brands in certain regions.

The Company's products are sold through wholesale and direct-to-consumer channels, primarily through mass merchants, outdoor and sporting goods stores, specialty stores, department stores, Company-operated stores, concession retail stores, independently-operated partnership stores, business-to-business through our workwear and uniform businesses and online, including digital marketplaces. In China, our Helly Hansen® business is operated through a joint venture arrangement.

Acquisition of Helly Hansen

On May 31, 2025, we completed the acquisition of a group of companies that own and operate the Helly Hansen® and Musto® brands, collectively referred to as "Helly Hansen," for initial cash consideration of $1.3 billion Canadian dollars, equivalent to $957.5 million U.S. dollars. The purchase price was funded by indebtedness and cash on hand. Helly Hansen® is a premium global outdoor and workwear brand, and Musto® is a premium sailing and outdoor brand. The acquisition of these brands scales Kontoor's penetration in the large and growing outdoor and workwear markets globally, and diversifies Kontoor's portfolio across geographies, categories, consumers and points of distribution. The results of operations of Helly Hansen have been included in the Company's consolidated financial statements since the completion of the acquisition. Refer to Note 2 to the Company's financial statements in this Form 10-K for additional information.

Fiscal Year and Basis of Presentation

The Company operates and reports using a 52/53-week fiscal year ending on the Saturday closest to December 31 of each year. For presentation purposes herein, all references to years ended December 2025, December 2024 and December 2023 correspond to the 53-week fiscal year ended January 3, 2026, and the 52-week fiscal years ended December 28, 2024, and December 30, 2023, respectively. Accordingly, the year ended December 2025 included an extra week when compared to the year ended December 2024.

References to fiscal 2025 foreign currency amounts herein reflect the impact of changes in foreign exchange rates from fiscal 2024 and the corresponding impact on translating foreign currencies into U.S. dollars and on foreign currency-denominated transactions. The Company's most significant foreign currency translation exposure is typically driven by the Norwegian krone, the euro, the Chinese yuan and the Mexican peso. However, the Company conducts business in other developed and emerging markets around the world with exposure to other foreign currencies.

Amounts herein may not recalculate due to the use of unrounded numbers.

Macroeconomic Environment and Other Recent Developments

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Global macroeconomic conditions that continued to impact the Company during 2025 included inconsistent consumer demand despite recent declines in interest rates, ongoing fluctuations in foreign currency exchange rates, moderating inflation and global supply chain issues. During 2025 and at the beginning of 2026, the U.S. government enacted and continues to enact significant changes to its tariff regime which increased rates on virtually all imports. The ongoing impact of increased tariff rates and uncertainty regarding the outcomes of trade negotiations is contributing to macroeconomic volatility. In addition, on February 20, 2026, the U.S. Supreme Court issued an opinion regarding certain tariffs imposed under the International Emergency Powers Act. It is unclear at this time what impact this decision will have on the Company’s future financial results, including whether we will be able to obtain refunds of amounts previously collected for such tariffs or the level of replacement tariffs the current U.S. administration may impose through other means.

Inflationary and interest rate pressures have lessened in recent quarters. Despite reduced pressure, these rates have continued to impact us, along with recent increases in product costs and tariffs, as compared to 2024. In 2025, retailers continued to conservatively manage inventory levels as a result of this uncertain macroeconomic environment. The Company has responded to ongoing macroeconomic conditions by controlling expenses, instituting pricing adjustments for our products, investing in our brands and executing our Project Jeanius business transformation.

The Company continues to evaluate mitigating actions, including the transfer of production within our global supply chain, transformation of our supply chain capabilities, pricing adjustments for our products, supplier partnership initiatives and inventory management. While we anticipate continued uncertainty related to the macroeconomic environment during 2026, including the potential impact of further tariff increases, we believe we are appropriately positioned to successfully manage through operational challenges and cost pressures should they arise. We continue to closely monitor macroeconomic conditions, including consumer behavior and the impact of these factors on consumer demand.

Business Overview

We are focused on delivering long-term value to our stakeholders, including our consumers, customers, shareholders, suppliers and communities around the world, by accelerating growth, expanding operating margin, increasing capital allocation optionality and establishing the Company as the employer of choice in the industry. Additionally, the integration of Helly Hansen is a strategic focus for the Company, with an emphasis on geographic and category expansion. The Company continues to execute on Project Jeanius, a multi-year comprehensive end-to-end business transformation focused on simplifying processes, optimizing systems and enhancing our global operating model with the goal of creating significant investment capacity through gross and operating margin expansion. In addition, our capital allocation strategy allows us the option to (i) invest in our business, (ii) pay down debt, (iii) provide for a superior dividend payout, (iv) effectively manage our share repurchase authorization and (v) act on strategic acquisition opportunities that may arise.

During 2025, in connection with the Helly Hansen acquisition, the Company incurred acquisition and integration-related costs of $50.8 million comprised of professional and other fees, which are reported in "selling, general and administrative expenses". Acquisition and integration-related costs also included a gain of $24.1 million reported in "other income (expense), net", related to the settlement of foreign currency exchange contracts to hedge the purchase price of the Helly Hansen acquisition. We expect to incur additional costs in future periods as we complete the integration of Helly Hansen.

The Company continued to execute on Project Jeanius during 2025. The Company closed a portion of our manufacturing facilities and incurred restructuring charges of $43.5 million primarily related to severance, employee-related benefits and asset impairments. A reduction in our manufacturing facilities and diversification in our sourcing footprint, which is part of our ongoing supply chain transformation, will help to promote flexibility, balance costs, improve speed of service and enhance our sourcing capabilities. Additionally, the Company incurred transformation charges of $37.1 million related to business optimization activities. During 2024, the Company incurred total restructuring and transformation charges of $38.3 million related to Project Jeanius. We anticipate to incur additional costs associated with Project Jeanius as we continue to execute on this multi-year initiative.

Refer to Note 23 to the Company's financial statements in this Form 10-K for additional information related to restructuring charges.

HIGHLIGHTS OF THE YEAR ENDED DECEMBER 2025

•The acquisition of Helly Hansen was completed on May 31, 2025, and the results of operations have been included in our consolidated financial statements since that date. During the year ended December 2025, the Company incurred $50.8 million of acquisition and integration-related costs which were recorded in "selling, general and administrative expenses".

•During the year ended December 2025, the Company incurred $80.6 million of charges related to the closure of a portion of its manufacturing facilities and business optimization activities, of which $46.3 million were recorded in "cost of goods sold", resulting in an 80 basis point decrease in gross margin for the period, and $34.3 million were recorded in "selling, general and administrative expenses."

•Net revenues of $3.2 billion increased 21% compared to the year ended December 2024, and included a $475.5 million contribution from the Helly Hansen acquisition and an approximate 2% benefit from the 53rd week.

•U.S. Wholesale revenues increased 7% compared to the year ended December 2024, and included a $66.3 million contribution from the Helly Hansen acquisition and an approximate 2% benefit from the 53rd week. U.S. Wholesale revenues represented 64% of total revenues in the current year.

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•International Wholesale revenues increased 65% compared to the year ended December 2024, and included a $281.6 million contribution from the Helly Hansen acquisition and a less than 1% benefit from the 53rd week. International Wholesale revenues represented 21% of total revenues in the current year.

•Direct-to-Consumer revenues increased 49% compared to the year ended December 2024, and included a $127.6 million contribution from the Helly Hansen acquisition and an approximate 3% benefit from the 53rd week. Direct-to-Consumer revenues represented 15% of total revenues in the current year.

•Gross margin increased 70 basis points to 45.2% compared to the year ended December 2024, b

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