At first I was excited this weekend to see a new name grace my search for double-nets -- companies trading between one and two times net current asset value. Since the company in question was a recent spinoff, I realized the fundamental data may not be complete, and in this case, debt assumed by the new company in the spinoff was not reflected in the financials. So, in the end, this company was not a double-net, which brings to mind an important lesson: Evaluating companies solely based on fundamental data is like driving a car while only looking in the rearview mirror. Still, the story here is intriguing.
Kontoor Brands Inc. (KTB) , spun off from retailer VF Corp (VFC) in May, was VFC's jeans division, and its Wrangler and Lee brands put the company in the No. 1 in slot among U.S. men's jeans (26% share) and men's shorts (12% share) companies, and made it the No. 2 U.S. jeans company overall (11% share). Just seeing the name Lee Jeans took me back to my junior high days.
This has not exactly been a growing business, with revenue (per VFC financials) in the range of $2.7 billion to $2.9 billion for the past 11 years and EBITDA margins in the range of 12.7% to 18.6%. Granted, a lot has happened during that period, including a market meltdown/recession (2008-2009), cotton inflation (2010-2011) and a challenging retail environment. Now we enter the brave new world of trade/tariff concerns, currently an overhang on this company and many other retail and retail-related names.
The actual spinoff, which began trading on May 24, has not been greeted warmly by the markets. Shares opened at $38.40 that day and closed Tuesday at $31, representing a 19% decline since their debut. That level of decline is child's play compared to the treatment some retail-oriented names are receiving these days, but it's still not comforting losing one-fifth of your market cap in just two months.
The thing that's interesting here about Kontoor Brands is the current valuation. With consensus earnings estimates for next year at $3.64 a share (six analysts covering the name), shares are changing hands at 8.5x forward earnings. In addition, Kontoor announced its first quarterly dividend on Tuesday, 56 cents a share, which implies a 7.23% yield. KTB has stated its targeted dividend payout ratio is 60%.
At the very least, Kontoor Brands is an interesting story -- direct exposure to solid/iconic brand names Lee and Wrangler at a time when brands are swallowed up into larger entities, along with attractive valuation and dividend yield. The environment just does not seem that great to be gobbling up such names, as retail continues to suffer, and you wonder whether it will be cheaper next month.