Snow bunnies will appreciate the first significant snowfalls in New South Wales and Victoria ski resorts this week, ahead of schedule. The weather will also please retailers, such as Kathmandu Holdings, that stock outdoor leisure wear, amid predictions of a colder-than-usual winter.
Weather forecasts, of course, can be wrong and are only one of many factors that affect retail earnings. But a chilly winter that boosts sales of puffer jackets, vests and other warm gear is good news for Kathmandu, a former star retailer that disappointed last year.
To recap, Kathmandu was smashed in late 2014 and 2015 after downgrading guidance. Its underlying earnings halved last year. Unseasonably warm weather, sluggish retail sales growth, and consumer uncertainty after the 2014 Federal Budget crunched Kathmandu’s profits.
I outlined a positive view (subsequently incorrect) on Kathmandu for The Bull in August 2014 when it traded at $3.10 and said ‘all bets would be off if the share price fell below $2.80′. Kathmandu did that and more, tumbling as low as $1.10 as investors deserted the stock.
Chart 1: Kathmandu Holdings
Source: The Bull
Its problems were more than cyclical. Kathmandu relied too much on a few big sales each year and heavy price discounting – a potentially volatile, margin-destroying strategy. Some of its store formats were far too big and, in my view, its clothing and footwear range had become a little stale and copied elsewhere.
Kathmandu has recovered to $1.42 after a better-than-expected half-year result for FY16. Sales rose 9.3 per cent to NZ$196 million and underlying earnings (EBITDA) more than doubled to $21.9 million. Solid profit margin and same-store sales growth were other positives.
I like Kathmandu’s growth strategy under new management, as outlined in a recent conference call with analysts (kudos to the company for releasing a written transcript as an ASX announcement.) Kathmandu is improving its pricing and promotions, optimising stores, and considering using other sales channels to distribute its product.
Other great leisurewear brands, such as The North Face, sell their products in company-owned or franchised stores, online, or wholesale them to department stores and other retailers. Kathmandu has good potential to boost sales in Australia and overseas by partnering with a range of retailers that presumably would be keen to stock its product.
It should be a reasonably capital-light expansion strategy that, if done well, has little effect on the brand or on Kathmandu’s key asset – the 1.5 million members in its Summit Club. The biggest risk is probably margin pressure if Kathmandu has to sell at lower prices in other retail channels.
Another key point overlooked in analyst research is Kathmandu’s new product range. As a regular customer, it’s the best I’ve seen Kathmandu look in some time. Its designers and buyers have given the range more of an edge – and a clearer point of differentiation over almost every fashion retailer that seems to sell puffer jackets these days.
I still like Kathmandu’s long-term thematic: young people travelling more overseas and buying outdoor leisurewear before they go; and retiring baby boomers spending extra time travelling here and overseas and buying leisurewear for their trips.
Liken fitness wear, winter leisurewear has become as much a fashion item as a practical piece of clothing or footwear. As my son’s recent soccer match, on a chilly Melbourne morning, I noticed five mums on the sideline, each wearing long black puffer jackets (North Face, I think). It’s big business as more consumers include trendy winter leisurewear in their wardrobes.
Kathmandu can do more to leverage its Summit Club membership. Other leisurewear groups that email me promotions are more aggressive and have clearer, timelier, and better offers. I’ve found Kathmandu’s pricing for members and non-members a little confusing at times and think price simplification in the business is long overdue.
That said, Kathmandu’s new management is on the right track. The company still has a great brand, great product and a large, loyal customer base. And plenty of hard work ahead as it convinces investors that the recent result was part of a sustainable share-price recovery.
A median share-price target of $1.95, based on consensus analyst estimates, suggests Kathmandu is undervalued. I wouldn’t read too much into a consensus based on four analyst forecasts, but there’s enough to suggest Kathmandu can deliver a double-digit total share return in FY17 – possibly more if the weather is kind – before stronger gains after that.
Takeover speculation is another factor, although never a reason on its own to buy a stock. New Zealand homewares and sporting goods retailer Briscoe Group made an opportunistic, unsuccessful bid last year and remains a 20 per cent shareholder. Don’t rule out it or other another retailer having a crack at Kathmandu in the next 12-18 months.
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 May 11, 2016