Kathmandu - 1H15 result

About the author:

Josephine (Jo) Little
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 promotions.

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%.

Recommendation

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.

More information

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.

Disclaimer(s): 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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