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Kathmandu lifts 1H profit 23%; sells shares to fund US$60M footwear purchase

Tuesday 20th March 2018

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Kathmandu Holdings, the outdoor equipment retailer, increased first-half profit 23 percent, in line with its forecast, as it discounted less products and lifted margins. It also announced plans to buy its US footwear supplier Oboz Footwear.

Profit rose to $12.3 million, or 6 cents per share, in the six months ended Jan. 31, from $10 million, or 4.9 cents, in the year earlier period, the Christchurch-based company said in a statement. That's in line with its January forecast for profit of at least $12 million. 

Under the management of chief executive Xavier Simonet, who started the role in June 2015, the company has been taking a more cautious approach to stock levels after earnings slumped in the July 2015 year as a build-up of inventory forced it into aggressive discounting at lower margins to rid itself of excess product. In the latest period, the gross margin increased to 63.3 percent from 61.6 percent in the same period a year earlier as more product was sold at full-price and higher average selling prices, the company said, adding that February margins were also ahead of last year.

“Striking the right balance between generating sales growth and improving our gross margin has fuelled healthy earnings growth in the first half," Simonet said today. "Sales momentum improved through the end of the Christmas trading period and into February and March.”

First-half sales rose 4.3 percent to $204.8 million, in line with the company's forecast. 

Total sales in New Zealand, including inter-segment sales, dropped 6 percent to $65.1 million while earnings before interest and tax slid 13 percent to $11.1 million. The company said New Zealand first-quarter sales were impacted by lower levels of clearance stock.

In Australia, total sales lifted 9.6 percent to $138.4 million as ebit more than doubled to $8.4 million from $3.7 million.

Kathmandu said clearance inventory levels at the start of the financial year were about 40 percent below the year earlier.

"While this impacted clearance sales performance, particularly in the first quarter in New Zealand, there were benefits to both gross margin and inventory handling costs," Kathmandu said. "By the end of the first half, the reset clearance stock levels were more in line with last year."

The retailer valued inventory at $84.2 million at the end of the first half, compared with $96.4 million a year earlier.

It said sales so far in the second half of the year, covering the six weeks to March 11, were 7.9 percent above last year at constant exchange rates, with same store sales increasing 7.5 percent in Australia and 5.1 percent in New Zealand.

"We are focused on delivering profit growth in our core markets for the second half of FY18," Simonet said, although he noted the success of the full-year result is still very dependent on the key promotion periods to come. 

Kathmandu said it agreed yesterday to buy Oboz Footwear for US$60 million in cash and a potential earn-out of up to US$15 million based on an earnings target for the 2018 calendar year, and expects acquisition costs of about $2 million. 

Bozeman, Montana-based Oboz designs, sources and distributes footwear for backpacking, hiking, travel and general outdoor wear through wholesales, primarily outdoor retailers in North America. Kathmandu is the exclusive retailer of Oboz in Australia and New Zealand and the companies have worked in partnership for more than 10 years, with Kathmandu being Oboz's second customer after REI when the brand launched in 2007.

"The acquisition of Oboz enables the Kathmandu Group to accelerate our international growth, and diversifies our product mix, geography and channels to market,” Simonet said.

Oboz founder John Connelly will continue to lead Oboz from Bozeman, and will report to Simonet.

Kathmandu plans to raise $40 million selling 18.5 million new shares at $2.16 apiece to institutional and sophisticated investors in Australia, New Zealand and some other countries, it said. The purchase price is a 10 percent discount to the company's $2.40 closing share price yesterday. It also intends to raise as much as $10 million selling shares to eligible retail shareholders in Australia and New Zealand for the same $2.16 share price as institutional investors.

The shares, which have gained 24 percent over the past year, are halted from trading until tomorrow due to the share placement.

Kathmandu noted that it has secured A$90 million of funding from Commonwealth Bank of Australia and $90 million from Bank of New Zealand, as part of its multi-option facilities agreements.

The company invested $8.7 million in capital projects in the first half, mostly to update its stores, ahead of the $6.8 million invested in the year-earlier period. It said working capital efficiencies led to record low net debt of $17 million, versus $48.9 million the year earlier period, lowering its finance costs.

Kathmandu will pay a first-half dividend of 4 cents per share on June 22, unchanged from the year-earlier period. 


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