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Kathmandu Video



 

Kathmandu (Hold)

A recent preliminary trading update for 1H15 by Kathmandu Holdings Limited (KMD) has indicated a downfall in margins. The Company reported EBITDA forecast to be in the range of NZ$6-$7mn which is 70-73% below on pcp of NZ$22.6mn. EBITDA margin dipped to circa 3.5% from 13.5% in pcp. A loss of -NZ$1.0mn to -NZ$2.0mn is expected for NPAT. The main culprit behind this appears to be the poor opex leverage along with condensed gross margins. Total sales for the Company are up by 6.9%. This update is consistent with the update provided in December 2014. However, LFL sales and gross margin deterioration has hastened over January 2015. KMD’s 2Q15 performance has been affected by clearance activity in 1Q15. The trading conditions in New Zealand have worsened over the Christmas and New Year trading period. The Company appeared to witness a little muddled period of promotional events. The extended discounting period affected the consumer spending with regards to the Christmas sales promotion. It is found that the consumers may not be captivated to purchase during promotional activities. There has been a lower than expected demand for higher margin summer and non-technical apparel categories. Cold weather apparel categories were also affected by warmer weather in New Zealand after Christmas.



Online % of Sales (Source – Company Reports)

Owing to the improvements in inventory management systems, the inventory levels at the end of the period were expected to be down on the pcp despite lower than expected revenues.

It is however to be born in mind that the Company still appears to have long-term offshore market growth opportunities. This coupled with the benefits emanating from a vertical model gives some potential room for growth although the outlook for the near-term growth may not look very appealing.

Factors which may weigh-in entail favorable weather conditions during trading periods, the strength of the brand, and a favorable movement in foreign exchange. At the same time, high level of competition may be hazardous for sales growth and may lead to excessive discounting. Then a lull in consumer spending may be another factor to ponder upon along with unfavorable weather patterns. However, most of the external factors appear to be cyclical which KMD has witnessed over the years. The Company needs to closely look at the cost structure and the roll-out of new stores at a time when there are increases in rental and other variable costs. The reevaluation of sales and pricing strategy, and CEO transition are few aspects yet to be watched closely to understand the impact in the near future. Further, success in the UK and recovery of sales and margin in Australia may help KMD regain the thrust in a better manner.



Optimising Existing Store Network (Source – Company Reports)

The peak 2H sales periods typically contributing about 60-70% of FY profit will be eyed with an expectation of better performance. A better trading condition with lesser fuel prices, lower interest rates and favorable seasonal patterns can work in favor of the Company given there is an improvement in execution as well. KMD has not provided full year earnings guidance in view of the thought that June and July are the Company’s most significant and historically most profitable trading periods, and an outcome therefrom is too early to be assessed at the moment.


KMD Daily Chart (Source - Thomson Reuters)

Based on the foregoing, we put a HOLD recommendation for the stock at the current price of $1.36.