Kathmandu ((KMD)) improved its trading momentum in the first half. Gross margins improved strongly in February, which partly reflects a weak comparable period in New Zealand, although Deutsche Bank cautions that this is a small sample in a low season.
All metrics suggest to Canaccord Genuity the company is managing its inventory well and not having to discount stock aggressively via clearances. Sales momentum appears to have accelerated into the early weeks of the second half, although winter sales remain key to the broker’s expectations for 18% net profit growth in the full year.
Sales growth was driven by Australia, up 3.7%, while New Zealand sales growth slipped -6.4%. Canaccord Genuity notes an interesting dynamic in New Zealand early in the financial year where the company likely lost share through the first clearance, as it had -40% less clearance stock than the prior year.
The flipside is that Kathmandu was selling current season product at full price, and this contributed to better gross margins. Meanwhile, international sales grew 97%, emanating from both the wholesale and direct consumer channels. Online sales growth was 13.9% and comprised 8.0% of group sales.
The results highlight good execution across many initiatives, Deutsche Bank believes, in particular more targeted promotions and better product management. The broker expects the company’s business will outperform the retail market.
Canaccord Genuity likes the fact management has pursued a strategy of diversifying away from a maturing Australasian retail market, and in this regard highlights the relationship with GoOutdoors (UK), which has resulted in an expanded range of Kathmandu product across that retailer’s 55 stores.
The company has announced the acquisition of US-based Oboz Footwear, which designs and sells hiking footwear via a wholesale distribution channel to North American outdoor chains. Consideration is NZ$107.1m and brokers believe it compliments the company’s international growth strategy.
The transaction will be funded via a NZ$40m institutional placement, NZ$8m shareholder purchase plan and NZ$70m in debt. The acquisition price suggests to Macquarie that management is confident about its ability to increase the contribution from this business in FY19 and beyond.
Around 45% of Oboz sales are derived from the leading US outdoor retailer, REI Co-Op. Kathmandu is the exclusive retailer of Oboz in Australasia and the product is also sold in GoOutdoors and Blacks in Europe.
Credit Suisse considers the acquisition strategically sound, presenting opportunities for expansion through the existing Kathmandu store network while leveraging the US distribution and retail relationships to build the wholesale business.
Credit Suisse believes the transaction also moves the mix away from a somewhat risky core that consists of an integrated mono-branded retail business. The broker’s assessment of the company’s enterprise value increase by 20% applying the transaction economics.
Importantly, Canaccord Genuity suggests this established international wholesaler with a category-leading product will enhance negotiations with retailers as Kathmandu seeks to penetrate its brand offshore. The broker, not one of the eight stockbrokers monitored daily on the FNArena database, upgrades to Buy from Hold. Price target is $2.52.
While the acquisition is not without risks, Deutsche Bank considers management has demonstrated a strong track record in managing brand, noting Kathmandu already distributes Oboz product. Given the company has strong visibility on the near-term expectations for Oboz, and with the stock trading on a price/earnings ratio on FY19 forecasts of 10x, the broker believes there is value on offer.
FNArena’s database shows two Buy and two Hold ratings. The dividend yield on FY18 and FY19 forecasts is 5.7% and 6.2% respectively.