Kathmandu Comes Back from a NZ$1.8 Million Loss

Early last year, Kathmandu Holdings [ASX:KMD] released their very disappointing second-half results for 2015. The retailer reported a net loss of NZ$1.8 million, down from NZ$11.4 million profit a year earlier. The group blamed the hugely disappointing Christmas trading period at the time.

KMD tried to discount excess stock left over from winter’s end. Yet this strategy just ended up hurting their margins. At the time, KMD was depending on Easter and winter sales periods to save them.

These days, however, it would seem that KMD has been able to turn things around.

This morning, KMD posted a NZ$9.4 million net profit after tax for the first half of 2016. It seems KMD’s struggles with inventory woes are far behind them.

The group was able to increase sales for the first half of 2016 by 9%, to NZ$195.9 million. Same store sales rose 3.8% on a constant currency basis. Kathmandu CEO Xavier Simonet commented:

The results for the first half of FY2016 were in line with our expectations. Operating margin improvement was achieved as a result of increased full price sell through combined with implementing planned cost efficiencies.

The slightly stronger Australian dollar also helped boost profits. Australian sales growth was up 8.9%; converted into NZ dollars, sales growth bumped up by 11.7%. Online sales saw improvements across all countries. Overall online sales growth increased 23%, contributing 6.6% to total sales.

KMD is expecting full-year net profits after tax to be in the region of NZ$30.2 million. However, this will depend on the success of its Easter and winter campaigns.

While it is good to be on track with our plan for the first half, as in ever year, the full year result is highly dependent on the sales and margin achievement in our Easter and Winter campaigns. We have just commenced our Easter Sale so it is too early to provide an update on this promotion,’ Simonet said.

KMD’s share price opened up 3.2% this morning, to $1.517 per share. Yet shares have been slightly receding since market open.

Kathmandu KMD share price

Source: Google Finance

From instore to online

KMD could very well be on track in meeting their net profit targets. However, they may soon need to address an issue facing many instore retailers — the threat of online stores. While KMD does have online stores for customers, it only makes up 6.6% of total sales.

Right now, the biggest thing shoppers care about is price. Research conducted by a global technology company, Pitney Bowes, found that 74% of Australian consumers shop for price. And that’s why a lot of Australian shoppers are buying from international retailers.

The IBM 2015 Global Smarter Consumer Study showed that brand loyalty could become a thing of the past. The study surveyed 1,800 Australians about their online consumer habits. The study found that consumers are increasingly more confident shopping online, with purchases increasing by 25%. This was pointed to as an indicator of consumers’ willingness to spend more.

And one fifth of those surveyed said their last purchase was made online. This just reaffirmed the trend towards online spending. But what is even more damaging, I believe, to retailers like KMD was that brand loyalty was decreasing.

Australian shoppers said they were less loyal to brand names, preferring to go with the cheaper option. Brand loyalty was sitting around 13% in 2014 but has come down to 10% in 2015.  Therefore, it’s imperative that KMD prepares itself for the new breed of shoppers to come. If not, then we might see KMD’s profits swing again into negative territory.

Härje Ronngard,

Junior Analyst, Money Morning

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