Kathmandu shares surge as investors take shine to Australian sales growth

Monday 24th March 2014

Shares in Kathmandu Holdings' jumped 8.4 percent, making them the best performer on New Zealand's benchmark stock index today, as investors looked past the impact of the high kiwi dollar on first-half earnings to see sales growth in Australia, the retailer's largest market.

Kathmandu shares jumped 28 cents to a two-week high of $3.62. The company's Australian unit, which accounts for almost two thirds of revenue, posted a 0.3 percent decline in sales to $103.1 million in the six months ended Jan. 31, although in Australian dollar terms sales rose 15 percent on a year earlier.

First half Australian pre-tax earnings climbed 45 percent to $2.8 million, the Christchurch-based company said.

"The market appears to be looking through the currency translation effect as they're obviously still getting quite strong growth in Australia," said Craig Stent, who helps manage $1 billion in equities at Harbour Asset Management. "Even the retailers in Australia, like Myers and David Jones have had pretty average growth, so Kathmandu is obviously a stock which has delivered."

Kathmandu, who sells outdoor clothing and equipment, said the stronger kiwi against the Australian dollar sliced $2.2 million off pretax earnings in the half. The New Zealand dollar has risen 18 percent against its Australian counterpart in the past 12 months and was recently at 93.78 Australian cents.

"We had a good half in Australia and the Australian market, its only when you convert it to New Zealand dollars that it doesn't look that flash," chief financial officer Mark Todd said on a teleconference. "There is a 15 percent weakening in the exchange rate, Australia is two thirds of our business, so it has approximately a 10 percent effect on earnings as a result."

Net profit rose 11 percent to $11.4 million in the period, while sales rose 1 percent to $167.6 million. In New Zealand, sales rose 4.6 percent to $62.3 million, to account for 37 percent of total revenue, while earnings before tax rose 8.2 percent to $9.85 million.

The company's gross profit margin widened to 63.9 percent in the first half from 62.7 percent a year earlier.

"There have been difficult trading conditions generally across Australia and New Zealand, as experienced by other retailers, but Kathmandu has still managed to get pretty good sales growth and maintain their gross margin," said Harbour Asset's Stent.

"Trading through Christmas was quite strong, so they didn't have to discount as much as they possibly have in the past, so they kept their prices up. Also they've got an increased range and high gross margin products compared to what they've had in the past," Stent said.

Sales in the UK fell 33 percent to $2.3 million while its loss widened to $1.2 million from $783,000. Kathmandu opened four new stores in Australia, one in New Zealand and closed one in the UK.

The company said it expects full-year profit growth, but warned "unseasonal weather through the Easter and winter sale periods is always a significant variable influencing the full year's results."

Kathmandu stock is rated an average "buy" according to analysts polled by Reuters. The company will pay a first-half dividend of 3 cents per share on June 17.

BusinessDesk.co.nz

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