Kathmandu's Christmas and January sales were lower than expected
Kathmandu's Christmas and January sales were lower than expected

Kathmandu slows new stores after disappointing first-half

KATHMANDU Holdings, which operates 157 outdoor clothing and equipment outlets, is pulling back the pace of new store openings after aggressive price discounting slashed its margin in Australia and resulted in a first-half loss.

The Christchurch-based retailer posted a loss of $1.8 million, or 0.9 cents a share, in the six months ended Jan. 31, from a profit of $11.4 million, or 5.6 cents a share, a year earlier, it said in a statement. The result is within the company's February forecast for a loss of $1 million to $2 million.

Sales rose 7 per cent to $179.4 million while costs increased 18 per cent to $99.5 million. The company said expenses were in line with expectations, but lower-than-expected sales meant costs as a percentage of sales increased to 55.5 per cent from 50.4 per cent a year earlier.

"The first half of our 2015 financial year delivered a disappointing result," said acting chief executive Mark Todd. "The aggressive quitting of excess stock in August and September drove top line sales but at significantly reduced gross margins. Most importantly, our Christmas sale and trading through January did not produce the sales we expected."

The company's full-year performance would be highly dependent on sales and margins achieved in the current Easter sale period, which had started slowly in Australia, and the upcoming winter sale, Todd said. The company wants to encourage its Summit Club loyalty members to buy earlier in the sale period to avoid it having to discount heavily at the end of a sale, he said.

Todd didn't provide a full-year forecast although he said he expects an improved performance in the second half when the company normally generated 60 per cent of sales. The company is expected to make an annual profit of $25.4 million, down from $42.2 million a year earlier, according to analyst estimates compiled by Reuters.

Kathmandu shares dropped 8.7 per cent to a two-week low of $1.47, the biggest decline on the benchmark NZX 50 Index today. The stock has dropped 25 per cent so far is year.

Kathmandu, which has been ramping up spending as part of a strategy to build a global brand, opened eight new stores in the first half but has cut its full-year target to 11 from 15. It still aims to lift stores in Australia and New Zealand to 180 although it said store rollouts will depend on individual returns on investment. In the first half of next year, replacement stores are planned for Adelaide and Melbourne.

"We don't expect to open many stores in the first half of FY16," Todd said. "We will continue to consider new stores in Australia in particular on an individual case by case basis, but we will want to see an improvement in trading performance in Australia before we start to roll out significant numbers of new stores again. We need to basically prioritise capital expenditure on the best stores in the network, those that have given us an effective return on investment."

The company retained its plan to invest $5 million a year to expand its UK, Europe and international business over the next three years.

Capital expenditure increased to $9.8 million in the first half, from $8.1 million a year earlier. Spending on new stores increased to $3.8 million from $1.9 million.

In Australia, first-half earnings before interest, tax, depreciation and amortisation slumped 85 per cent to A$1.7 million as sales rose 12 per cent to A$104.9 million. The company had an additional 18 stores in the first half compared with the year earlier period, taking its total in the country to 108. Its profit margin fell to 1.6 per cent from 12.2 per cent.

Kathmandu plans to reduce its range of products to better fit its smaller Australian stores, the majority of which are in malls, and to reduce options in some of the categories that didn't do well in first half, Todd said.

In New Zealand, Ebitda dropped 28 per cent to $8.8 million as sales increased 4.7 per cent to $65.2 million. Its margin weakened to 13.5 per cent from 19.6 per cent.

In the UK, the Ebitda loss widened to 1.3 million British pounds from 600,000 pounds in the year earlier period as sales increased 29 per cent to 1.5 million pounds.

Kathmandu's combined Australia, New Zealand and international online sales increased 33 per cent in the first half and now make up 6 per cent of overall sales. It sells through its own website and other trading sites such as eBay and Trade Me and plans to start selling on Germany's Otto in the first half of its 2016 year.

The company will pay a 3 cent dividend on June 19, unchanged from the year earlier.

Kathmandu's stock is rated a 'buy' according to analyst recommendations compiled by Reuters.