Has Kathmandu conquered its mountain of problems?

The 2016 financial year started with a takeover offer for the adventure retailer. Was its board right to reject it?

That didn’t take long. After a horrid 2015, adventure retailer Kathmandu (ASX:KMD) has reported a 64% increase in net profit and says it is looking at further international expansion. The curious thing is that this comes after the closure of three stores in the UK.

There was a lot riding on Kathmandu’s 2016 result. It was only a year ago that New Zealand retailer Briscoe Group bought 19.9% of the company and launched a takeover offer at around NZ$1.80 per share.

As part of its defence, the company forecast that 2016 operating profit would hit NZ$42m. This figure led Briscoe chief Rod Burke to respond that Kathmandu was ‘high on rhetoric and low on substance’ and that ‘there is a lot of blue sky in their 2016 forecasts’. Fighting words, but in the end Kathmandu smashed that target, with operating profit rising 53% to $51m.

The result was largely a story of less discounting activity and cost reductions. Sales increased 4%, although same-store sales were broadly flat (up 0.4% in actual terms and 1.6% on a constant currency basis). The company purposely cut back on promotional activity, meaning fewer sales and more products being sold at full price. Also, operating efficiencies (such as job cuts at head office) led to the cost of doing business dropping to 50.6% of sales compared to 53.4% of sales in 2015.

Another good sign was the 16% reduction in inventory. Inventory, or the inability to sell it unless it was significantly discounted, was the chief cause of Kathmandu’s problems in 2015.

The company was one of the more inefficient specialty retailers on the ASX (ASX:ASX) in 2015, with inventory sitting around for an average of 252 days before being sold compared to the average for the apparel specialty retail sector of 135 days. Kathmandu's 'inventory days' of 240 in 2016 is still high, but it's a step in the right direction and led to a $13.5m improvement to operating cash flow.

So far, with the share price up 15% since the company rejected Briscoe’s offer, the call to reject it looks like a good one. Kathmandu will be hoping this performance continues and the problems of last year are left well behind.

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