Kontoor Brands has been on fire lately. In the past six months alone, the company’s stock price has rocketed 51.7%, reaching $87.77 per share. This performance may have investors wondering how to approach the situation.
Is now the time to buy Kontoor Brands, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Kontoor Brands Will Underperform?
We’re glad investors have benefited from the price increase, but we’re cautious about Kontoor Brands. Here are three reasons why there are better opportunities than KTB, plus one stock we’d rather own.
1. Weak Constant Currency Growth Points to Soft Demand
In addition to reported revenue, constant currency revenue is a useful data point for analyzing Consumer Discretionary - Apparel and Accessories companies. 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 17.9% 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. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Kontoor Brands’s EPS grew at 7.6% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 2.9% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Over the last few years, Kontoor Brands’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Kontoor Brands, we’ll be cheering from the sidelines. After the recent rally, the stock trades at 15.3× forward P/E (or $87.77 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
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