Is KTB a bad bet, or a big bargain in this market?

Increasing inflation causes all kinds of stress for just about everybody in every sector. On the consumer level, rising interest rates raise prices for just about any good or service we may use, which eventually suppresses demand for those goods and services.

“Consumer goods” is a term that covers a big swath of products, but that most of us tend to associate with items where new purchases can be deferred relatively easily when budgets get tight. Pantries, fridges, and freezers have to be kept stocked as much as possible, which is why food usually gets grouped into the “Consumer staples” category. Consumer goods, then usually include items like apparel, shoes, televisions, and so on, which is why the companies that produce them are usually grouped into the “Consumer Discretionary” category.

While consumer prices continue to increase across the board, there are usually other signs that the increase in rates is having an immediate impact; recent reports on monthly, pending home sales, for example show that in most of the U.S., demand has softened as the Fed has raised rates on an accelerated basis. Price increases so far this year have also been a symptom of a longer-term, supply chain problem that pre-dates the pandemic and that has only been extended by it and compounded by geopolitical and other issues this year.

Those issues, along with healthy consumer demand combined to start increasing consumer prices in 2021, and so far hasn’t shown any signs of coming down in the near term. What does that mean for consumer goods? Today, I want to turn the focus to a company, Kontoor Brands Inc. (KTB) spun off in 2019 using recognizable apparel brands Wrangler, Lee and Rock & Republic. This is a stock that saw a big push higher from October of 2020 to a little above $69 in May of 2021, then slid into a downward trend has extended into this month, hitting its most recent low at around $31. It is now sitting just a little above that point and could trying to establish a new consolidation range. The company’s fundamental profile shows generally healthy free cash flow, manageable debt with good liquidity, and an attractive dividend. Are those elements enough to a provide a value proposition that you should be paying attention to, or is the larger economic climate such that KTB is just a bad bet? Let’s find out.

Fundamental and Value Profile

Kontoor Brands, Inc. is a global apparel company. The Company is focused on the design, manufacturing, sourcing, marketing, and distribution of its portfolio of brands, including Wrangler, Lee and and Rock & Republic. It sells its products primarily through its wholesale and digital channels. Its distribution channels include United States (U.S.) Wholesale, Non-U.S. Wholesale, Branded Direct-to-Consumer and Others. Wrangler offers denim, apparel, and accessories for men and women. Lee is a denim and apparel brand. Lee product collections include a range of jeans, pants, shirts, shorts, and jackets for men, women, boys and girls. Rock & Republic is a premium apparel brand. Rock & Republic products are sold in the United States exclusively through Kohl’s. It also owns and operates other various brands worldwide, which include Gitano and Chic. KTB has a current market cap of about $1.9 billion.

Earnings and Sales Growth: Over the last twelve months, earnings declined -2.1%, while revenues grew by about 4.3%. In the last quarter, earnings were 59% higher, while sales were flat, but slightly lower by -0.2%. KTB’s operating profile is healthy, and is showing signs of strength; over the last twelve months, Net Income was 8.46% of Revenues and increased to 11.89% in the last quarter.

Free Cash Flow: KTB’s free cash flow is $210 million over the last twelve months. That marks a decline from $247 million in the quarter prior, and from $351 million a year ago. The current number also translates to a Free Cash Flow yield of 11.38%.

Debt to Equity: KTB’s debt/equity ratio is high, at 4.29. That sounds alarming, but it is also misleading. As of the last quarter, the company reported $193.5 million in cash and liquid assets against $789 million in long-term debt. It should be noted that liquidity increased in the last quarter, from $185.3 million, which I take as a confirmation of the company’s operating improvement as shown by increasing Net Income. The company’s operating profile, along with generally healthy free cash flow suggest that servicing their debt isn’t a problem.

Dividend: KTB’s annual dividend is $1.84 per share, which translates to a yield of 5.59% at the stock’s current price. This is a bit unusual when you consider that the company has only existed as a public entity for about two years; I take the dividend as a positively inherited characteristic from parent company VFC, which has a long history of returning value to shareholders via consistent dividend distributions. The current annual payout also marks an increase from $1.60 per share, announced by management at the beginning of this year.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target at about $40 per share. That suggests that the stock is undervalued by about 21%at its current price.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s downward trend from a high at around $61 in November of last year to its low earlier this month at around $31. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. Whether the latest low is just another, temporary pause in the longer downward trend remains to be seen, but the last couple of weeks have seen the stock begin to consolidate between current support at $31 and immediate resistance at the last pivot high around $34. A push above $34 could see short-term upside to about $40, where the stock peaked at the beginning of June, while a drop below $31 could see the stock drop to about $28 based on the current distance between support and resistance.

Near-term Keys: I think KTB’s fundamental profile, like its parent company in the face of the economic conditions of the last two and half years is a very interesting story, and the fact is that the stock offers a very interest value proposition right now. I do think the broader economic and market climate make this a stock that will continue to be sensitive to inflationary pressures, so a long-term investor may be smarter to wait for signs the stock has, in fact, stabilized before considering a new, value-based position. The stock’s current activity could offer some interesting signals to work with short-term trades. A drop below $31 could offer a useful signal to consider shorting the stock or buying put options, with a useful bearish profit target at around $28 per share. A push above $36 would be a good signal to think about buying the stock or working with call options, with a practical bullish target at around $40 per share.


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