Key Brands Providing Upside For Kathmandu

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Kathmandu has posted a soft start to FY22 with the reintroduction of lockdowns across Australasia yet key brands are providing a strong outlook

-Wholesale order books significantly above pre-pandemic levels for Rip Curl and Oboz
-Lockdowns considered a temporary setback for Kathmandu
-Upside risk exists with the expansion in Europe and Canada
 

By Eva Brocklehurst

The lockdowns across Australasia in July and August have dealt a blow to sales of outdoor gear at Kathmandu ((KMD)) stores, leading to a soft performance at the finish of FY21 and subdued start to FY22.

Nevertheless, the medium-term outlook is more rosy as wholesale order books at the start of the new financial year are significantly above pre-pandemic levels for both the Rip Curl and Oboz divisions, with Oboz orders at the highest level ever.

First half profit is expected to be lower than the prior corresponding half because of the ongoing impact of the pandemic yet Kathmandu is expected to benefit from the global roll-out of vaccinations for its Rip Curl brand, Macquarie adds.

On the other hand, a depressed travel market means continued pressure on airport locations and travel-related products for the Kathmandu brand. Sales have been strong in those regions that are less affected by restrictions.

Rip Curl sales rose 11% and Oboz sales were up 45% in FY21, countered by a weaker performance for general outdoor sales online. Jarden notes, together, these two businesses accounted for two thirds of operating earnings. Overall, sales rose 15% to NZ$923m, slightly below the guidance provided in late June.

During the recent summer in North America and Europe sales remain above pre-pandemic levels amid increased participation in surfing and strong engagement with the Rip Curl brand. Hawaii is a case in point, Macquarie notes, as business is now exceeding pre-pandemic levels since the reopening although it was severely affected by the pandemic for a substantial part of FY21.

Restrictions related to the pandemic have also affected supply lines in Asia, particularly shoe production in Vietnam which is relevant to Oboz, and Kathmandu is working to minimise the impact. Jarden points out long lead times the key products are providing a natural offset to any material disruptions and while freight costs have increased this is being offset by improved FX rates.

The gross margin was down -4 percentage points to 58.7%. Margins have benefited from rental abatements while around $50m has been accrued from restructuring and synergy savings.

Morgan Stanley considers the lockdowns are only a temporary setback and sales should rebound as Australasia reopens and consumers spend more time outdoors. Same-store sales in the first six weeks of FY22 are down -12.8% yet the broker points out, when taking those stores that are closed out of the equation, same-store sales are up 3.6%.

Meanwhile, the balance sheet is in good shape and the stock screens cheaply at 12x Morgan Stanley's FY22 PE (price/earnings ratio) estimate.

Jarden asserts, given the stated medium-term target for leverage is net debt/earnings of 0.5x, Kathmandu may use its balance sheet capacity to pursue bolt-on acquisitions or return funds to shareholders. Yet, while restrictions and disruptions related to the pandemic continue, the broker acknowledges balance sheet strength is likely to be favoured over a rapidly increasing dividend payment.

Jarden, not one of the seven stockbrokers monitored daily on the FNArena database, considers the stock presents an attractive risk/reward, which drives a Buy rating and NZ$1.75 target.

UBS finds the valuation attractive in contrast to retail peers, confident Kathmandu can double operating earnings (EBITDA) out to FY23 because of the growth in Rip Curl sales and the expected reopening of Australasian stores.

Offshore

Macquarie notes the pandemic is not only affecting store sales in Australasia but also the ability to secure the supply that is required to meet demand offshore. This is where the upside risk exists, yet the broker does not specifically capture the development in forecasts, preferring to await successful execution.

Kathmandu will launch in mainland Europe and Canada in FY22. The initiative will be underpinned by $37m in cash and a total facility of $300m. The company is also undertaking digital initiatives to enhance its online platform as well as the launch of a Rip Curl loyalty program in FY22 and relaunch of the Kathmandu Summit program.

FNArena's database has two Buy ratings and one Hold (Macquarie). The consensus target is $1.65, suggesting 16.2% upside to the last share price. The dividend yield on FY22 and FY23 forecasts is 4.7% and 5.8%, respectively.

See also, Riding The Kathmandu Wave on September 6, 2021 and Winter Lockdowns Impact Kathmandu Sales on July 1, 2021.

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