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Stock Of The Day - Kathmandu (BUY)

Kathmandu Holdings Ltd (ASX: KMD) reported a revenue growth of 7% to $ 179.4 million in the first half of 2015, as compared to the same period in 2014. The decrease in prices to clear the excess stock has impacted the margins of the company. Moreover, the high margin summer apparel product groups also performed below the expectations. The lower exchange rates against USD also impacted the selling prices. KMD also increased the weightage of clearance sales to attract customers.


Earnings Summary (Source - Company Reports)

As a result, Gross margins also fell to 59.3% during the period, from 63.9% in 1H2014. The firm’s operating expenses surged 17.8% in year over year terms to $99.5 million. Consequently, Earnings before interest and tax plunged 96.6% to $0.6 million during the period, as compared to $17.6 million. Thus, Net profit after tax also fell 115.8% to $(1.8) million from $11.4 million in first half of 2014. 


Gross Margin (Source - Company Reports)

With regards to the sales growth by region, Australia, New Zealand and United Kingdom reported a year over year revenue growth of 11.7%, 4.7% and 28.5% respectively, during the first half of the year. Online sales accounted 5.8% of the overall sales revenues. Kathmandu derives 64.2% of the gross profit from Australia, 34.3% from New Zealand and 1.5% from the United Kingdom. Same stores growth in Australia was just 0.9% during 1H15, as compared to 6.6% in 1H14. Meanwhile, same store growth in New Zealand improved to 4.8% during the period as compared to 3.2% in 1H14.


 Sales growth by region (Source: Company reports)

Earnings before interest tax depreciation and amortization (EBITDA) for Australia declined by 85.2% in year over year terms to $1.7 million. Meanwhile, EBITDA for New Zealand fell 27.9% to $8.8 million, as compared to the last year. United Kingdom EBITDA plunged 116.7% to $(1.3) million, as compared to $(0.6) million in 1H14. 

As per the capital expenditure, KMD spent $9.8 million during the period, with $3.8 million for new stores (8 new stores and 1 relocation). The present stores incurred $2.1 million of expenses. Other assets rose to $26.6 million from $14.5 million in 1H14, due to rise in foreign currency hedging of $10.5 million. KMD’s stock per store decreased 15.8% to $0.616 in 1H15 from $0.732 in 1H14, as expected. KMD’s stock turns ratio improved to 1.6 in 1H15 from 1.5 in 1H14. Kathmandu estimates to enhance its stock turns ration further by the end of 2015. The firm’s Gearing ratio (Net Debt/Net Debt +Equity) slightly improved to 22.6% during first half of 2015 as compared to 22.5% in first half of 2014. The company declared an interim dividend of 3 cents per shares for shareholders of record on June 5, 2015. KMD might decrease its full year dividend, as it gave a dividend of 11.2 cents in the earlier fiscal year.


Same Stores Sales Growth (Source - Company Reports)

KMD decreased its gross margin estimates to the range of 61% to 63% due to weakening currencies against the United States dollar. As a result, the company has implemented effective hedging rates in first half of 2015. The firm’s AUD/USD for first half of 2015 was 0.892, as compared to 0.984 in first half of 2014. NZD/USD also decreased to 0.799 in 1H15, as compared to 0.808 in 1H14. Kathmandu also implemented forward hedging for AUD/USD at effective rates of 0.901 for second half of 2015 and 0.841 for first half of 2016. With regards to the NZD/USD, KMD hedged at an effective rates of 0.829 for second half of 2015 and at 0.768 for first half of 2016.


Permanent open stores (Source - Company Reports)

Kathmandu expects to increase its store count to 180 in Australia and New Zealand. The company opened 18 new stores in the period, reaching a total of 157 permanent open stores for the group. The firm plans to open 11 new stores in FY15, but expects a slowdown in new stores by FY16. Kathmandu is implementing the product lifecycle management to enhance its product flow to source the market. The firm is also working on improving its gross profits by enhancing, forecasting, planning and rea time performance analysis capabilities. 


Share of business (Source - Company Reports)

Above all these efforts, KMD is focusing on its online growth, estimating a growth of 33% in fiscal year of 2015. The firm’s United Kingdom’s new member acquisition is also expected to show online as well as in store growth. The firm has launched market place trading in Australia as well as New Zealand through eBay and Trade Me websites. KMD remains intact on its investment programme of spending $5 million annually over the next three years. KMD is also seeking to make the most from its existing store locations by enhancing loyalty and individual engagement programs. 


Kathmandu Daily Chart (Source - Thomson Reuters)

 The shares of KMD has declined 54.6% in the last six months and fell 37.13% in this year till date. The stock is almost trading at one year low as it reported a weak first half of 2015 results. However, we believe the stock to perform better going forward, as the KMD’s share prices have already factored in the weak first half of 2015 results. We estimate the group’s performance in the second half to improve, as the firm has already digested the clearing stock effect during 1H15. Moreover, KMD’s products will be on demand if Australia will have a harsh winter and a dry autumn. KMD’s UK expansion might also boost the company in the long run. KMD’s UK online business is also growing at a rapid pace, which posted a year over year revenue growth of 92.9% in the first half of 2015. The company is also exploring international market places like Germany from 1H2016.

Based on the foregoing, we give a “Buy” rating to KMD at the current price of $1.245.