KMD Brands is ‘cautiously optimistic’ after posting robust 1Q: Eyeballs China as future growth market

KMD Brands (ASX: KMD) defied a -1.3% fall across the broader consumer discretionary sector today, with the retailer’s – best known for the Kathmandu and Rip Curl brands – share price up around 4% this afternoon.

What the market clearly liked this morning was the retailer’s 1Q FY23 update which revealed that gross margin and profitability were holding up well.

Sales and profits have surged by double digits, while the disruptive downside experienced by the US boots business’s (Oboz) supply chain has been sorted.

CEO Michael Daly told investors that Oboz inventory position has recovered, finally allowing the group to fulfil wholesale order book demand and support the significant online growth potential of the brand.

Critical trading period

As always, Daly reminded investors that the first half-year results remain dependent on the key Black Friday and Christmas retail trading periods still to come.

Meantime, the group’s 1Q FY23 total sales are 61.8% above Q1 FY22, despite retail prices increasing 4.8% through the year to the June quarter.

Despite more challenging headwinds for the retail sector, the group’s forward order book and inventory position point to ongoing growth.

Total sales were 17.5% above the pre-covid period of FY20 (including Rip Curl sales before acquisition), while underlying operating profit improved by nearly NZ$30m ($27.3m) in the quarter.

Eyes on China

Numbers aside, the market clearly warmed to Daly’s cautious optimism in the face of high inflation and rising interest rates denting consumer sentiment.

Attempts by the Labor government to rekindle normal trading conditions with China may have added extra significance to the company’s announced plans to enter the middle kingdom over the longer term.

While the immediate focus is on core international markets, Daly acknowledged the importance of China where interest in camping and outdoor activities is on an uptrend.

“…our immediate focus is on our existing key markets in Australasia, Europe and North America… we haven’t lost sight of the importance of the China market and the size of the China market,” noted Daly who completed his first full year as CEO in 2022.

1Q FY23 highlights

Overall, the group experienced strong sales growth across all brands compared to both prior year and pre-covid levels.

• Direct-to-consumer same store sales growth for the 14 weeks until November 6 gained 107.2%

• Rip Curl jumped 29.7%.

• US boot business Oboz achieved record wholesale and online sales.

• Underlying operating profit improved by nearly $30m year-on-year.

Outlook

Daly expects sales to continue to increase as travel recovered, and more workers returned to cities and offices.

The company recently launched in France, Germany and Canada with wholesale partners and online, and has sold two seasons ahead of initial expectations.

KMD also plans to leverage the surf brand, Rip Curl, through its Oboz distribution network in the US.

What brokers think

KMD’s share price is down -34% over 12 months but has staged an insipid uptrend since mid-September.

Consensus on KMD is Strong Buy.

Macquarie retains a Neutral rating and target price of $0.90 after factoring in growing pressure on gross margins and high inventories being experienced by KMD’s peers.

Following KMD’s FY22 result, Morgan Stanley lowered its target price to $1.25 from $1.35 to allow for a challenging macroeconomic backdrop.

The Overweight rating is maintained.

KMD Brands' share price over 12 months.