By Jenny Ruth
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Monday 18th October 2010 |
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The Reserve Bank of Australia is likely to raise interest rates in November while would create a further headwind for retailers and Kathmandu Holdings heading into the key Christmas period, says James Levien, an analyst at Aegis Equities Research which is owned by Morningstar.
"We have previously highlighted that Kathmandu relies on favourable retail conditions coinciding with the three promotional periods during the year," Levien says.
As well as Christmas, these periods are Easter and Winter during which Kathmandu discounts product regularly by about 50% but still maintains gross margins of about 60%. "We wonder about the sustainability of the pricing model in what has become a tough retail climate where discounting wars have become common," he says.
"Shortfalls in any of the three annual sale events could significantly impact company results and is a key risk," Levien says.
"A subdued sales event could leave large inventory overhangs and cause the company to breach working capital covenants," he says.
Levien values the stock at A$1.55 (NZ$2.03) but says the company's lack of history as a listed company - it listed in late 2009 - makes valuation more difficult. While demand in its segment is strong and there appears to be potential to grow earnings per share at 15% plus for several years, "we are cautious about Kathmandu's ability to navigate challenging retail conditions."
Recommendation: Hold.
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