Kontoor (KTB) reported earnings on Thur 8 Aug 2019 (b/o)

Only 14 months after initiating the spinoff, Greensboro-based Kontoor Brands issued its first quarterly report.

• Revenue was above forecasts, but took a hit from the bankruptcy of Sears and Kmart as well as a stronger dollar.
• Kontoor Brands has its eye on China as a growth opportunity.
• While it currently sells its Lee-branded denim in China, Wrangler will enter the country in the first quarter of 2020, when it will be sold on Alibaba.

Denim company Kontoor Brands (NYSE: KTB), which was spun off from VF Corp. in May, reported its second-quarter results before the market opened on Aug. 8. Revenue was hurt by the bankruptcy of Sears Holdings, the exit from an underperforming country in Europe, business model changes in certain markets, and foreign-currency headwinds. But the company still managed to beat analyst expectations by a large margin.

A messy quarter

Kontoor's revenue and earnings were down compared to the prior-year period, but both handily exceeded analyst estimates:

Metric	Q2 2019	Change (YOY)	Compared to Average Analyst Estimate
Revenue	$609.7 million	(8.2%)	Beat by $18.4 million
Non-GAAP earnings per share	$0.96	(33.8%)	Beat by $0.29

Kontoor (KTB) : Wrangler, Lee and a spin-off in denim

Sector: Consumer Cyclical
Industry: Apparel Manufacturing
Full Time Employees: 17,000
http://www.kontoorbrands.com

VF Corp. (VF) spun off Kontoor Brands, Inc. (KTB) on May 22, 2019 and regular trading in the shares began the next day.

After trading in the $40 range in when issued trading, Kontoor has fallen consistently since regular way trading began due to classic spin-off selling pressure.

Kontoor Brands is mainly comprised of the Wrangler and Lee denim brands. While these brands are not "hot", they are stable.

Scott Baxter, Kontoor Brands CEO and president, welcome employees at an event to celebrate the new company and it’s Wrangler and Lee brands employees at a BBQ lunch at corporate headquarters on North Elm Street in downtown Greensboro.

For example, revenue only declined by 11% during the Great Financial Recession. Further, denim has staying power. In 50 years, people will still be wearing jeans (although the styles will have changed).

Spin-offs usually unleash entrepreneurial forces as the spin-off is no longer weighed down by the bureaucracy of being part of a larger organization. This often results in the spin-off taking advantage of low hanging fruit that the parent company previously didn't prioritize.

An example of this is that Wrangler jeans are not available in China despite Lee being the leading denim brand in China. This will change in January 2020, when Wrangler will launch in China. Opportunities like this should improve KTB's revenue growth.

The quality of KTB's business is quite high as the business is not capital intensive; CapEx as a percentage of sales was only 0.80% in 2018. Historically, KTB has generated a return on equity of ~20%.