Kathmandu full-year profit halves as discounting cuts margins, recovery seen in 2016

Tuesday 29th September 2015

Kathmandu Holdings, the outdoor clothing retailer that spurned a takeover offer this year, reported net profit about halved because of "aggressive" discounting to shift surplus stock and weak demand in Australia. It affirmed guidance for a rebound in 2016 while announcing the exit from the UK market.

Profit was $20.4 million in the year ended July 31, from $42.2 million a year earlier, the Christchurch based company said in a statement. Sales rose to $409.4 million from $392.9 million a year earlier. The results about met the guidance the retailer gave in August.

Kathmandu fended off a hostile takeover offer from Briscoe Group, the retailer controlled by managing director Rod Duke, arguing the approach at what amounted to $1.80 a share in cash and scrip was opportunistic, coming after a slump in the stock after a difficult Christmas sales season. The shares fell 3.6 percent to $1.36, well below the $2.10-$2.41 valuation in Grant Samuel’s independent assessment of the Briscoe offer, which lapsed this month.

“The results for FY2015 were disappointing and well below our expectations," said chief executive Xavier Simonet, who arrived in July, just as the Briscoe takeover was being launched. "After a challenging first three quarters, our Winter promotion delivered improved same-store sales and gross margin results year on year, which was a significantly better outcome than our Christmas and Easter promotions."

"We remain committed to our FY2016 forecast,” he said.

Last month, Kathmandu forecast 2016 sales to rise to $454.6 million, and earnings before interest and tax to rise to $48.2 million from $33.2 million this year. Its earnings margin, which halved to 8.2 percent in 2015, was expected to recover in 2016 to reach 10.6 percent.

The company will pay a final dividend of 5 cents a share, making 8 cents for the year, down from 12 cents a year earlier.

Kathmandu admitted to some missteps in its latest year. Excess inventory at the start of 2015 forced it into "aggressive clearance activity" in the first quarter "at compressed margins." It said pricing and promotional activity through the first three quarters of the year "caused customer confusion and was compromised by clearance activity." At the same time, operating costs rose in anticipation of sales growth that didn't eventuate, consumer sentiment was weak in Australia and a falling kiwi dollar lifted the cost of imported goods.

Gross margin declined 1.6 percentage points to 61.5 percent in 2015, although in the second half, gross margin improved by 0.7 points to 63.3 percent.

"This improvement, driven by less discounting, was particularly evident in the Winter sale promotion where margins improved by over 3.5 percentage points year on year," it said.

Australian sales rose 7 percent to $264.6 million while New Zealand sales declined 1.3 percent to $139 million. UK sales rose 21 percent to $5.7 million. Same-store sales fell 2 percent in Australia and 1.1 percent in New Zealand.

The results also included $1.9 million of one-time costs from the relocation of the company's New Zealand support office, Australian distribution centre and costs related to the Briscoe offer. Following a structural review, The retailer has identified cost savings of about $7 million that will be implemented in 2016, it said.

The company said it will exit its UK store network in 2016, and intends "to build on our brand equity and online platform to expand internationally using a capital light model."

“The FY2015 result has highlighted the need to review our cost structure and we have taken decisive action on this already," Simonet said. "It also emphasised the need to optimise our pricing strategy and promotional model in order to improve same store sales growth and profitability in existing stores. These levers will remain a strong focus for management in FY2016."

Kathmandu remained committed to its long-term target of 180 stores across Australasia, he said.

BusinessDesk.co.nz

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