Get up to 2 Years of free subscription by inviting your friends to KALKINE!

For every friend of yours who joins KALKINE, we'll give you 3 months of free subscription (up to a limit of 24 months free subscription). If you recommend 3 friends and they join within a month of you referring them, you get 1 year free subscription to KALKINE reports added to your account (up to a limit of 24 months free subscription). Simply reply to this email with their name, e-mail and phone number.
 

Stock Of the Day  - KATHMANDU (HOLD)

Kathmandu Holdings (KMD) reported for its trading update for the half-year ended 31 January 2015 sometime back triggering a mix of sentiments as per the market. Total group sales for the half-year are expected to amount to approximately $ 179.2 million which would be a growth of 6.9% over the figure for the previous comparative period which was $ 167.6 million. Same-store sales growth for the period grew by 2.8% (constant currency basis) and 0.6% based on actual exchange rates. The company advises that the sales results were lower than expected and the gross margins for the period will be lower than what was reported in the same half-year of the previous year particularly in Australia. Consequently, the estimated earnings performance for the half year in question are estimated to be in the range of $6.0 to $7.0 million for  EBITDA (last year $22.6m), $(0.2) to $0.8 million for EBIT (last year $17.6m) and NPAT a loss of $(2.0) to $(1.0) million (last year profit of $11.4m).



Sales and EBIT (Source – Company Reports)
 
The acting CEO Mark Todd said that the trading performance of the company particularly in the critical Christmas and January periods was below expectation. He was disappointed at the reduction in same-store sales in December and January in Australia and in New Zealand from Boxing Day forward. He attributed the disappointing sales performance to the following factors: the volume of sales in the first quarter at discount prices to clear excess inventory principally in Australia had reduced the level of sales and caused lower gross profit margins for the period; the sales mix recorded at Christmas and in January was the result of weaker than anticipated demand especially for apparel in the summer and non-technical categories; and weaker sales in New Zealand after Christmas of cold weather apparel because of an extended spell of dry and warm weather.
 
However, despite the lower than expected level of sales, inventory levels as at 31 January 2015 are expected to be reduced in comparison to the same time as 2014 because of improvements achieved in the process of purchasing seasonal items of inventory. The company has carried out a critical review of the effect of its promotional initiatives to combat the lower levels of sales and has evolved comprehensive promotional strategies for the second half of the financial year 2015. The success of the sales promotions in Easter as well as winter are critical for the financial performance of the full year 2015. Historically, these periods account for more than 60% of the company's annual sales and in the last year, more than 70% of the full-year profit was earned during this period.


Growth Strategy Update (Source – Company Reports)
 
In accordance with its practice, the company did not provide guidance for earnings for the full year but pointed out that the last two months of the financial year June and July are historically the most significant and profitable and that it is too premature to judge the potential outcome at this point of time.
 
The preliminary update analysed above triggered a decline of more than 25% to a two-year low of $ 1.39 because of the anticipated loss on the operations for the first half of 2015. However, we should point out that in the financial year 2016, the company may post an EPS of $ 0.14 a share and pay a dividend of $ 0.08 per share.
 
We believe that the sales and gross margins may recover over 2H of FY16 and thereafter. Improvement in retail cycle and store rollout progression may also prove beneficial going forward. Sales momentum in the UK and at other international platforms seem to work in favour of KMD. In our view, the current challenges are cyclical only. The positives do emanate from KMD’s position as the largest FY14 store footprint and sales player in the Australia/New Zealand travel and adventure apparel and equipment market. This position seems to be supported by factors such as vertical integration, focus on apparel with full travel and adventure range, store location, etc. For instance, KMD eyes for an opportunity for about 180 stores (as opposed to 149 as at June 2014) in Australia and New Zealand by FY18. Other positives entail loyalty schemes maintaining a good customer base and robust online offering.


Permanent Open Stores (Source – Company Reports)
 
Naturally, the future outlook depends on the ability of the company to overcome the problems about short-term revenue growth and reverse the declining trend of the recent sales figures. We believe that the strengths of the company including the loyalty of its customers and the quality of its management should provide investors with a great deal of encouragement. Indeed, we think that the price decline because of the weak outlook for the first half of 2015 provides a window of opportunity for potential investors to take advantage of the potential upside based on the current metrics.


KMD Daily Chart (Source - Thomson Reuters)

We therefore reiterate a HOLD recommendation for this stock at the current price of $1.625.