Summary
- Kontoor Brands had a great run higher after management announced financial results covering the final quarter of the company's 2022 fiscal year.
- Sales and profits both exceeded expectations and management provided positive guidance for 2023.
- Though the easy money has been made, KTB shares still look attractively priced right now.
Before the market opened on February 28th, the management team at Kontoor Brands ( KTB ) announced financial results covering the final quarter of the company's 2022 fiscal year. Results that exceeded expectations on both the top and bottom lines, combined with higher-than-expected guidance for the 2023 fiscal year, resulted in shares of the company spiking, closing up 19.9% for the day. This is great news for shareholders, but now is the moment to take a step back and reassess the firm's overall fundamental condition. Fundamentally, shares of the business are still quite cheap on an absolute basis. But they aren't as cheap as they were and they are looking closer to fairly valued compared to similar firms. Factoring all the data in together, I would make the case that the company probably still does offer some upside potential from here. But clearly, the easy money has already been made.
A robust quarter from Kontoor Brands
Back in the middle of November of last year, I revisited my bullish thesis on Kontoor Brands. The company, which produces leading fashion brands like Wrangler and Lee, had up to that point experienced a bit of pain, especially on the bottom line. Even in spite of that pain, however, I felt as though shares of the business looked incredibly cheap. This provided some wiggle room even in the event that the fundamental condition of the business continued to worsen. Given how cheap shares were, I could not help but to rate the business a ‘buy’ to reflect my view at the time that the stock should significantly outperform the broader market for the foreseeable future. Fast forward to today, and now shares are up an impressive 24.1% compared to the 0.2% decline experienced by the S&P 500 over the same window of time.
This return disparity has been driven in large part by the fundamental data released when management announced financial results covering the final quarter of the firm’s 2022 fiscal year. Revenue, for starters, came in strong, totaling $731.6 million. In addition to coming in 7.4% higher than the $681.1 million the company reported for the final quarter of 2021, it also came in higher than what analysts expected to the tune of $65.1 million. Interestingly, growth would have been even stronger had it not been for foreign currency fluctuations. That took about 2% off the company's top line. The domestic wholesale and digital operations of the company fared particularly well in the final quarter. In the U.S. market, sales spiked 16% year over year, while wholesale revenue here at home shot up 17%. Both of the company's top brands fared well. But the real winner of the two was Wrangler, with revenue spiking 15% compared to the 6% rise associated with the Lee brand name.
On the bottom line, the picture for the company was also bullish. Net income came in at $51.6 million. That's 17.5% higher than the $43.9 million reported one year earlier. On a per-share basis, the company generated a profit of $0.91. This was actually $0.24 per share higher than what analysts expected for the quarter. On an adjusted basis, the $0.88 per share the company reported came in $0.21 per share higher than expected. Interestingly, this improvement in profitability came even in spite of the company's gross profit margin contracting slightly. This was more than offset, however, by a reduction in selling, general, and administrative costs as a percentage of sales. Tight controls of discretionary expenses, combined with lower compensation costs and a decrease in credit loss provisions offset higher distribution expenses and an increase in strategic investments that the company made in IT. Other profitability metrics were somewhat mixed. Operating cash flow, for instance, shrank from $74.5 million in the final quarter of 2021 to $70.9 million in the final quarter of 2022. Even if we adjust for changes in working capital, it would have dipped from $55.6 million to $54.3 million. The only other profitability metric that improved was EBITDA. According to the data provided, it came in at $93 million compared to the $82.5 million reported one year earlier.
For the 2022 fiscal year in its entirety, the picture for the company was quite positive. Revenue of $2.63 billion exceeded the $2.48 billion that the company reported for its 2021 fiscal year. Net profits jumped from $195.4 million to $245.5 million. Admittedly, operating cash flow did worsen in this case as well, dropping from $283.9 million to $83.6 million. But if we adjust for changes in working capital, it would have risen from $270.6 million to $304.5 million, while EBITDA for the company expanded from $386.8 million to $402.5 million.
For 2023, management said that revenue should continue climbing. The overall growth rate should be a bit slower, coming in at the low single-digit rate. Earnings per share, meanwhile, should total around $4.55 and $4.75. This was the first really exciting news for the company if you ignore the headline news related to revenue and profits. By comparison, analysts were expecting earnings for 2023 of $4.36. At the midpoint of management's latest guidance, this implies that the company should generate net profits in 2023 of $265.1 million. No guidance that was of a substantive nature was given when it came to other profitability metrics. But if we assume that they will increase at the same rate that net profits are forecasted to, we would anticipate adjusted operating cash flow of $328.8 million and EBITDA of $434.6 million.
Taking all of this data, it becomes easy to value the firm. In the chart above, you can see how pricing is for the 2021, the 2022, and the 2023 fiscal years. Given that we are still early into 2023, it's best to rely on the pricing of the company using the data reported for 2022. In this case, the company is trading at a price-to-earnings multiple of 11.8. The price to adjusted operating cash flow multiple should be 9.5, while the EV to EBITDA multiple should come in at 9. As part of my analysis, I also compared the company to five similar businesses. On a price-to-earnings basis, these companies ranged from a low of 4.6 to a high of 43.5. In this case, only two of the five firms are cheaper than it, while another one is tied with it. Using the price to operating cash flow approach, we get a range of between 7.3 and 33.2. In this case, only one of the five firms was cheaper than our target. On the other hand, using the EV to EBITDA approach, the range would be from 4.8 to 12.1. In this scenario, Kontoor Brands was cheaper than only one of the five firms.
Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
Kontoor Brands | 11.8 | 9.5 | 9.0 |
Canada Goose Holdings ( GOOS ) | 43.5 | 31.5 | 12.1 |
Capri Holdings Limited ( CPRI ) | 9.4 | 11.4 | 6.9 |
Oxford Industries ( OXM ) | 12.2 | 15.3 | 7.6 |
Carter's ( CRI ) | 11.8 | 33.2 | 7.5 |
G-III Apparel Group ( GIII ) | 4.6 | 7.3 | 4.8 |
Takeaway
When I last wrote about Kontoor Brands late last year, I knew that shares warranted upside. But I never would have guessed that the movement higher would have been this quick. Frankly, I'm both surprised and happy by this development. As to whether or not the company still makes sense to buy into at this moment, I would say that shares are still fundamentally attractive on an absolute basis. They aren't as cheap as they were, and they look closer to fairly valued compared to similar firms. But considering that the business continues to expand and that shares are even cheaper on a forward basis compared to what many might have expected, I would say that additional upside from here makes sense.
For further details see:
Kontoor Brands Q4 Earnings: Further Upside Is Justified From Here