Kathmandu full-year profit halves as discounting cuts margins, recovery seen in 2016

See also: Rod Duke opines on Kathmandu’s 'appalling' result

Kathmandu Holdings [NZX: KMD], the outdoor clothing retailer that spurned a takeover offer this year, reported net profit nearly halved because of "aggressive" discounting to shift surplus stock and weak demand in Australia. It affirmed guidance for a rebound in 2016 while announcing an exit from the UK market.

Profit was $20.4 million in the year ended July 31, from $42.2 million a year earlier, the Christchurch-based company said in a statement. Sales rose to $409.4 million from $392.9 million a year earlier. The results nearly met the guidance the retailer gave in August.

Kathmandu fended off a hostile takeover offer from Briscoe Group [NZX: BGR], the retailer controlled by managing director Rod Duke, arguing the approach at what amounted to $1.80 a share in cash and scrip was opportunistic, coming after a slump in the stock after a difficult Christmas sales season. The shares fell 3.6% to $1.36, well below the $2.10-2.41 valuation in Grant Samuel's independent assessment of the Briscoe offer, which lapsed this month.

"The results for the 2015 financial year were disappointing and well below our expectations," said chief executive Xavier Simonet, who arrived in July, just as the Briscoe takeover as being launched. "After a challenging first three quarters, our winter promotion delivered improved same-store sales and gross margin results year on year, which was a significantly better outcome than our Christmas and Easter promotions."

"We remain committed to our 2016 financial year forecast," he said.

Last month, Kathmandu forecast 2016 sales to rise to $454.6 million, and earnings before interest and tax to rise to $48.2 million from $33.2 million this year. Its earnings margin, which halved to 8.2% in 2015, was expected to recover in 2016 to reach 10.6%.

The company will pay a final dividend of 5c a share, making 8c for the year, down from 12c a year earlier.

Kathmandu admitted to some missteps in its latest year. Excess inventory at the start of 2015 forced it into "aggressive clearance activity" in the first quarter "at compressed margins." It said pricing and promotional activity through the first three quarters of the year "caused customer confusion and was compromised by clearance activity." At the same time, operating costs rose in anticipation of sales growth that didn't eventuate, consumer sentiment was weak in Australia and a falling kiwi dollar lifted the cost of imported goods.

Gross margin declined 1.6 percentage points to 61.5% in 2015, although in the second half, gross margin improved by 0.7 points to 63.3%.

"This improvement, driven by less discounting, was particularly evident in the winter sale promotion where margins improved by over 3.5 percentage points year on year," it said.

Australian sales rose 7% to $264.6 million while New Zealand sales declined 1.3% to $139 million. UK sales rose 21% to $5.7 million. Same-store sales fell 2% in Australia and 1.1% in New Zealand.

The results also included $1.9 million of one-time costs from the relocation of the company's New Zealand support office, Australian distribution centre and costs related to the Briscoe offer. Following a structural review, the retailer has identified cost savings of about $7 million that will be implemented in 2016, it said.

The company said it will exit its UK store network in 2016 and intends "to build on our brand equity and online platform to expand internationally using a capital light model."

"The 2015 result has highlighted the need to review our cost structure and we have taken decisive action on this already," Mr Simonet said. "It also emphasised the need to optimise our pricing strategy and promotional model to improve same store sales growth and profitability in existing stores. These levers will remain a strong focus for management in 2016."

Kathmandu remained committed to its long-term target of 180 stores across Australasia, he said.

(BusinessDesk)