High Dividend 50: Kontoor Brands

Kontoor Brands (KTB) may be a relatively unknown name, given it debuted as a stand-alone company only three years ago. The company was spun off from V.F. Corporation, and it owns the popular Wrangler and Lee denim brands.

The pandemic struck just as the spin off was getting into gear, but this caused the company to suspend its dividend, and they later reinstated it below the prior dividend level. Today the company has a high yield of 4.5%, which is roughly in-line with its trailing three-year average.

Business Overview

Kontoor Brands is a global “lifestyle” apparel company. The company, which was spun off from V.F. Corporation (VFC) in 2019, owns some of the world’s most iconic denim brands, including Wrangler, Lee, and Rock & Republic.

Kontoor Brands has operations in more than 70 countries and employs 14,000. Still, the company is primarily US-focused, with 75% of revenue derived in the U.S. and the remaining 25% coming from international markets. The Wrangler brand accounted for 63% of 2021 revenue, and the Lee brand made up 36% of revenue. Other global revenue made up the remaining 1%.

The company’s products are mostly sold through established wholesale and digital platforms. Sales are also made through their branded brick & mortar locations.

Kontoor Brands reported Q4 and FY 2021 financial results on March 9th. The company reported 3% year-over-year revenue growth for the fourth quarter, to $680 million. Adjusted earnings per share was $0.88, which is a significant downtrend from $1.23 in the same prior-year period.

For the full year of 2021, revenue rose 18% to $2.5 billion. Adjusted EPS soared from $2.61 in the prior year to $4.28 in 2021.

For 2022, the outlook is excellent, despite uncertainties. Management expects revenue to be roughly $2.7 billion, a high single-digit percentage increase over 2021. Gross margin should remain consistent with 2021, as the company anticipates combatting freight expenses with expanding more profitable sales channels such as digital and international.

Leadership expects EPS to be in the range of $4.65 to $4.75, for a $4.70 mid-point.

Growth Prospects

Kontoor Brands has a detailed and specific growth plan outlined. Their growth plan is composed of four main growth catalysts the company plans to capitalize on.

Source: 2021 Annual Report

First, the company plans to improve the core U.S. wholesale business. The company will gain share in existing distribution through continuous innovation and by strengthening demand and acquiring new customers.

Kontoor will leverage its digital and All Terrain Gear (ATG) platforms to generate higher revenue at the Wrangler brand. And it sees significant opportunity to expand Lee in premium, value and digital. Since Lee is the smaller of their big two brands, there may be more room for immediate growth.

They will penetrate new channels with new business development. And expand into categories that fit with their brand, such as Wrangler outdoor and workwear.

Lastly, the company also plans to expand geographically. In November 2021, Kontoor opened the first freestanding Wrangler retail location in China. The company’s Lee brand also has a leading market position in China.

Competitive Advantages & Recession Performance

Kontoor Brands claims that their vertically integrated supply chain is a competitive advantage. The company owns manufacturing facilities in the Western portion of the globe, which provide a major speed advantage when producing internally as opposed to sourcing from Asia.

The company claims this process can take less than 3 weeks compared to 20 weeks sourcing from Asia.

Source: 2021 Investor Day

Kontoor’s major, iconic brands, Wrangler, and Lee, are also valuable competitive advantages. The brands have a global presence and have been around for 75 years and 133 years, respectively.

The company also has many long-term relationships with brick & mortar retailers such as Kohl’s, Target and Walmart who also provide an advantage to Kontoor in displaying their products to an immense amount of people.

Still, despite these advantages, the apparel industry is fiercely competitive with low barriers to entry. The company must really use every advantage it has to fend off competitors in the field. Some of Kontoor’s major competitors are Calvin Klein, Diesel, Guess, Levi’s, Tommy Hilfiger and Uniqlo.

Dividend Analysis

Kontoor Brands is a relatively new stand-alone name, as it was spun off a mere three years ago. In this short time, however, the company already suspended and cut its dividend.

In mid-2020, Kontoor suspended the dividend as the pandemic ravaged the industry. At the end of 2020, the company reinstated the dividend, but it was 29% lower than its original $0.56 quarterly dividend at $0.40 a quarter.

By the end of 2021, Kontoor began to increase the dividend, but it still has not yet reached its prior level. The latest $0.46 quarterly dividend remains 18% below its original dividend.

Kontoor is forecasted to pay an annual dividend of $1.84 in 2022. At the current KTB share price, the company has a high yield of 4.5%. This is just slightly higher than its trailing three-year average yield of 4.2%.

With anticipated earnings per share of about $4.70 for the year, the company is sporting a healthy 39% payout ratio. From here on out, and barring any more significant waves of the pandemic, the company should be clear to continue raising the dividend.

Final Thoughts

Kontoor Brands is a spin-off from V.F. Corporation (VFC), with only three years of stand-alone results. The pandemic massively affected the apparel industry, and this caused the company to more narrowly focus on digital, but also led to a dividend suspension.

In its short history, Kontoor has already suspended the dividend. The company has reinstated it, but the dividend remains 18% below its original dividend payment. The company’s payout ratio is fairly healthy and barring the reclosing of brick-and-mortar retail locations, the company should do well in the medium term.

We see no immediate threat to the dividend, but the company already has a lackluster history, which includes a dividend suspension and cut, so dividend growth investors may look past this name.

How did you like this article? Let us know so we can better customize your reading experience.