About the author:
- 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).
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.
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