Outdoor and adventure-wear retailer Kathmandu Holdings has been an easy stock to sell this year. Unseasonably warm weather, sluggish retail sales growth, and consumer uncertainty after the Federal Budget conspired to snap Kathmandu’s stellar run.
When it downgraded earnings guidance in June, Kathmandu joined a long list of retailers suffering from falling sales and earnings as consumers reined in spending. After more than doubling from $1.75 in early 2013, the company was due for some profit-taking.
It has fallen from a 52-week high of $3.85 to $3.10 since the downgrade and some commentators have been quick to downplay the prospects for one of Australia’s best-run small-cap retailers. But those price falls have brought Kathmandu back to value territory.
Chart 1: Kathmandu share price
Kathmandu is a stock-specific rather than thematic idea. With the exception of a few key retail companies (which I’ll cover in coming instalments of The Bull), I’m not convinced it is time to buy retailers aggressively, despite improved recent retail sales-growth data. Most retail stocks are value traps rather than good value.
Kathmandu is an exception. Its trading update on August 1 was better than the market expected. Earnings before interest and tax are expected to be $62.5 million to $65.5 million, from $63.4 million a year earlier. That is a higher than analysts had expected, after the downgrade.
Kathmandu said colder weather in the second half of July helped it recover “a significant portion of the shortfall in sales revenue it experienced in the early part of winter”. Freezing weather in late July in Melbourne had this writer running to Kathmandu to buy a warmer jacket!
CEO Peter Halkett said: “It is pleasing to have delivered a better full-year result for FY14 than we were anticipating a few weeks ago when warm weather had significantly reduced customer demand. The improvement in sales and earnings in July once colder winter weather became established has resulted in a satisfactory outcome for our key winter-sale event.”
The improvement says two things about Kathmandu. First, that well-run companies have a knack of bouncing back quickly from performance disappointments. And second, that Kathmandu can be unpredictable given its reliance on a few big sales each year, and on colder weather to drive people into its stores. More than half of its sales come from the winter, Christmas and Easter promotions.
Nevertheless, I like Kathmandu’s long-term prospects on a few levels. It has a good product and market position. Notice how many people buy ski-wear these days, such as dark puffy jackets, to stay warm. And although competition in this segment has intensified, Kathmandu is the clear leader for market recognition, brand and product quality, in my view.
Its Kathmandu Summit Club has been a terrific success. Members get significant discounts and are alerted to offers, and the company gets to market to a large database of loyal customers. I notice other adventure-wear shops introducing similar membership clubs.
In the medium term, Kathmandu has scope to continue its store rollout – about 15 new ones a year – and benefit from operating in smaller store formats that maximise sales and reduce rents. The smaller store I visited was doing lively trade, more so than many larger nearby stores. Scope to extend the brand into other products and categories also has potential.
Longer-term, the coming exodus of baby boomers should spur demand for outdoor wear, particularly as more boomers travel overseas. Half the customers in Kathmandu during my latest visit seemed to be baby boomers seeking warm clothing for their travels.
I underestimated Kathmandu’s potential when it listed on ASX in 2009, after an initially disappointing float. Companies that rely on a few big sales each year for the bulk of their earnings rarely have a sustainable competitive advantage or pricing power.
Kathmandu’s competitive advantage is arguably its brand position as a high-end outdoor wear provider, and large and growing membership base. That gives it some pricing power, certainly more than many retailers in a sluggish retail environment.
Macquarie Equities Research has a 12-month share-price target of $3.40 and an “outperform” recommendation. Morningstar has a $3 fair-value and hold recommendation. Three of six analysts in its consensus forecasts have a strong buy recommendation and three have a hold.
With a bit of luck with the weather, and an improvement in Australia’s retail-sales growth, Kathmandu should beat Macquarie’s $3.40 target within 12 months. Its previous price high of $3.85 looks a long way off, but some big headwinds for Kathmandu in the past six months are easing slightly. All bets would be off if Kathmandu breaks $2.80, where it has support on the charts.
Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their financial adviser before acting on themes in this article. All prices and analysis at August 7, 2014.