Date : 11/09/2020

Kathmandu Holdings Limited

NZE :

KMD

Market Cap : $864.9 Million

Dividend Per Share : $0.11

Dividend Yield : 10.31 %

Buy

52 Week Range : $0.47 - $2.49

Share Price : $1.23

The stock comes with bags of potential in a post-pandemic world as demand in retail bounces back. The stock has not fully recovered and hence we give it a “Buy” recommendation at the current price.

Company Analysis

Kathmandu Holdings Ltd (KMD) is a global outdoor and action sports Kivi brand that retails clothing, footwear, and equipment under the brands Kathmandu, Rip Curl, and Oboz. Currently, KMD operates in New Zealand, Australia, and the United Kingdom.

KMD currently operates 328 retail stores globally. Retail is one of the most impacted sectors due to the coronavirus. However, Australia and New Zealand is one of the least impacted regions in the world. While we do forecast a fall in demand as buyers maybe cash-strapped due to the higher joblessness rates, we do expect the demand to come back soring for the much-loved Kathmandu brand among its faithful – maybe not so in the upcoming summer season, but eventually by the end of FY21. Kathmandu has a huge fan-following of sorts in the region with incredible brand loyalty as the go-to retailer for any outdoor gear and action clothing.

Of the three brands that it currently owns and operates, Kathmandu was how its story started. Oboz, an American premium footwear brand was acquired in 2018 for US$ 60m, and Rip Curl was acquired in 2019 for a sum of A$ 350m. The management of KMD have not slacked but invested wisely to diversify its portfolio within the retail sector.

Kathmandu does operate with an e-commerce website as well. However, due to the image the brand portrays and the kind of customer base that it has won over, the firm relies heavily on its much-adored retail stores to bring in most of its sales.

KMD sets itself apart by caring for our environment by taking sustainability measures for its products. Kathmandu is a “B Corp” certified firm – meeting the highest verified standards of social and environmental performance. It has also reported in its previous annual report of having recycled 9.7 million plastic bottles into its gear.

The experienced board of Kathmandu has ridden the Covid-19 induced market downturn in March, and it is seen to be recovering slowly from it. Just as we mentioned earlier, we do believe Kathmandu would go above previous levels. The firm has also taken measures to mitigate the impact of Covid-19 by implementing cost reduction measures. A completely underwritten $207m Equity raise at a price of $0.50 per share by means of a $30m Placement offer to existing shareholders and a $177m pro-rata-based Entitlement offer is in place. The market uncertainties should be mitigated with this raise and it will fortify its balance sheet and liquidity position.

Company Updates


Source: TradingView.com

The stock chart of the year-to-date shows the stock reacting to every major announcement that was made by KMD post the March slump. We believe the volatility of the stock was induced due to the below events and announcements:

  1. Trading halt (downturn)
  2. Completion of Equity Raise (upward trend)
  3. Release of Interim Financial Statements (stable)
  4. Surge in online sales and staged store reopening strategy (upward trend)

Trading halts by firms does not really work in our opinion since investor moods and momentum will only worsen once trading resumes.

The financial statements have been analysed and our take on it is on the following sections.
Kathmandu reports that it expects sales to pick up in the second half of the year due to the seasonal nature of the company.

Surge in online sales provides evidence to investors about the sound nature of its risk-management strategy during a pandemic and also its adaptability. The diverse skill set of the team is definitely a confidence booster for investors with attributes and experience across various verticals in business. The below chart depicts the capabilities of the Directors of Kathmandu.

Industry Analysis

Kathmandu mainly operates in the Sports & Camping Equipment Retailing, Clothing Retailing, and Footwear Retailing industries. These industries share a lot of similarities partly because they principally they all fall under the same sector – sports retail.

The retail industry is currently experiencing supply-chain and pandemic related store closure issues like never before. Currently, its usually steady and predictable outlook looks shaken. However, the same industry in Australia and NZ is no longer as affected as the rest of the world due to its excellent management of the pandemic.

This industry usually comes with stable, steady, and relatively growth rates, with excellent opportunities with the growth in e-commerce around the world. Firms in this space usually operate with high debt, high margins if it is a luxury brand or expensive brand, and a steady free cash flow for recognizable brands.

The sports and camping equipment retail industry in Australia is $4.1 billion market. Kathmandu has the highest exposure to Australia, followed by New Zealand. The segmented revenue chart shows how diversified its revenues are –

The Australian and Kivi retail sector will recover ahead of other developed markets such as the US, Europe, and China. We expect Kathmandu to take advantage of the early opening and get back to pre-Covid levels.

Investment Thesis

The brick and mortar retail industry is associated with high levels of debt and lesser flexibility due to their capital-intensive business models. In this section, we have analysed the past and present financial performance and health of KMD.

KMD began its strategy to rightly align itself for a post-Covid world by raising Equity. The firm holds a record high figure in Cash of NZ$ 40.3m – a whopping 546% increase from 2019.

Kathmandu paid a dividend of NZ$ 0.12 per share at a 70.9% payout ratio. This is slightly higher than the 6-year average payout ratio of 68.9%.

KMD shows a relatively steady Net Income chart and ending the year with NZ$ 51.2m – indicating steady past performance. The revenue growth rate for the year ending Jan 2020 showed a 24% increase. A stellar performance the past year for Kathmandu. This was partly due to the acquisition of Rip Curl and also due to the rise in sales mainly in Australia. The 24% increase in revenue came with a 25% increase in operating expenses. This goes to show just how capital intensive the industry is and the maturity levels of the firm relative to its corporate life cycle.

The short-term and long-term financial health of the organization is very strong as well. The below numbers coupled with a cash balance of 40.3m is enough to showcase a balance sheet that is Covid proof – to sustain the impact and come out swinging and thriving in the post pandemic economy. The firm’s capital structure is well balanced with debt and equity accounting for 53.33% and 46.47%, respectively. However, this does not reflect the numbers after the recent equity raise as we are still waiting for the latest updated report from Kathmandu. However, what we are stressing on is KMD has an immensely strong past performance, especially a strong 2019-20. The risk mitigation measures taken up by its board further strengthens their position and sets up the firm to get back to high levels once the demand rebounds in their favour – which will happen considering a firm with a line of happy and brand loyal customer base!

Recommendation

Kathmandu is an adored home brand of the Commonwealth. A company with a sound strategy, able and experienced management that also cares about the environment with its sustainability programs. KMD, like all retailers has been impacted by Covid and has not recovered as of yet. However, we give this a “Buy” recommendation as it has strong past performance and forecasts of the demand coming back to higher than previous levels as we enter a post-pandemic world. This we believe is the right price to buy into the stock as it comes with bags of potential.

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