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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Kathmandu Holdings<br>A COVID Chill to Australian Trading</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Kathmandu (KMD) has lowered its FY21 earnings guidance as&nbsp;lockdowns&nbsp;across Australia weigh on sales during the key winter period. Although sales disruption is poorly timed, commentary suggests underlying brand performance is healthy, with Kathmandu tracking at pre COVID-19 levels as it entered winter, while Rip Curl is delivering strong growth in the Northern Hemisphere as consumer mobility improves.&nbsp;KMD remains well positioned over the medium-term as it benefits from favourable category exposure, while longer-term earnings growth opportunity exists from international expansion of the Kathmandu brand. On a 12m forward PE ratio of 12.5x, KMD continues to trade at a discount to peers. OUTPERFORM.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;We lower our FY21 EBITDA -5.4% to NZ$221m (c. NZ$118m&nbsp;on a pre-IFRS 16 basis) to reflect the impact of&nbsp;lockdowns</li>
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<h3>Earnings downgrade driven by restricted trading in Australia</h3>
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<p>Lockdowns&nbsp;in Western Australia (minimum of four days), New South Wales (minimum of two weeks), and an earlier two week&nbsp;lockdown&nbsp;in Victoria have&nbsp;impacted KMD sales. As a result&nbsp;the company has guided to group revenue of c. NZ$930m and pre-IFRS 16 underlying EBITDA of&nbsp;c. NZ$120m, with the implied EBITDA impact from the&nbsp;lockdowns&nbsp;c. NZ$13m. We understand that impact captures the effect of announced restrictions only, with any extension/expansion creating further earnings downside. We estimate that a one week extension to the New South Wales&nbsp;lockdown&nbsp;would have a c. -NZ$4m impact to EBITDA. The update highlights the ongoing trading risk from potential COVID-19 flare ups. However,&nbsp;we&nbsp;suspect KMD is more exposed to this trading risk than other retailers given 1) the poor timing&nbsp;during a seasonally important period, and 2) stay at home orders likely limit any weather related consumer purchasing&nbsp;prompts.</p>
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<h3>Underlying brand performance appears strong</h3>
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<p>Encouragingly, underlying brand performance appears healthy. Early winter sale indications for Kathmandu, implied sales consistent with pre COVID-19 levels, while Northern Hemisphere sales for Rip Curl and Oboz have been tracking at double digit growth ahead of FY19. We suspect supply chain congestion is likely limiting further sales growth for Rip Curl, with demand for wetsuits outpacing the ability to supply. We remain positive on KMD's brand positioning over the medium-term given 1) beneficial category exposure, 2) its sustainability credentials, and 3) further Kathmandu brand product development expected in FY22, providing a lever to drive good customer engagement.</p>
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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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<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
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Kathmandu Holdings A COVID Chill to Australian Trading

OUTPERFORM
Kathmandu (KMD) has lowered its FY21 earnings guidance as&nbsp;lockdowns&nbsp;across Australia weigh on sales during the key winter period. Although sales disruption is poorly timed, commentary suggests underlying brand performance is healthy, with Kathmandu tracking at pre COVID-19 levels as it entered winter, while Rip Curl is delivering strong growth in the Northern Hemisphere as consumer mobility improves.&nbsp;KMD remains well positioned over the medium-term as it benefits from favourable category exposure, while longer-term earnings growth opportunity exists from international expansion of the Kathmandu brand. On a 12m forward PE ratio of 12.5x, KMD continues to trade at a discount to peers. OUTPERFORM.


What's changed?&nbsp;



Earnings:&nbsp;We lower our FY21 EBITDA -5.4% to NZ$221m (c. NZ$118m&nbsp;on a pre-IFRS 16 basis) to reflect the impact of&nbsp;lockdowns



Earnings downgrade driven by restricted trading in Australia


Lockdowns&nbsp;in Western Australia (minimum of four days), New South Wales (minimum of two weeks), and an earlier two week&nbsp;lockdown&nbsp;in Victoria have&nbsp;impacted KMD sales. As a result&nbsp;the company has guided to group revenue of c. NZ$930m and pre-IFRS 16 underlying EBITDA of&nbsp;c. NZ$120m, with the implied EBITDA impact from the&nbsp;lockdowns&nbsp;c. NZ$13m. We understand that impact captures the effect of announced restrictions only, with any extension/expansion creating further earnings downside. We estimate that a one week extension to the New South Wales&nbsp;lockdown&nbsp;would have a c. -NZ$4m impact to EBITDA. The update highlights the ongoing trading risk from potential COVID-19 flare ups. However,&nbsp;we&nbsp;suspect KMD is more exposed to this trading risk than other retailers given 1) the poor timing&nbsp;during a seasonally important period, and 2) stay at home orders likely limit any weather related consumer purchasing&nbsp;prompts.


Underlying brand performance appears strong


Encouragingly, underlying brand performance appears healthy. Early winter sale indications for Kathmandu, implied sales consistent with pre COVID-19 levels, while Northern Hemisphere sales for Rip Curl and Oboz have been tracking at double digit growth ahead of FY19. We suspect supply chain congestion is likely limiting further sales growth for Rip Curl, with demand for wetsuits outpacing the ability to supply. We remain positive on KMD's brand positioning over the medium-term given 1) beneficial category exposure, 2) its sustainability credentials, and 3) further Kathmandu brand product development expected in FY22, providing a lever to drive good customer engagement.



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





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Kathmandu Holdings: A COVID Chill to Australian Trading