Kathmandu weathers changing retail climate

Cold, wet winters … a perfect storm for retail.

Summary: This time of the year is an important sales milestone for clothing retailers such as Kathmandu, and the cooler and wetter the better. But beyond temperature, retailers are hoping the consumer confidence climate will also brighten.
Key take-out: Any persistent abnormal warmness during the season could translate to further discounts by Kathmandu to clear stock.
Key beneficiaries: General investors. Category: Growth.

The school holidays are upon us, and the mid-year break is typically marked with a family camping trip in the country. Indeed, there may be many readers that have already escaped! If this is the case, then it bodes well for Kathmandu’s winter sale.

Kathmandu specialises in selling outdoor clothing and camping equipment in Australia and New Zealand. The winter sale in June and July is the company’s largest promotional event each year, and weather is a key variant to the event’s success – the colder and wetter the winter, the more clothing, equipment and ski-gear is sold.

Kathmandu management flagged in May that autumn was unseasonably warm and dry for both Australia and New Zealand. This factor made it important for the company’s winter sale to be a success. Yet a dichotomy seems to be forming between the Australian and New Zealand climates, in terms of both a meteorological and a retail sense.

Winter appears to be well and truly underway in New Zealand. The ski season started with record snowfalls, and temperatures are now reaching sub-zero levels, with the wind-chill factor intensifying the conditions. Australia, conversely, has had a relatively slow start to winter. The ski season opened in June with almost no snow, and conditions have not improved much since. Temperatures have been mild, though June has been very wet, which would encourage purchases of water-resistant clothing.

While the differing severity of the weather will be influencing sales in the two countries, it seems that the retail climate in Australia is being made tougher by consumer sentiment. A number of New Zealand retailers that have a presence in both New Zealand and Australia have recently provided earnings updates, and it appears that New Zealand operations are meeting expectations, but Australian operations are underperforming.

Hallenstein Glasson, a specialty fashion retailer, recently announced that larger Australian chains have commenced winter clearances earlier than usual, and there is now considerable pressure on margins for the balance of the winter season. Pumpkin Patch, which designs and sells premium clothing for children, has echoed this sentiment. Management has seen a significant increase in the level of promotional activity in the Australian market in recent weeks, with major retailers entering end of season sales far more aggressively than normal.

The Australian market comprises over 60% of Kathmandu’s sales, and such a low level of consumer confidence is one of the key risks to the company’s second half-year performance (to July 31, 2013).

Kathmandu’s underlying earnings rely on promotions because of the premium mark-up that is applied to stock. While Kathmandu’s products are perceived to be of a high quality, many people will only make purchases during these sales events. It is therefore crucial for the company to sustain margins, and any persistent abnormal warmness during the season could translate to further discounts to clear stock.

I hold a position in Kathmandu, and am impressed with the company’s growth plans and confident in the ability of management to execute their strategy. The group had 120 stores in 2012, and is targeting 170 stores in the coming years. The company is also refreshing its brand through new product and store designs to increase its global appeal.

As a value investor, my focus is on the long-term potential of Kathmandu, though I am mindful of the effect that short-term fluctuations in the retail climate will have on the company’s profitability.

In May, management was confident of posting a strong performance for the full-year, and, as at the time of writing, is yet to announce an earnings update. As such, I am a happy camper when it comes to investing in Kathmandu, and eagerly await reporting season.

Roger Montgomery is the founder of The Montgomery Fund. To invest, visit www.montinvest.com

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