Kontoor Brands' (KTB) strong Q2 report showcased its capability to overcome tariff challenges and generate higher margins over time, UBS said in a Friday note.

The global apparel company's expansion into diverse categories, channels, and geographies presents a lucrative long-term growth potential. Kontoor's recently acquired Helly Hansen brand is likely to support its long-term EPS growth algorithm, according to the note.

Channel checks revealed the company is facing roadblocks in stabilizing the Lee brand, a slump in Wrangler's growth, and constrained distribution scope for Helly Hansen in premium US channels, which are collectively contributing to the company's low price-to-earnings ratio.

UBS said it views the market underestimating Kontoor's expertise in US wholesale, which will support its growth playbook and P/E expansion.

For Q3, UBS said it expects EPS to decline 1.5% to $1.35, sales to rise by 27.6% to $855 million, and gross margin to expand 50 basis points to 45.5%. The brokerage also raised its 2025 sales growth guidance by 200 basis points to over 19% and EPS guidance by 10% and expects 2026 sales to continue benefiting from Helly Hansen.

For fiscal year 2026 and 2027, UBS expects EPS growth of 10% and 8% on the expectation of a rebound in earnings before interest and taxes margins as the company realizes more benefits of its Jeanius cost savings program. The brokerage expects a 5-year EPS compounded annual growth rate of 11% and the company to become a growth stock from a cash flow stock.

The brokerage said it reiterated its buy rating on the stock and raised its price target to $99 per share from $92.

Price: 65.91, Change: +1.92, Percent Change: +3.00