Kathmandu still climbing

Kathmandu still climbing

Kathmandu (ASX: KMD) has reported pleasing financial results for the January 2014 half-year. While Kathmandu’s store rollout is well on track, it’s the company’s long term potential that has us excited.

Kathmandu operates 139 outdoor clothing and equipment stores in New Zealand, Australia and the United Kingdom, and predominantly sells its branded products.

Australia is the primary growth driver of the group with 90 stores. During the half, the division grew same store sales (SSS) by 6.6 per cent. The New Zealand market, with 45 stores, also performed well with 3.2 per cent SSS growth. It was pleasing to see that Kathmandu did not have to resort to excessive discounting during Christmas, which helped the gross margin improve from 62.7 per cent to 63.9 per cent.

Kathmandu is experiencing considerable success with its small format stores in regional areas, and has increased the network target from 170 to 180 stores in the result. By most accounts, the medium term prospects look sound, but how will the company deliver value in the long term?

Management took this opportunity to explain the next growth driver of the business. Unlike other retailers, a store rollout strategy isn’t the long-term focus. Rather, it’s building Kathmandu into a globally-recognised brand.

Kathmandu is a product that is well regarded in the market, evidenced by the one million members in its Summit Club loyalty program. The club already has 13,000 international members who joined while visiting Australia. Rather than improving awareness with a global store rollout, Kathmandu is focused on enhancing its online offering and developing its omni-channel capabilities. There is a lot of potential when you consider that Kathmandu can ship a product ordered online from New Zealand to the United States for free, and still get a better margin than in their stores.

Management considers that the market is valuing Kathmandu as an Australasian retailer, rather than a brand with global potential. The company already generates 4.7 per cent of its sales from online, and there are plans to increase this share to 20 per cent in the next five years. Kathmandu’s store rollout will help support this next stage of growth.

Both the Montgomery [Private] Fund and the Montgomery Fund own shares in Kathmandu.