Over the last six months, Kontoor Brands’s shares have sunk to $69.52, producing a disappointing 16.5% loss - a stark contrast to the S&P 500’s 3.9% gain. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Kontoor Brands, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Kontoor Brands Will Underperform?
Even though the stock has become cheaper, we're cautious about Kontoor Brands. Here are three reasons why KTB doesn't excite us and a stock we'd rather own.
1. Weak Constant Currency Growth Points to Soft Demand
We can better understand Consumer Discretionary - Apparel and Accessories companies by analyzing their constant currency revenue. This metric excludes currency movements, which are outside of Kontoor Brands’s control and are not indicative of underlying demand.
Over the last two years, Kontoor Brands’s constant currency revenue averaged 11.4% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Cash Flow Margin Set to Decline
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict Kontoor Brands’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 13.8% for the last 12 months will decrease to 10.6%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Kontoor Brands’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We see the value of companies helping consumers, but in the case of Kontoor Brands, we’re out. After the recent drawdown, the stock trades at 11.2× forward P/E (or $69.52 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment. We’d suggest looking at the most entrenched endpoint security platform on the market.
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