My gym trainer joked that he is getting old. He’s started choosing clothes as much on their functionality as fashion. Ah, the problems of being a super-fit twentysomething.
He lampoons men in their 40s and 50s who buy expensive hiking gear, even though they rarely venture beyond the city. These “urban hikers” love their double-pocketed shirts and $300 waterproof shoes – just what you need to walk the dog and get a coffee.
Ouch! Without realising it, I find myself in this category. The one where you favour high-performance clothing that is comfortable and lasts years. And where you forget that having two pockets on every shirt and a wardrobe that is half khaki or beige is dull.
I thought about my personal trainer during a recent visit to Kathmandu, the outdoor-wear retailer that is defying sector trends with share-price gains. The company issued a positive trading update in late January after a solid Christmas trading period.

I always thought Kathmandu’s target market was young travellers: backpackers who load up on functional outdoor wear for their next overseas adventure. Or diehard camping enthusiasts buying their next sleeping bag, tent or cooking gadget for their outdoor adventure.
But most people in the Kathmandu store on my visit – and subsequent ones – were just like me: middle-aged men looking for durable clothing that is modern but not too trendy. How many twentysomethings could afford Kathmandu gear, even when it is heavily discounted?
Rising demand for outdoor or leisure wear from old consumers is a reason why I have favoured Kathmandu Holdings for the past few years. 
I last wrote about the company for The Bull in May 2016 when it was $1.42. The stock hit $2.36 this year after its trading update and now trades at $2.17 (after some falls this month in line with the broader market sell-off). Although an excellent result in a depressed retail market, Kathmandu’s share price is still down on levels in late 2014.
I wrote favourably in May about Kathmandu’s turnaround potential under new management, its improving product design and potential to increase sales while maintaining profit margins. So far, so good: nimble management is ensuring Kathmandu navigates the retail slowdown.
There are concerns: the company still relies too much on aggressive sales – a sector-wide trend as heavy discounting becomes part of the retail landscape. Like other retailers, Kathmandu has conditioned its customers to wait for sales. That said, the strategy is working.
Inventory is another issue. I notice the same items on sale for longer. Kathmandu would not be the first retailer to buy larger quantities of a smaller range of goods, to improve margins, and then keep them on the shop floor for longer and discount them heavily.

Although this strategy boosts short-term sales, the risk is consumer tiring of the product range and the brand being damaged. Consumers ask whether the products were massively overpriced to begin with given they are regularly being marked down by up to 60 per cent.
Risks aside, Kathmandu has several long-term tailwinds. The first is social and demographic trends. As young and old Australians travel more, demand for travel-related goods, such as expensive hiking shoes, will rise. I know one family member who had a blow-out at Kathmandu before an overseas trip, buying hiking shoes and all sorts of functional travel gear.
An ageing population is another plus for Kathmandu. As my gym trainer noted, there are more examples of older Australians wearing expensive outdoor wear or “athleisure” wear. Look at how many people wear costly gym gear for everyday use these days.
Kathmandu’s online database, through its Summit Club, is another key asset. I seem to receive extra online promotions from Kathmandu and some are eye-catching. The company has upped its digital-marketing skill and has over 1.5 million Summit Club members to target.
The Summit Club and Kathmandu brand are important defences if rival outdoor-wear retailers sell more goods through department stores or other channels. Clearly, there’s a core base of Kathmandu customers who are loyal to the brand and want to buy it in the company’s stores.
This is a good example of the benefits of brand equity, customer goodwill and product differentiation. Too many fashion retailers have products and brands that are similar, then wonder why customers choose products mostly based on price. 
I still think Kathmandu can do better on pricing and promotions, and store optimisation. Any improvements would quickly translate into better sales and margins, and higher earnings. There’s long-term upside if the company can become more efficient and digitally focused.
Kathmandu’s recent rally has taking it closer to fair value. An average share-price target of $2.36, based on the consensus of only three analysts, suggests the company has just a sufficient margin of safety to buy at the current price. Macquarie’s target is $2.58.
Gains will be slower from here, but Kathmandu deserves a spot on portfolio watchlists in anticipation of better value as the current market rout plays out over the next few months.
There’s more to like as Kathmandu expands its gross earnings and boosts sales – in part, no doubt, by selling clothes to cashed-up baby boomers who are less price sensitive.
Chart 1: Kathmandu HoldingsSource: The Bull

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• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article you should consider the appropriateness and accuracy of the information, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at February 15, 2018.