Kathmandu to open up global markets

After successfully fending off an opportunistic takeover bid last year, Kathmandu Holdings Ltd (ASX: KMD) seems to have turned a corner with half year net profit of $NZ9.4 million, following strong same-store sales growth across Australia, NZ and the UK – of 4.3%, 3.1% and 1.5% respectively – in the six months to 3 January.

Due largely to cost cutting and a strong rebound in Christmas and January sales, the NZ headquartered company’s share price jumped 5% on the revelations that it had grown first half sales by 9.3% to $NZ196 million, on the back of both same-store sales growth, plus the expansion of the store network.

Following a 51.7% drop in profit for 2015, the return to profits was particularly pleasing if not altogether unexpected, with margins up due to improved selling prices and promotional activities, and online sales also up 23%.

But what also ignited the market’s imagination were plans by CEO Xavier Simonet to grow the brand overseas, despite six consecutive halves of negative EBITDA in the UK.

Renewed overseas ambitions are a major shift in strategy since plans last year to close its four bricks and mortar UK stores and abandon expansion plans in Europe, to focus on the Australian business which had been hard hit by heavy discounting on excess winter stock.

Since stepping into the top job last June, Simonet has closed unprofitable stores, cut head office staff numbers by 10%, and reduced the number of clearance sales to boost gross margins.

He’s also investigating a blended model approach deployed by the company’s major competitors internationally – like North Face, Patagonia and Columbia – which could see Kathmandu’s polar fleeces, waterproof pants and hiking boots could sold in overseas department stores, sporting goods stores and franchised shops under new business models.

These sorts of strategies would enable Kathmandu to adopt a more measured “capital light” approach to international expansion, and spend minimal capital until the right model gains traction.

While Simonet has declined to forecast potential sales or when the new international strategy would kick off, Kathmandu has appointed an as-yet unnamed international executive to identify gaps between its vertical retail model and the requirements of a wholesale/franchise model and potential long-term partners.

Equally important, Simonet wants to maintain growth in its Australian and NZ businesses, and has reaffirmed full year profit guidance of $NZ30.2 million, which remains contingent on its key second half, which includes Easter and winter.

Assuming Kathmandu can achieve this full year outcome, it would see it trading at around 10x net profit, which doesn’t make the stock particularly expensive.

Admittedly, much of the good news within the interim result announcement was already built into the price by the time was released.

But the stock still remains reasonably well priced against a 12 month target of $1.66, and has the potential to be re-rated as further plans for international expansion come to market.