Helly Hansen Acquisition Will Advance Operational Efficiency And Brand Positioning

Key Takeaways

• The Helly Hansen acquisition is set to boost revenue, improve market penetration, and enhance earnings and capital allocation capabilities for Kontoor Brands.
  
• Efforts on supply chain efficiencies and strategic brand expansion are aimed at improving margins, cash flow, and long-term growth in untapped segments.
  
• Increased macro volatility and potential tariff fluctuations pose risks to revenue, earnings stability, and operational costs for Kontoor Brands.

Catalysts

A lifestyle apparel company, designs, produces, procures, markets, distributes, and licenses denim, apparel, footwear, and accessories, primarily under the Wrangler and Lee brands.

• The acquisition of Helly Hansen is expected to drive immediate revenue growth and improved cash flow in 2025, significantly enhancing Kontoor Brands' top-line growth, earnings, and capital allocation capabilities. By accelerating Helly Hansen's growth and improving market penetration in under-serviced areas like the U.S., this acquisition contributes to revenue and earnings growth.
  
• Kontoor plans to double Helly Hansen's operating margin from high-single digits to mid-teens by leveraging global operating models, supply chain efficiencies, and technology platforms, which are expected to positively impact net margins and profitability.
  
• Project Jeanius is focused on SKU rationalization to improve supply chain agility and decision-making. Expected cost savings and operational efficiencies will contribute to better net margins and cash flow over time, supporting overall earnings growth.
  
• Kontoor Brands has laid out plans for improved capital allocation optionality, aiming to reduce leverage within 24 months post-acquisition. This will support increased capital investments in growth initiatives, dividends, and share repurchase programs, positively impacting earnings per share (EPS).
  
• The strategic focus on expanding the female demographic for the Wrangler brand and tightening Lee's brand positioning indicates a potential growth catalyst in untapped segments, thereby affecting overall revenues and long-term growth potential positively.

Kontoor Brands Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kontoor Brands's revenue will grow by 1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.8% today to 9.2% in 3 years time.
• Analysts expect earnings to reach $253.2 million (and earnings per share of $4.71) by about May 2028, up from $229.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.9x on those 2028 earnings, up from 15.6x today. This future PE is greater than the current PE for the US Luxury industry at 15.6x.
• Analysts expect the number of shares outstanding to decline by 0.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.22%, as per the Simply Wall St company report.

Kontoor Brands Future Earnings Per Share Growth

Risks

• There is increased macro volatility, which could impact consumer behavior and lead to a slowdown in POS (Point of Sale) trends, affecting Kontoor Brands' revenue.
  
• Despite the expected increase in Helly Hansen's operating margin, there is execution risk involved in achieving these synergies, which could impact net margins.
  
• The fluctuations and potential increases in tariff rates pose a risk to operating profit, potentially leading to increased SG&A costs and impacting overall earnings.
  
• Helly Hansen will add more seasonality to Kontoor Brands' earnings, and significant losses during the low-volume quarters could affect short-term earnings stability.
  
• Lee's brand repositioning is still underway, with an 8% revenue decline, and if not successful, it could continue to negatively impact Kontoor Brands' overall growth and revenue diversification.

Valuation

• The analysts have a consensus price target of $71.4 for Kontoor Brands based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $85.0, and the most bearish reporting a price target of just $48.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.7 billion, earnings will come to $253.2 million, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $64.62, the analyst price target of $71.4 is 9.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.