Legacy Denim Will Lose Market Share Amid Rising Cost Pressures

Key Takeaways

• Shifting consumer preferences and a reliance on legacy brands threaten Kontoor's ability to sustain revenue growth and market share amidst rising competition.
  
• Margin pressures from industry commoditization, cost inflation, and limited diversification may hinder profitability and challenge long-term earnings stability.
  
• Brand strength, operational efficiencies, and financial improvements position the company for sustained growth, stronger margins, and increased shareholder returns.

Catalysts

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

• Demand for traditional denim and legacy brands may erode over time as younger consumers increasingly prioritize sustainability and circular fashion, challenging Kontoor's ability to grow core product revenue and maintain market share in the long term.
  
• The ongoing shift toward e-commerce and digital-centric shopping dynamics could favor more agile and innovative direct-to-consumer brands, threatening Kontoor's wholesale-heavy business and limiting its ability to defend gross margins.
  
• Kontoor's business remains heavily concentrated around Wrangler and Lee, leaving it exposed to fashion cycle volatility; a lack of diversification and slow category innovation may accelerate revenue declines if consumer preferences shift away from its heritage brands.
  
• Global denim and casualwear markets continue to be commoditized, driving intense price competition and putting downward pressure on average selling prices, which is likely to squeeze gross margins and curb earnings growth even as the company invests in premiumization strategies.
  
• Rising labor, raw material, and regulatory costs-particularly in light of geopolitical risks and the company's overexposure to North American and mature Western markets-could steadily inflate SG&A, limit cash flow expansion, and impair Kontoor's ability to deliver sustainable earnings growth despite near-term synergy targets from recent acquisitions.

Kontoor Brands Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Kontoor Brands compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Kontoor Brands's revenue will grow by 11.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.5% today to 9.6% in 3 years time.
• The bearish analysts expect earnings to reach $354.7 million (and earnings per share of $6.49) by about August 2028, up from $251.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.1x on those 2028 earnings, down from 16.1x today. This future PE is lower than the current PE for the US Luxury industry at 19.9x.
• Analysts expect the number of shares outstanding to grow by 0.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.43%, as per the Simply Wall St company report.

Kontoor Brands Future Earnings Per Share Growth

Risks

• The successful integration of Helly Hansen is already delivering higher revenues and operational synergies than initially planned, with significant opportunities for further growth in the U.S. market and a clear road map to double operating margins, which is likely to drive both revenue and net earnings growth.
  
• Wrangler continues to post sustained market share gains, achieving its thirteenth consecutive quarter of share increases and growing across both wholesale and direct-to-consumer channels, indicating durable brand strength that supports long-term revenue growth and stable margins.
  
• Lee's turnaround has shown early signs of success, with high single-digit growth in U.S. digital channels and a refreshed brand positioning that is resonating with younger consumers, raising the possibility of stable or growing revenue and improving brand equity over time.
  
• Project Jeanius and ongoing supply chain optimizations are delivering ahead-of-schedule cost savings, leading to gross margin expansion and improved cost structure, which can bolster net margins and strengthen cash flow in future years.
  
• Strong cash generation and accelerating debt repayment are improving the company's financial flexibility and capital allocation optionality, increasing the potential for future earnings growth and shareholder returns through buybacks or dividends once leverage normalizes.

Valuation

• The assumed bearish price target for Kontoor Brands is $49.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Kontoor Brands's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $99.0, and the most bearish reporting a price target of just $49.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.7 billion, earnings will come to $354.7 million, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 9.4%.
• Given the current share price of $72.87, the bearish analyst price target of $49.0 is 48.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.