Company Overview: Kathmandu Holdings Limited (ASX: KMD) is a retailer of clothing and equipment for travel and adventure. It designs gear to take on the adventurous spirit of people. The group is organized into four operating segments, depicting the four geographical regions in which the group operates. The company operates ~110 stores in Australia, over 46 stores in New Zealand and approximately four in the United Kingdom.
KMD Details
Faster Earnings Growth and Increase in Shareholders Value: Kathmandu Holdings Limited (ASX: KMD) is a retailer of clothing and equipment for travel and adventure. As on 28 July 2020, the market capitalization of the company stood at ~$755.09 million. During FY19, the company delivered another year of record sales and profit. The key growth drivers were a positive contribution from the Australian business, and rapid sales and profit growth from Oboz. At the same time, as delivering sales growth, the company focused on cost control and benefitted from the wholesale operating cost that resulted in earnings growth faster than revenue. Over the past four years, the company has delivered decent operating cash flows and generated significant value for its shareholders. KMD has delivered these growing financial results while continuing its transformation from a leading Australasian retailer to a brand-led global multi-channel business.
During FY19, group sales of NZ$545.6 million increased by 9.7% overall, with the inclusion of Oboz in North America. This resulted in an increase in gross profit to NZ$17 million with a gross margin of 63.6%, above its long-term target range of 61% to 63%. During 1H20, the company successfully completed the acquisition of Rip Curl, creating a more diversified group of three iconic brands across key global markets. The company also fortified its balance sheet in conjunction with the aggressive and significant cost savings and structural cost reduction initiatives in response to the global COVID-19 pandemic.
KMD seems to be well positioned to deliver on the next level of growth opportunities. It has an un-diverted focus on growing the core markets of Australia and New Zealand. It is also enhancing the customer experience through technology by enhancing product information, payment options, and fulfilment solution. Kathmandu and Oboz are two well established and distinctive brands, with decent financial fundamentals, delivering great quality products. It is building strategic partnerships, leveraging Oboz relationships to establish the Kathmandu brand.
FY19 Financial Highlights (Source: Company Reports)
Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Kathmandu Holdings Limited. Yarra Funds Management Limited is the largest shareholder in the company, with a percentage holding of 10.22%.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Well Management of Costs and Stable Balance Sheet: During 1H20, gross margin of the company stood at 60.2%, higher than the industry median of 17.5%. This indicates that the company is managing the costs well and is capable of converting its revenue into profits. In the same time span, the company reported an EBITDA margin of 16% as compared to the industry median of 8.4%, indicating increased profitability. During 1H20, Return on Equity of the company stood at 1.5%. In the same time span, current ratio of the company was 1.8x, higher than the industry median of 1.18x. This shows that the company is liquid enough to pay off its current liabilities using its current assets. During the half-year, assets/equity ratio of the company stood at 2.5x, lower than the industry median of 3.11x. This indicates that the business is financed with a more significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet.
Key Margins (Source: Refinitiv, Thomson Reuters)
Half Year Performance: During 1H20, total segment sales witnessed an increase of 58.8% to NZ$363.7 million, up from NZ$229.0 million in the pcp. This was mainly due to the acquisition of Rip Curl. In the same time span, EBIT of the company went up by 46.5% to NZ$29 million from NZ$19.8 million. At the same time, the company witnessed organic growth in customer engagement, unique products, and well-known brands. Despite the challenging conditions, with Australia experiencing widespread bush fires and New Zealand having negative same store sales growth during the preceding two years, the first half financial results highlight the strength of the global brands, -Kathmandu, Rip Curl and Oboz. These results also show the healthy position the company had the global COVID-19 pandemic not occurred.
The company has also strengthened its balance sheet via a fully underwritten equity raising comprising an institutional placement of $30 million and an accelerated non-renounceable entitlement offer to raise ~$177 million. The group intends to use these proceeds to pay down the existing revolving multi-option facility and to provide additional cash on the balance sheet.
1H20 Financial Performance (Source: Company Reports)
Surge in Online Sales and Staged Reopening of Stores: The Group has responded decisively to the COVID-19 challenges. During the month of April, Kathmandu and Rip Curl have continued to trade online in all international jurisdictions. As a result, online sales were 2.5 to 3 times higher than last year, with the highest growth rates in Australia. With the ease in restrictions, most of the group store network has opened. Since the reopening, retail store and online sales have exceeded the management expectations, further strengthening the liquidity.
Key Risks: The social distancing measures and lockdown restrictions globally have impacted Group sales this financial year. The company may also face an adverse impact on the supply chain which may result in disruption in operating performance. There remains significant downside risk over future economic conditions following the impact of lower foot-traffic. The company also remains cautious about medium-term levels of consumer demand. The company is also exposed to credit risk, interest rate risk, liquidity risk and foreign exchange risk.
Future Expectations and Growth Opportunities: The company is focused on growing the core markets of Australia and New Zealand and is expecting opportunities to supercharge the Summit Club loyalty program. The company continues the dramatic optimization of its store network and is working to diversify by growing the contribution of the Summer season and elevating the performance of its key metro markets. KMD is aiming to become a global business and is seeing an opportunity to build the Kathmandu brand to ignite demand in North America. It is building wholesale partnerships, leveraging Oboz relationships to establish the Kathmandu brand.
In the medium term, the company is expecting subdued consumer demand as a result of the ongoing economic and social impacts of COVID-19. Based on current COVID-19 conditions globally, FY20 adjusted EBITDA is expected to be above NZ$70 million. Gross margin of KMD is expected to be at the lower end of the target range of 61% to 63%. Based on the current assessment of the operating environment and outlook, the company expects the available liquidity of over NZ$300 million at the end of this financial year.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
Stock Recommendation: The company seems to be well-capitalized to navigate through the current trading uncertainties caused by COVID-19. The digital infrastructure and supply chain investments have underpinned the company’s ability to rapidly ramp up online trading capabilities and distribution capacity in the face of unprecedented online demand. As per ASX, the stock of KMD gave a return of 43.92% in the past three months and a return of 3.9% in the past one month. The stock is also trading close to its 52-weeks’ low level of $0.469, proffering a decent opportunity for the investors to enter the market. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation and have arrived at a target price offering an upside of lower double-digit (in percentage terms). Considering the attractive trading levels, decent returns in the past three months, improvement in financial performance and positive long-term outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $1.07, up by 0.469% on 28 July 2020.
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KMD Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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