Kathmandu’s Growth Potential Global And Online

This story features KMD BRANDS LIMITED. For more info SHARE ANALYSIS: KMD

-Online focus for global growth
-Strong margins impress brokers
-Small format success
 

By Eva Brocklehurst

Kathmandu ((KMD)) has achieved success where many have ventured but few have made the grade. The outdoor clothing specialist is now planning to ratchet up its global network, commencing online. The success of smaller format stores has extended the product reach and, while growth in the company's mature business is limited beyond three years or so, management thinks international expansion will provide the long-term opportunities.

Moelis has a Buy rating with a $4.00 target but expects the near-term prospects for sustained share price upside are limited, given the rally over the past year. It's the international penetration that holds promise, according to the broker, given scope for a further re-rating of fundamentals. Management has conducted "testing" that shows Kathmandu is already in the top 10 global brands for outdoor adventure gear, with product sold in 40 countries. Both North America and Europe are considered realistic targets for growth, which will be facilitated by the international shipping network. Moelis observes the company's strategy will entail building an increased online presence in targeted regions, then to subsequently open cornerstone stores once a level of brand recognition has been reached.

Deutsche Bank found a lot to like in the latest results, noting the first half demonstrated the superior position of the brand and the resilience of the outdoor category. The broker was impressed with the like-for-like growth in Australia and New Zealand as well as the underlying gross margins. The company is structurally better placed than its peers, with brand ownership, no exposure to "fast fashion" and an online presence that can enhance offshore distribution, in Deutsche Bank's opinion. Online is currently around 5% of sales. Deutsche Bank retains a Buy rating and NZ$3.85 target.

Australia was the star performer in the first half and, in the light of the poor performance of the company's competitors, Credit Suisse thinks this is telling of both Kathmandu's market share growth and the resilience in the outdoor area in general. Gross margin expansion also impressed the broker, with product traction resulting in less discounting than the store had anticipated. Credit Suisse has upgraded gross profit margin assumptions to 64.3% over the medium to longer term, to take into account the higher-margin online representation.

Credit Suisse had downgraded numbers recently, assuming the macro landscape in Australia and an unfavourable current mix would affect the stock. The broker has had to eat humble pie in this regard, noting Kathmandu's product and growing profile in Australia is offsetting this. Of particular note was the ability to absorb a meaningful headwind in the strengthening of the NZ dollar against the Australian dollar. Long-term valuation has signaled a need to upgrade the rating. Consequently, Credit Suisse has upgraded to Neutral from Underperform. The target is NZ$3.75.

The company's growth in the home market of New Zealand was respectable too, with revenue growth of 5.6% in the first half. Credit Suisse highlights that the first half is a small part of overall earnings, as Easter and winter sales remain the key to profitability. Credit Suisse is a little cautious about the company taking on a crowded global marketplace in online outdoor gear. Having said that, the broker considers Kathmandu is sufficiently capable of driving reasonable sales from this platform.

Macquarie finds the outdoor market attractive and thinks there's upside for the stock from optimising the stores. The broker has a Buy rating and $3.70 target. One area of notable weakness was the UK footprint which, while small, dragged on the overall results. Sales declined with the store portfolio reconfiguration, and gross margin contraction reflected clearance activity. This business has downsized to four flagship stores and Macquarie observes Kathmandu is now looking to leverage online marketplaces such as Amazon, Next and eBay.

Kathmandu is trading on a FY15 earnings multiple of 13.2 times, which Deutsche Bank observes is a discount to the peer group average of 14.5 times. The company has maintained its target for 15 new stores in FY14 and upgraded its overall target to 180 from 170 in Australia and New Zealand. Kathmandu is weighting the majority of store openings to the second half, having opened four in Australia and one in New Zealand in the first half.

The FNArena database shows two Buy or equivalent and one Hold rating for KMD.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms