Kathmandu affirms 2016 profit growth guidance, tweaks marketing to reduce 'sales fatigue'

Click the NBR Radio box for on-demand special feature audio: New Zealand Shareholders’ Association chairman John Hawkins and Briscoe Group managing director Rod Duke on Kathmandu listening to its shareholders

Kathmandu Holdings [NZX: KMD], the outdoor clothing retailer that spurned a takeover offer this year, affirmed its guidance for 2016 profit growth after lifting gross margin in the first quarter, and said it would refresh its promotions strategy to reduce "sales fatigue" among customers.

Net profit is forecast at $30.2 million for the year ended July 31, 2016, a partial recovery from 2015 when profit slumped 52 percent to $20.4 million, the company told shareholders at their annual meting in Christchurch. Gross margin rose 5 percentage points in the first quarter ended Nov. 1 and the retailer also gave figures for the 15 weeks through Nov. 15, showing sales rose 8.6 percent to $91.3 million.

Kathmandu mishandled its Christmas and January clearance sales season, which made up 27 percent of annual revenue last year, and then had to fend off an opportunist and unsuccessful takeover offer from Briscoe Group when its shares tumbled down to the record low previously reached in 2012 of $1.246. The stock rose 12 percent to $1.78 today, just below the theoretical $1.80 a share implied at the time Briscoe made its offer. The rival retailer now holds 19.9 percent of the stock.

Chief executive Xavier Simonet, who started in July, just as the Briscoe takeover was being launched, said the company had made "a solid start, which is encouraging, but our first half-year profit result still remains highly dependent on the more significant Christmas trading period from now to 31 January."

Same-store sales for the first 15 weeks of the year rose 4.8 percent on a constant currency basis, led by a 6.5 percent gain for Australia, 2.1 percent for New Zealand and a 0.9 percent decline in the UK, a market it plans to exit. Simonet told shareholders, though, that the first quarter made up only 18 percent of total sales last year and is a period outside the retailer's major promotion periods, where it gets most of its revenue.

In presentation slides, he set out the results of a review of the company's "promotional model and pricing architecture". The main focus will be "rationalisation of media spend with clear sense of return on investment, particularly through social media and digital channels; improved clarity of promotions for our customers; optimising events and promotions that drive increased foot traffic and conversion and maximise gross profit contribution; and refinement of promotional calendar to reduce sales fatigue/dependency."

It was "critical to focus on the basics and optimise the profitability of our existing assets," Simonet said. Kathmandu also needed to improve the look of merchandise in its stores, reinforce its expertise in adventure travel products and work on promoting product benefits and brand attributes. Stores are likely to be reorganised to favour most profitable product groups, and the company would also focus on improving execution of promotions.

Kathmandu also wants to improve engagement with the 1.4 million members of its Summit Club loyalty scheme, he said. It would continue to push online sales and look at expanding into other markets on a "capital-light" basis, which could be online sales, wholesale distribution or franchised stores.

Among resolutions being put to shareholders at the Christchurch meeting is to grant Simonet performance rights up to a value of A$546,000. The board modified the terms of the bonus, lifting the performance targets after criticism from shareholders including Briscoe managing director Rod Duke that the targets were too soft.

In order to qualify for 50 percent of the performance rights, Kathmandu must achieve compound annual average growth in earnings per share over three years of 17.5 percent. The board had initially proposed 100 percent of the bonus on achieving a 15 percent growth rate and 50 percent of the bonus on 10 percent growth.

(BusinessDesk)