Overview: As the great Yogi Berra once said, “it’s like Kathmandu all over again”, such was the markets familiar reaction to their half year result released on Tuesday. It was only last month that I wrote about Kathmandu and the 25 percent drop in their share price after a disappointing sales update. In the mean time their share price rose 28 percent from lows of $1.39 to a peak of $1.79 reached last week. Those highs were fleeting, with Tuesday’s result sending the stock back down to $1.39 again at points.
Pros: Much of the result came as no surprise as it was flagged when the company reported poor Christmas sales in February. Looking for positives, the Company can point to increased sales in all three countries of operations, as well as 33 percent growth in online sales growth.
The online sales growth is worthy of particular note. Kathmandu is amongst the many retailers facing fierce online competition, crimping margins. Kathmandu, due to their strong brand image, are better placed than most to survive the proliferation of online shopping. They have shown their commitment to the online world by employing Christchurch based SLI Systems to optimise their search engine and general customer experience. SLI has helped many online retailers increase sales in recent years. Kathmandu will be hoping for similar success.
Improvement should be expected in the second half, as this period usually accounts for 60 percent of sales, given two of the three major sales occur during this period.
Cons: The biggest concern for investors in the Kathmandu result was the lack of a turn around in sales after the disappointing Christmas period. In fact, sales were down 2% on a constant currency basis for the seven weeks to the 15th of March. A worrying trend.
Much will depend on the recently started Easter sale, and the upcoming winter sale. So far the first week of the sale “was soft in Australia, but satisfactory in NZ”.
The performance of Kathmandu’s Australian operations is key to the company’s future. Kathmandu continues to open new stores in Australia, but have been struggling to increase sales on a same store basis. In the face of slowing sales growth, Kathmandu have slowed their store roll out, now opening just 11 news store in this financial year, rather than 15.
Price performance: The share price is off 33 percent this year
Investment outlook: Turn around potential exists if the company’s growth strategies are successful. Attractive for those willing to take a risk.
*A Broker's View is written by Grant Davies, Authorised Financial Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.
Morningstar - We downgrade our fiscal 2015 to 2019 NPAT forecasts by 24% to reflect the lower gross margin assumptions and lower like-for-like sales expectations. Our fair value estimate reduces to NZD 1.90 per share, from NZD 2.50 previously. Shares in Kathmandu are currently trading below our revised fair value estimate, as the market appears to be extrapolating the current challenging conditions excessively into the future. We maintain our no-moat rating on Kathmandu. Despite brand ownership and exposure to a strongly growing category, we believe these attributes are easily replicable.