New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Attention to Retail<br>A More Jolly Christmas...</h2>
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<p>With Christmas only eight weeks away, the approaching seasonal spend looks to be better than previously anticipated. Retail sales momentum is supported by a buoyant housing market and low interest rates, reducing the incentive to save, while continued border closures allow for a re-allocation of travel spend towards other categories. However, the underlying economic&nbsp;picture remains unclear and we carry a degree of caution into 2021. Within our coverage our preferred consumer retail exposure is Kathmandu (KMD).&nbsp;</p>
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<h3>Positively positioned for the Christmas peak...</h3>
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<p>The retail sector is poised to positively surprise into Christmas, in our opinion. The housing market remains buoyant and is unlikely to reverse near-term with tight inventory, low borrowing costs, and returning kiwis re-entering the market. Interest rates at record lows also reduces incentive to save, supportive of continued retail activity, particularly in the homeware segment. With borders remaining shut, there has been a re-allocation of travel spend towards other discretionary categories. We view the likelihood of New Zealand's borders reopening (meaningfully) in the next six months as low. A key concern during lockdown was the possible build up of retail inventory and therefore elevated discounting pressure. The surge in spending as New Zealand moved into lower alert levels combined with inventory management has alleviated concerns and reduces the likelihood of gross margin pressure, albeit with a possible swing towards inventory shortage risk.</p>
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<h3>...outlook into 2021 remains cautious</h3>
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<p>Our view of the world has improved as government restrictions eased and consumer activity proved to be resilient, however, we remain cautious heading into 2021 as broad government support tapers off and the economic realities become clearer. Economic forecasts suggest New&nbsp;Zealand&nbsp;GDP will be below pre COVID-19 levels in 2020 and 2021, with unemployment peaking in 2Q21.&nbsp;</p>
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<h3>Preferred exposure KMD and MHJ</h3>
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<p>The best placed categories amid the current backdrop of nesting behaviour, border closures, and economic uncertainty are homeware and outdoors, in our view. Given fluid lockdown restrictions, companies with strong online offerings and well recognised brands are likely to outperform. Within our listed retail coverage, we view Kathmandu (KMD) and Michael Hill (MHJ) as offering investors the best risk/return.</p>
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<li>KMD's&nbsp;well established brands, track record of performance, and our view that adventure retail is&nbsp;well positioned to benefit from increased&nbsp;domestic tourism are supportive of near-term earnings. Having lagged a recovery against peers and the wider retail sector, we see&nbsp;KMD's&nbsp;valuation as attractive and is our preferred pick. In addition, its leverage&nbsp;to the Christmas/Summer sales period has increased following the acquisition of Rip Curl.</li>
<li>Productivity and gross margin turnaround&nbsp;was evident at MHJ prior to COVID-19.&nbsp;Whilst it is exposed to a more discretionary category and therefore higher risk, at current multiples (9x two year forward PE ratio) we view valuation as more than compensating&nbsp;for the uncertainty.</li>
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<div><strong>Guy Hooper</strong></div>
<div><a href="mailto:guy.hooper@forsythbarr.co.nz" target="_blank" rel="noopener">guy.hooper@forsythbarr.co.nz</a></div>
<div>+64 4 495 5255</div>
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Attention to Retail A More Jolly Christmas...

With Christmas only eight weeks away, the approaching seasonal spend looks to be better than previously anticipated. Retail sales momentum is supported by a buoyant housing market and low interest rates, reducing the incentive to save, while continued border closures allow for a re-allocation of travel spend towards other categories. However, the underlying economic&nbsp;picture remains unclear and we carry a degree of caution into 2021. Within our coverage our preferred consumer retail exposure is Kathmandu (KMD).&nbsp;


Positively positioned for the Christmas peak...


The retail sector is poised to positively surprise into Christmas, in our opinion. The housing market remains buoyant and is unlikely to reverse near-term with tight inventory, low borrowing costs, and returning kiwis re-entering the market. Interest rates at record lows also reduces incentive to save, supportive of continued retail activity, particularly in the homeware segment. With borders remaining shut, there has been a re-allocation of travel spend towards other discretionary categories. We view the likelihood of New Zealand's borders reopening (meaningfully) in the next six months as low. A key concern during lockdown was the possible build up of retail inventory and therefore elevated discounting pressure. The surge in spending as New Zealand moved into lower alert levels combined with inventory management has alleviated concerns and reduces the likelihood of gross margin pressure, albeit with a possible swing towards inventory shortage risk.


...outlook into 2021 remains cautious


Our view of the world has improved as government restrictions eased and consumer activity proved to be resilient, however, we remain cautious heading into 2021 as broad government support tapers off and the economic realities become clearer. Economic forecasts suggest New&nbsp;Zealand&nbsp;GDP will be below pre COVID-19 levels in 2020 and 2021, with unemployment peaking in 2Q21.&nbsp;


Preferred exposure KMD and MHJ


The best placed categories amid the current backdrop of nesting behaviour, border closures, and economic uncertainty are homeware and outdoors, in our view. Given fluid lockdown restrictions, companies with strong online offerings and well recognised brands are likely to outperform. Within our listed retail coverage, we view Kathmandu (KMD) and Michael Hill (MHJ) as offering investors the best risk/return.

KMD's&nbsp;well established brands, track record of performance, and our view that adventure retail is&nbsp;well positioned to benefit from increased&nbsp;domestic tourism are supportive of near-term earnings. Having lagged a recovery against peers and the wider retail sector, we see&nbsp;KMD's&nbsp;valuation as attractive and is our preferred pick. In addition, its leverage&nbsp;to the Christmas/Summer sales period has increased following the acquisition of Rip Curl.
Productivity and gross margin turnaround&nbsp;was evident at MHJ prior to COVID-19.&nbsp;Whilst it is exposed to a more discretionary category and therefore higher risk, at current multiples (9x two year forward PE ratio) we view valuation as more than compensating&nbsp;for the uncertainty.





Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255




Attention to Retail: A More Jolly Christmas...

Kathmandu Holdings

Attention to Retail: A More Jolly Christmas...