Consumer Discretionary

KMD Brands FY22 earnings to disappoint: Covid challenges are fading

Wed 13 Jul 22, 11:23am (AEST)
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Key Points

  • Underlying FY22 earnings (EBITDA) are expected to be lower than FY21
  • Rip Curl and Oboz products remains at record levels and continue to perform well
  • Fourth quarter profitability is expected to be above pre-covid levels

Despite the market’s indifference to companies with less than rosy news right now, revelations that KMD Brands (ASX: KMD) earnings for the full year ending July 31 are set to come in lower than the previous period, the share price was surprisingly up 2% at the open.

Despite a record performance witnessed by its Kathmandu brand during the key winter period, overall retail trade in Australasia has been impacted by the omicron outbreak.

Covid earnings hit

Total FY22 sales for the mid-cap retailer are expected to be in the range of NZ$955m to NZ$965m, higher than the NZ$922.8m it recorded for FY21, due to strong retail and wholesale trading in Rip Curl and production improvements at Oboz.

However, underlying FY22 earnings (EBITDA) are expected to come in between NZ$88m to NZ$94m and underlying earning (EBIT) to range from NZ$53m to NZ$59m.

Both are lower than FY21 results of $113.3m in EBITDA and EBIT of $83.8m.

But despite the significant covid impacts on retail, same store sales in Rip Curl and Kathmandu brands were up 2.1% and 7.3% respectively.

As previously communicated, the year-on-year impact of covid on first half earnings (EBITDA) was around $35m.

Blame it on covid

While trading conditions improved in the second half, management notes covid’s impact on footfall, particularly in the third quarter, caused sporadic store closures due to staff availability.

Adding to covid, CEO Michael Daly flagged early in 2022 rising input cost issues, especially in raw materials to make wetsuits, and surging freight costs.

Having decided to accelerate orders to meet forward wholesale orders and expected retail demand – especially in light of ongoing supply chain disruption - inventory levels are forecast to be above 2021.

What happened at the half year?

Heavily impacted by covid lockdowns, sales of $407m came in slightly behind first half FY21.

Due to elevated international freight costs, and increased clearance mix for the Kathmandu brand, gross margins experienced a 130-basis points headwind at 57.7%.

But management notes forward demand for Rip Curl and Oboz products remains at record levels and continues to perform well.

Looking forward

While the third quarter was impacted by the ongoing covid outbreak, fourth quarter profitability is expected to be above pre-covid levels, assuming there are no new government restrictions.

“The group continues to target our long-term objective of 0.5x net debt to underlying EBITDA,” noted Daly.

“KMD is well positioned for growth as travel rebounds globally, and covid impacts on consumer behaviour and international supply chains ease.”

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KMD Brands share price over six months.

 

What brokers think

As a reflection of deteriorating consumer confidence, the consumer discretionary index is down -17.72% over 12 months.

While KMD’s share price has oversold the index, down -26.37% over the same period, year-to-date the company is down a whopping -44%.

Consensus on KMD is Moderate Buy.

Based on Morningstar’s fair value of $1.40 the stock appears to be undervalued.

Based on the two brokers that cover KMD (as reported on by FN Arena) the stock is trading with 27.5% upside to the target price of $1.275.

Morgan Stanley believes consumer-facing stocks [like KMD] are among the most vulnerable to rising interest rates and inflation.

But in light of KMD’s leverage to the covid reopening and shift to outdoor activities, a repaired balance sheet and cheap valuation, the broker retains an Overweight rating and target price of $1.35. (29/06/22).

Macquarie believes KMD is yet to execute offshore and realise the benefits of an increased marketing spend.

While Macquarie retains a Neutral rating and $1.20 target, the broker’s last update was late March 2022.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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