KMD’s interim reveals green shoots: Flags margin/inflation concerns

KMD Brands (ASX: KMD) owner of Kathmandu and Rip Curl brands today posted a sharp -125% drop in net profit for the first half ending 31 January 2022, leading to a loss of -$NZ5.5m.

Today’s announcement should have come as no surprise to the market after the retailer pre-warned early November that its operating profits for the September quarter would be NZ$35m less than those of the first quarter of financial year 2021.

Nevertheless, investors seem to have taken some solace from the realisation that green shoots were emerging within a much better second quarter, with the share price up around 1% at the open this morning.

Higher costs & unfulfilled orders

While the result for the six months was underscored by an improving second quarter, gross margins were squeezed to 57.7% compared with 59% a year ago courtesy of higher international freight costs, and increased clearance sale for the Kathmandu brand.

What also weighed on the first half result was the closure of the company’s Vietnam factories which meant half the orders for US hiking footwear business Oboz couldn’t be fulfilled, resulting in a -30.2% drop in sales.

However, group CEO Michael Daly has flagged strengthening demand for the Oboz brand and products since factories reopened.

“While Kathmandu continued to feel the impacts of COVID-19-related travel restrictions, we were pleased to see a 46.4 per cent increase in online sales, and the business is well positioned to grow internationally, with the Europe Fall /Winter 22 sell-in complete, and forward orders in line with expectations,” Daly noted.

Daly did not provide any firm sales update but noted that February was the lowest month of sales of the year.

Higher prices

While second-half margins are expected to be in line with last year, Daly raised concerns over fiscal 2023.

“Like everyone, we’re concerned about where inflation is and where cost inputs may go. But at the same time, we believe with our technical innovation base we have got the potential to raise prices where we need to."

Fundamentals

Equally pleasing within the interim result were signs of a second-quarter of recovery of sales at Kathmandu and Rip Curl, up 0.8% and 2.7%, respectively.

Other notable highlights within the first half results included:

• Interim dividend increased by 50% to 3.0 cents per share (fully franked for Australian shareholders).

• Strong balance sheet with $48.6m net debt and comfortably within all covenants; significant funding headroom of $250m.

• Underlying earnings (EBITDA) of $10.2m (1H FY21: $48.2m).

• Sales of $407.3m (1H FY21: $410.7m).

Future plans

The Kathmandu brand is targeting international sales of $NZ100m in the next five years and is looking to expand to Europe, Canada and then the US markets.

Initiatives to elevate the company’s digital capabilities, include the launch of the Club Rip Curl loyalty scheme in the second half, and the relaunch Kathmandu’s Summit Club, with an exciting new value proposition.

"I am excited by the opportunities we have to build our portfolio of brands under our new parent company KMD Brands,” Daly noted.

“The parent company is providing vision and strategic guidance to enable group synergies, including sharing expertise in technology, materials and leveraging operational excellence in sourcing, supply chain and systems, to deliver the best customer experience across our brands.”

KMD share price over six months.