Australia | Jul 01 2021
This story features KATHMANDU HOLDINGS LIMITED. For more info SHARE ANALYSIS: KMD
With lockdowns and travel restrictions adversely affecting Australasian winter trading, Kathmandu has had to step back its FY21 sales guidance
-Lockdowns in NSW and Victoria impacting on winter season sales
-Importantly, Rip Curl and Oboz provide brand and geographic diversity
-Leveraged to re-opening economies and shift back to outdoor activity
By Eva Brocklehurst
Prior to sudden lockdowns in Melbourne and then Sydney, Kathmandu ((KMD)) appeared to be performing strongly as the peak winter trading period approached. Now lockdowns are adversely affecting the Australasian outdoor sector.
Yet the risks were known, even at the half-year result, Canaccord Genuity asserts, amid lower foot traffic in the CBD and airports along with uncertainty around the extent of winter travel/activity restrictions.
Kathmandu has guided to FY21 sales of NZ$930m and underlying operating earnings (EBITDA) of NZ$120m. With the absence of concessions such as JobKeeper, operating expenditure associated with closed stores is being accrued and the company expects operating earnings will be negatively affected by around -NZ$13m.
In NSW 40 stores are currently closed and this combines with the Victorian lockdowns where 62 stores were closed in early June. Operating earnings for FY21, before the impact, were estimated by brokers at around NZ$133m.
This signals to Macquarie that the negative impact is stemming wholly from the lockdowns, as opposed to any deterioration in performance or product. Jarden agrees the update implies the company was on track to deliver on forecasts and highlights a couple of important features to note.
The downgrade should be temporary, with no impact to FY22, and the Rip Curl acquisition continues to provide not just brand diversity but also geographic and channel diversity, reducing earnings concentration and risk profile.
Jarden downgrades estimates for FY21 underlying net profit by -14% to reflect the trading update and believes this will be entirely driven by Kathmandu Australia earnings because of lower sales, gross margin and fixed cost leverage.
Regardless, Canaccord anticipates earnings will soon be on an upward trajectory, which is in contrast to many other "cheap" small cap retailers that had a strong year in 2020/21and are now looking at potentially negative momentum into FY22.
The broker, while acknowledging it prefers a little more margin of safety in forward multiples, anticipates renewed interest in the stock and upgrades to Buy from Hold with a target of $1.48.
Rip Curl and Oboz are performing well in North America and Europe, exceeding pre-pandemic levels despite disruptions. Oboz wholesale orders for FY22 are well ahead of FY19 and wholesale orders for Rip Curl for FY22 are exhibiting double-digit growth versus FY19. Direct-to-consumer sales for Rip Curl are also well above pre-pandemic levels.
Canaccord also anticipates some upside to estimates regarding "recovery" earnings, as this is only really captures pro forma numbers provided at the time of acquiring Rip Curl, and particularly so since both Rip Curl and Oboz appear to be outperforming.
The broker had been predicting a multiple re-rating following the acquisition of Rip Curl but now suspects this could be a little further off, given what has transpired over the last 12 months. Canaccord also awaits any advice on the company's direction from the new CEO Michael Daly before assessing whether this view remains relevant.
While encouraged by the recent performance, Macquarie believes its forecasts are capturing the momentum and cautions that even as winter passes, the Kathmandu brand is likely to be affected by international border closures and a lack of travel-related purchases.
As a result, the broker retains a Neutral rating and $1.35 target. Morgan Stanley, on the other hand, noting the lockdowns are not permanent, remains a buyer on any weakness and retains an Overweight rating with a $1.80 target. The broker assesses Kathmandu is leveraged to the re-opening of economies and a shift back to outdoor activities.
Meanwhile the balance sheet is well-positioned and Jarden expects the company will be net cash in FY21, finishing the year with inventory that is broadly in line with FY20 levels.
The broker reiterates a Buy rating with a NZ$1.75 target to reflect attractive valuation upside, a cash dividend yield, earnings recovery and conservative balance sheet. Jarden anticipates a final dividend for FY21 of NZ5c.
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