This article covers Kontoor Brands, Inc. (NYSE:KTB) Q2 2024 results and earnings call. It also reviews the company’s valuation and rating.
The results were mixed. Revenues were flat, which is typical for many apparel firms in the current cycle. The company improved its guidance, expecting a little better margins for the remainder of the year. On the other hand, Kontoor’s results also hid some negative aspects, namely some weaknesses in wholesale and Asia. Further, with a positive denim cycle, it is strange that Kontoor is not doing better.
Regarding the valuation, the company’s stock price has not changed meaningfully since my last article from May, and neither have the fundamentals. For that reason, I still believe the stock is fairly valued but not an opportunity, and I maintain my Hold rating.
Mixed 2Q24 results
Kontoor’s 2Q24 results were mixed, with some positives and some negatives. The market clearly liked the results because the stock was up more than 2% after the release, despite a general market downturn, with the indices shedding 1% to 3%.
Starting with the positives, one is resilience. In the current context, not losing revenues is a positive metric. KTB’s revenues were down 1% YoY, so flattish. Another positive point was margins, with a strong recovery in product costs. Despite applying some price cuts, gross margins expanded close to 400 basis points, all from the cost side. This led to a significant uplift in EPS of 27% YoY and to the company revising its gross margin, operating income, and EPS guidance to be closer to the upper range of their previous guidance.
Other positives from the call include management claiming that PoS data continues to show them gaining market share and the brands turning mind-single-digit positive in June in the US. This last point could be read with hope for a turnaround.
Finally, management commented that although retailers are still cautious, they believe some parts of the wholesale channel are understocked. This could also signal a potential upturn in wholesale demand in 2H24.
The negatives come from looking at some segments. Whereas Wrangler, which represents about 2/3 of revenues, was up 1%, Lee was down 6%, coming from previous weakness in 1Q24. A hit in international revenues accompanied this (Lee is more exposed to them). Europe was down 5% and Asia 13%. The wholesale falls were even worse (8% and 26% respectively). Although the tremendous weakness in Asia wholesale was in part self-generated (to clean the channel according to management during the call), it is still too big to ignore.
Finally, and despite management mentioning that an optimization project (Project Jeanius), to start in late 2024, is expected to drive $100 million in cost savings, the company’s SG&A is growing above revenues. For 1H24, despite revenues being down 3.5%, SG&A was up 4.7%.
Brand developments
This quarter was not super heavy on brand activities.
Management mentioned a collaboration between HEYDUDE (CROX) and Lee and the launch of a designer Lee collection (by British designer Paul Smith) for spring 2025. Wrangler collaborated with the movie Twisters, which is about rural American tornado hunters.
Still, marketing is expected to increase a little ($6 million more for an annual budget of about $135 million), with the goal of investing in the top of the funnel, for example via a TV commercial.
Valuation still not attractive
Going forward, Kontoor Brands, Inc.’s main question mark relates to when its wholesale customers will restock and how much of a lift that restocking will represent. Current wholesale purchases may also be sustainable from the retailers’ perspective, and therefore, no uplift is to be expected.
Another question mark is why KTB sales are not growing, given the positive denim cycle (for example, here in Google Trends). As mentioned in my previous article, many fast fashion retailers, like American Eagle, comment on denim’s strength. If denim is growing, and (as KTB’s management comments on every call) KTB is gaining share, then why are sales down?
Since my last article on Kontoor, the stock has risen 4%, and the fundamentals have not changed meaningfully. The company has a market cap of $3.9 billion, and based on their guidance, I expect a net income of about $280 million or a P/E of 14x.
The cycle-adjusted multiple is probably lower because KTB is not at its best point in the cycle. I believe 14x is relatively fair for a company with low and manageable leverage and good brands, considering the economy is not in its best moment.
However, I also believe that the upside potential is not sufficient to justify belief in a lower multiple in the future and that 14x is definitely not opportunistic for the long term. For that reason, I believe KTB is still a Hold.
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