Australia | Sep 21 2023
This story features KMD BRANDS LIMITED. For more info SHARE ANALYSIS: KMD
A mild winter and cycling covid reopening has led to KMD Brands suffering sales weakness.
-FY23 cycled store re-openings from lockdown in FY22
-The mild winter hit Kathmandu sales
-FY24 continuing the trend to date
-Jarden sees further out positives for KMD Brands
By Greg Peel
KMD Brands ((KMD)) was previously Kathmandu – the well-known Kiwi-based retailer of quality winter-wear with a hiking theme. The group also includes Oboz hiking boots, and, in a move to diversify away from winter concentration, acquired surf-wear company Rip Curl in 2019, since changing its name to KMD Brands.
The Kathmandu label still dominates earnings, for which sales are very dependent on winter weather conditions. This winter just past was a mild one, which impacted on sales.
KMD reported FY23 results yesterday which came in towards the bottom of well-flagged guidance. The first three quarters of the year saw solid performance, but the fourth quarter let the side down, and colder months are critical for the group. The company was also cycling record earnings from a year ago, after reopening after covid. So it was a tough ask to begin with.
For the financial year, KMD grew earnings by 15%. But in the second half, group sales fell -3%, with Kathmandu sales down -9.9%, and earnings -26% with margin contraction of -340 basis points.
Management has implemented a cost-out program to improve margins, but only a small amount benefited FY23, Macquarie notes. And the weak sales trend seen in the fourth quarter has continued into the first quarter FY24, which is most of winter.
Looking forward, the wholesale market remains tough, Jarden admits, as participants look to de-stock and orders have moderated. However, should consumer sales prove stronger than expectations, additional mid-season purchasing can occur, this broker suggests, which is typically higher margin for KMD.
KMD expects to deliver 130 basis points of earnings margin accretion through its cost-outs via 100 points of gross margin uplift, 100 points from operating leverage and 200 points from normalisation of recent headwinds, including supply chain constraints, a soft consumer environment, and the unseasonably warm winter.
To the latter point, we are now in an El Nino pattern which we all know means hotter, drier conditions. We’re not looking forward to summer. But a lack of rain, and clear skies, also leads to a cold winter.
As for a normalisation of the soft consumer environment, management seems more optimistic than brokers. Given ongoing uncertainty around both consumer confidence and hitting margin targets, Macquarie has cut its price target by -20% to 70c (A$) and retained a Neutral rating.
Morgan Stanley has retained its 90c target, but this broker expects the market to remain cautious on FY24 earnings given the current macro conditions, and thus remains Equal-weight.
Jarden is a little less dour. Two encouraging factors Jarden highlights relate to inventories and store openings.
Given falling sales, one would expect a retailer to be caught with excess inventory, but in fact KMD managed to reduce inventory over the period.
In the second half of FY23, KMD opened on net three new Kathmandu stores, increasing the count by 2%, and six new Rip Curl stores (11%). Another eight new stores across the group are set to be opened in the first half of FY24.
Jarden expects KMD to return to growth in the second half, driven by a recovery in activity, the continued store rollout, and aforementioned normalisation of winter weather.
While this broker acknowledges there are reasons to be cautious near-term, it believes these are well reflected in the share price and a possible return to growth in H2 FY24 is a potential positive catalyst.
Trading on a price/earnings ratio of 8.3x Jarden’s FY25 forecasts, with a double-digit three-year earnings compound annual rate of growth, the broker views risk/reward as attractive.
Jarden retains Buy, with a slightly reduced NZ$1.20 target, which is around A$1.10 on the current exchange rate.
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