Launching New Wrangler And Lee Products Will Fuel Future Success

Key Takeaways

• Product innovation and demand creation are driving market share gains, with new launches boosting revenue and net margins.
  
• Cash flow and inventory management are enhancing capital flexibility, supporting share repurchases and dividend increases.
  
• Uneven macroeconomic conditions, supply chain volatility, and cautious capital strategy may limit Kontoor Brands' revenue growth, margins, and investor sentiment.

Catalysts

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

• Investments in product innovation and demand creation are expected to drive continued market share gains for Wrangler, contributing to revenue growth.
  
• The launch of new products, such as the Cliffside utility pant and Outdoor Chino, and expansions in the outdoor category are anticipated to support double-digit increases, positively impacting both revenue and net margins.
  
• Project Jeanius is progressing well, with expectations to deliver significant SG&A and gross margin savings, which should enhance profitability and potentially improve net margins.
  
• Significant growth in Lee's female business, aided by new consumer segmentation and insights, alongside anticipated launches like Lee X Move and Lee X Light, are expected to support revenue growth and market share gains.
  
• Cash flow generation and inventory management improvements are strengthening the balance sheet, enabling increased capital allocation flexibility, such as share repurchases and a dividend increase, likely enhancing earnings per share (EPS).

Kontoor Brands Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kontoor Brands's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.7% today to 11.3% in 3 years time.
• Analysts expect earnings to reach $319.4 million (and earnings per share of $6.26) by about December 2027, up from $250.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $251.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.7x on those 2027 earnings, down from 19.3x today. This future PE is lower than the current PE for the US Luxury industry at 18.8x.
• Analysts expect the number of shares outstanding to decline by 2.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.53%, as per the Simply Wall St company report.

Kontoor Brands Future Earnings Per Share Growth

Risks

• Uneven macroeconomic conditions in Europe and Asia continue to pressure Kontoor Brands' international business, which could lead to decreased revenue and lower profitability from these regions.
  
• The reliance on expedited freight due to supply chain volatility highlights the potential for increased supply chain costs, which could negatively impact the company's gross margins.
  
• Kontoor Brands faces challenges with retail partners who remain conservative with inventory management, potentially limiting revenue growth despite market share gains.
  
• The anticipated product cost inflation in 2025, alongside the recent unfavourable supply chain environment, may increase operational costs, impacting net income and margin expansion efforts.
  
• Kontoor Brands' cautious capital allocation strategy, despite strong cash generation, suggests potential shareholder returns might be limited, which could affect investor sentiment and overall earnings growth.

Valuation

• The analysts have a consensus price target of $94.43 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 $110.0, and the most bearish reporting a price target of just $59.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.8 billion, earnings will come to $319.4 million, and it would be trading on a PE ratio of 18.7x, assuming you use a discount rate of 7.5%.
• Given the current share price of $87.57, the analyst's price target of $94.43 is 7.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.