What happened

Shares of Kontoor Brands (KTB 1.78%) are soaring 17.5% higher this week compared to where they closed last Friday, according to data from S&P Global Market Intelligence, after the denim maker reported fourth-quarter earnings results that beat Wall Street forecasts on the top and bottom lines.

Kontoor Brands said it earned $0.88 per share for the period on $732 million in revenue compared to analyst expectations of profits of $0.67 per share on sales of $669 million. The company is the owner of the Wrangler and Lee jeans brands.

Person looking through stack of denim jeans.

Image source: Getty Images.

So what

The rise of athleisure wear had denim falling out of favor as a fashion choice, while apparel sales generally were crushed by the pandemic, There was little need to buy new clothes if you weren't going out. 

But fashion trends tend to be circular, and the popularity of television shows like Yellowstone has helped revive interest in denim. Kontoor Brands said sales jumped 9% in constant currency terms in the fourth quarter, primarily a result of U.S. wholesale sales to retailers like Amazon, Kohl's, Target, and Walmart surging 17% year over year.

The international market was weak, in large part due to the lockdowns and travel restrictions China imposed in an attempt to contain Covid outbreaks. Sales in China tumbled 33% year over year, leading to a 12% decline in currency adjusted revenue. Because the U.S. represents 83% of total sales, the international revenue falloff did not affect results much.

Wrangler remains Kontoor's moneymaker, accounting for 70% of sales, and its sales were up 16% from a year ago to $509 million. Lee brand jeans suffered a 3% drop in global revenue to $219 million.

Now what

Although Kontoor Brands expects macroeconomic headwinds to persist throughout 2023, it expects its brands to perform well this year. The apparel stock forecasts revenue will grow by low-single-digit rates with the U.S. dominating over international markets in the first half of the year but losing foreign sales in the back half, as the company expects U.S. markets to lag while a reopened China accelerates.

Kontoor is guiding full-year earnings to be in the range of $4.55 per share to $4.75 per share, up from the $4.49 per share in adjusted earnings it generated in 2022. It expects most of the gains to be weighted to the second half of the year.