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.
Featured Article: Bond7 Hotel Stocks Just Waiting For the Vaccine
Like any group of stocks related to travel and tourism, hotel stocks saw a steep drop in share prices in 2020. The leisure and hospitality sector that once had 15 million employees has lost 4 million jobs since February.
Many major cities will be feeling the ripple effects of the Covid-19 pandemic for years. However, there is ample evidence that shows the pandemic may be coming to an end. The number of new cases is dropping. The number of those getting vaccinated is rising. And even in the cities with the most restrictive mitigation measures, the slow process of reopening is beginning.
All of this can’t come fast enough for individuals who rely on the travel and tourism industry for their livelihood. Hotel chains had at least some revenue coming in the door. And when earnings season concludes, the more budget-friendly hotel chains may realize revenue that is 75% of its 2019 numbers. But that is not enough to bring the hotels to anywhere near full employment. Particularly with hotels that have bars and restaurants that have remained closed or open at limited capacity.
Many economists are optimistic that travel may begin to look more normal by the summer of this year. And the global economy may deliver 6.4% GDP growth this year. With that in mind, the hotel chains with the best fundamentals and the broadest footprint will be in the best position as the economy reopens.
View the "7 Hotel Stocks Just Waiting For the Vaccine"
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