Kathmandu Holdings

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
26 June 2014, 2:42 PM
Sectors Covered:
Consumer Discretionary, Industrials & Developers

Kathmandu Holdings (KMD) has not escaped the recent mild winter and soft retail conditions. Unfortunately, this has also coincided with the group's key winter sale resulting in a significant sales/earning deficit this year.

Weak trading conditions

KMD provided a training update following weak trading conditions. Sales through June (last two weeks in particular) have been well below expectations and coincided with the start of KMD's key winter sale. Mild and dry winter conditions in both Australia and NZ are largely to blame.

Currency (AUD translation to NZD 100% unhedged) has also significantly impacted the group's performance (we estimate a c11% negative impact on earnings). Very little guidance has been provided around lfl sales or margin performance with the company expected to provide detailed commentary in early August.

Material earnings impact

KMD still has five key trading weeks to go, but if current conditions continue management expects EBIT will be at least c10-15% down on FY13. KMD's inventory position was already elevated at 1H14 (which management attributed to gearing up for 2H weighted new store openings and concerted online push).

We expect the group will undoubtedly be carrying a higher than optimum level of stock post 31 July and while a good proportion of the group's products are less seasonal in nature, we expect a higher level of clearance activity will be necessary in FY15.

The inventory position is the key reason why having visibility in FY earnings is difficult. In deriving our FY15 forecasts, we assume 4% Australian and 2.5% NZ comp growth, 15 new stores, modest margin recovery (reflecting stock concerns) and relatively constant currency.

Moving to Hold

While much uncertainty reigns across the entire retail sector, we continue to rate KMD from a management execution and brand equity perspective. However, post today's events, the stock is now commanding a premium PE and we would prefer to accumulate on weakness.

We reduce our share price target to A$3.24 (previously A$4.07).

More information

Morgans clients can access our detailed research report on Kathmandu Holdings (KMD). If you are interested in finding out more, please contact your nearest Morgans office.

Disclaimer(s): Analyst owns shares.

The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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