Three Apparel Makers in the Bargain Bin

07/30/2020 5:00 am EST

Focus: CONSUMER

George Putnam

Editor, The Turnaround Letter

Like many consumer goods producers, companies that make apparel have experienced sharply lower sales and profits with the pandemic restrictions, observes George Putnam, editor of The Turnaround Letter.

Some stocks are more appealing bargains than others. For companies that make everyday apparel, particularly those with enduring brands or an outdoor/active lifestyle focus, demand should eventually return to healthy levels.

In times like these, consumers generally migrate to the familiarity and assurances of a quality brand. Too, work-from-home brings a step-down from business casual, helping shift demand toward more casual but quality apparel.

Another emerging trend is that consumers are spending more time outdoors, raising demand for the clothing and gear that accompanies these activities.

In addition to having the right brand quality and product types, those less-reliant on sales through department stores or weaker malls, for example, will likely be more resilient. Listed below are several companies that we believe offer interesting recovery potential.

Kontoor Brands (KTB)

Spun off from VF Corporation (VFC) in May 2019, Kontoor houses the well-known Wrangler and Lee brands of jeans as well as VF’s Outlet operations. After years of underinvestment as part of VF, Kontoor is rebuilding its business.

New initiatives include its rollout of Lee jeans into 2,000 new U.S. mass retailer locations, Wrangler’s expansion into China and 400 new stores in Europe and an updated e-commerce platform. The company’s elevated debt will constrain its near-term flexibility. Yet as it flexes its newly-independent muscles, and as its shares sell at a considerable discount, Kontoor Brands has noticeable potential.

Levi Strauss (LEVI)

This company, with one of the most highly regarded brands in the world, sells its iconic blue jeans in over 50,000 retail locations in 110 countries. Over 70% of its inventory is evergreen, with little fashion or seasonality risk. After an initial surge to over $22 in its March 2019 initial public offering, its shares are now 28% below their $17 IPO price.

Investors worry about Levi’s high reliance on department store and mall stores. However, its balance sheet has cash that mostly offsets its debt, and it readily raised new debt to help it endure the downturn. Levi’s capable management is proactively adjusting the business model. While the near-term outlook is humbling, the company and its shares should prosper in the long-term.

Ralph Lauren (RL)

Shares of this iconic company remain near their year-to-date lows, and, remarkably, trade at the same level they did in 2006. Some of the investor concern is driven by the company’s weak U.S. outlook. But the company’s enduring value and longer-term outlook offer solid reasons for optimism.

Better management is revitalizing Ralph Lauren’s prospects: its relatively new CEO (joined in 2017) has restored much of its former luster by shifting away from department stores and mass retailers, emphasizing instead its own prestigious stores and elevating its game on its e-commerce platform.

Ralph Lauren’s balance sheet is flush with $2.1 billion cash, against $950 million in debt. The Lauren Family retains a controlling 34% stake. Selling at a modest 5x estimated FY2022 EBITDA, shares of this conservatively funded, well-run company, with its high-value brand, look meaningfully undervalued.

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