Kathmandu - 1H15 result
About the author:
- Author name:
- By Josephine (Jo) Little
- Job title:
- Senior Analyst
- Date posted:
- 25 March 2015, 9:11 AM
- Sectors Covered:
- Consumer Discretionary, Industrials & Developers
Management will no doubt be keen to put a disastrous 1H15 behind it
and prove that a promotional strategy change is capable of gaining
traction. Low earnings confidence at this stage makes pointing to
valuation metrics somewhat futile.
However we still believe this is a
strong brand and that a less confused and more targeted promotional
strategy could lead to substantial upside over the medium term.
1H15 result – one they’d like to forget
Kathmandu (KMD) reported 1H15 EBITDA of NZ$6.8m (down 70% on pcp) and a net loss of
NZ$1.8m (from NZ$11.4m in the pcp), in line with recently downgraded
guidance. The result included a negative EBIT impact from currency of
NZ$0.2m and additional UK investment costs of NZ$1.6m.
Overall, the half
reflected poor sales campaigns and a weak consumer environment leading to
aggressive clearance of excess stock. Highlights of the result include: SSS
growth of 0.6% (+2.7% at constant currency); significant gross profit margin
erosion (-460bp); and negative operating cost leverage resulting in EBITDA
margins declining to 3.8% (from 13.5% in the pcp).
Australia was most
impacted, recording 600bp of gross margin decline.
Consumer and currency headwinds continue
As is usual practice (given the large 2H earnings reliance), KMD has not issued
formal guidance. Given the poor 1H15 trading result, FY15 store opening
guidance has decreased to 11 (from 15) and management is expecting a slow
roll-out program into FY16.
Soft trading has persisted into the 2H with group
SSS of -2%. Management commented consumers had delayed spend to the end
of promotional periods, creating an over-reliance on end of sales clearances. In
response, KMD is looking to better align promotional activity to the strongest
periods of consumer spending and prioritise the Summit club member
KMD also faces additional gross margin pressure from a strong
USD moving into FY16 (~10% exchange rate declines into 1H16) and has
therefore downgraded it GM target to 61-63%, although we suspect there is
downside risk to this target. Our EPS forecasts fall by 3%/6%/9%.
With various headwinds still playing out and low earnings visibility, we
maintain a Hold rating. However, we still believe this is a strong brand and that
there is substantial upside available if consumers respond positively to the
strategy change. Additionally, corporate action cannot be ruled out.
Morgans clients can access our full research report on Kathmandu Holdings (KMD), which includes our target price. For further information, please contact your nearest Morgans office.
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