Kontoor Brands Defies The Odds

Kontoor Brands Has Only Begun To Grow

Kontoor Brands (NYSE:KTB) has defied the odds not once but twice to come back from a less than spectacular spin-off and then survive the pandemic to come out stronger than before. The company’s efforts over the last two years have helped improve the company’s position within the market, reinvigorate the brands, and set the company on track for growth. Now, with that growth begun, the stock looks like a great recovery play for dividend-growth investors.

Kontoor Brands, Those Jeans Look Good

Kontoor Brands has proven its relevance in today’s market by not only recovering from the pandemic but returning to YOY growth before the end of the fiscal year. The company’s $660.87 million in revenue accelerated 13.2% sequentially for a 1.3% YOY gain and beat the consensus by 335 basis points. The strength in revenue was carried primarily by the eCommerce channels which find to be no surprise. There was also an uptick in retail demand which is another good sign for 2021.

The strength carried through to the bottom line in more ways than one with margins improving to boost earnings. The gross margins widened by 180 basis points while at the adjusted level margin improved by 230 basis points. Adjusted gross margin came in at 43.2% and drove eps well above the consensus. The consensus for adjusted EPS is $0.96, Kontoor Brands beat by more than a quarter dollar.

On a GAAP basis, earnings of $0.74 missed the consensus by $0.07 but there is a mitigating factor. The company exit some non-performing businesses and made the decision to not carry third-party branded merchandise. The silver lining is that these moves improve the company’s profitability and that is seen in the guidance. Kontoor Brands is guiding for full-year EPS of $3.50 to $3.60 versus the consensus of $3.16.

“Our strong fourth-quarter performance is also a result of the strategic measures we’ve taken over the last two years, allowing us to not only navigate near-term challenges, but also position the company for success in 2021 and beyond. Focused investments in brand-enhancing initiatives, technology and talent are setting the stage for an exciting next phase of our journey in which we expect accelerating long-term sustainable growth,” said CEO Scott Baxter.

Kontoor Brands Is A Bet On Dividend Growth

Kontoor Brands suspended its dividend payments for the first half of the year in an effort to preserve capital and the effort paid off. Now, two quarters after reinstating it the company is well-positioned to keep paying and to make an increase this year or next. At face value, the $1.60 payout is reasonably safe with some worry over FCF. The mitigating factor is that earnings are outpacing the consensus and driving FCF cash growth as well. In addition, the company made a discretionary payment of $125 million to bring its revolving credit facility balance to $0 other debts are manageable. Looking forward, the company is forecasting earnings that put the payout ratio closer to 45% than last year’s 67% and into a much safer range. Regardless of the outlook for distribution increases, the 3.65% yield is attractive enough in its own right.

The Technical Outlook: Kontoor Brands Breaks Out

Kontoor Brands popped more than 7.5% in early trading to break out of a recent range and set a new all-time high. Because the new high is supported by the fundamental story and the indicators we see this stocking moving higher over the near, short, and long term. Once the stock makes a clear break above resistance we expect it to go to $58 or higher.