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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Kathmandu Holdings<br>Rip Curl Swells into Southern Summer</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Kathmandu's (KMD) 1Q21 trading update contained more positives than negatives, with the seasonally important Rip Curl delivering strong sales growth, offsetting weakness at Kathmandu. Heading into the Christmas quarter, we expect category exposure to continue to benefit Rip Curl, with a re-allocation of international travel spend likely to favour outdoors and surf. In addition, wholesale order books have recovered which is supportive of positive trading momentum into 2H21 led by the Northern Hemisphere summer. We reiterate our OUTPERFORM rating.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;Headline earnings changes reflect the inclusion of IFRS-16 to our forecasts. Our underlying earnings forecasts are effectively unchanged.</li>
</ul>
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<h3>EBITDA in line with prior year</h3>
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<p>KMD announced mixed 1Q21 trading with ongoing COVID-19 disruption, offset by wage subsidies and strong sales in key categories. Group (pro-forma) direct to consumer 1Q21 sales fell -24% (wholesale -14%) on the prior comparable period. Despite weaker sales, group (pro-forma) EBITDA is flat on the prior year, although more reflective of wage subsidies offsetting the impact of temporary store closures, rather than material underlying margin movements.&nbsp;</p>
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<h3>Strong Surf sales, with Outdoors lagging (in a seasonally low period)</h3>
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<ul>
<li><strong>Outdoors</strong> —&nbsp;1Q21 same store sales (SSS) fell -7.6% on the prior comparable period (adjusted for store closures, -40% unadjusted). Weakness was largely driven by travel exposed categories, insulation and&nbsp;rainwear, and more than offset&nbsp;momentum in core outdoors, camping and footwear.&nbsp;Oboz&nbsp;performance has been robust, and encouragingly the forward order book is tracking ahead of pre-COVID-19 levels.
<ul>
<li>Although headline sales appear weak, this is a&nbsp;seasonally quiet period for the Kathmandu brand (1H/2H profitability split c. 25%/75%). We expect soft sales to remain a feature in 2Q21&nbsp;(border closures impacting travel linked products). Winter sales trading is key to performance, and whilst it is early, category performance indicates trading should improve into 2H21.&nbsp;</li>
</ul>
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<li><strong>Surf (pro-forma)</strong> —&nbsp;Rip Curl delivered exceptional direct to consumer SSS growth, up +27%&nbsp;on the prior comparable period (adjusted, -1.7% unadjusted).&nbsp;Total wholesale orders fell -14% on the prior comparable period, however, the wholesale order book has recovered ahead of pre COVID-19 levels, a positive signal into 2H21.
<ul>
<li>Earnings seasonality for Surf is more evenly weighted across the halves, however, given the geographic spread we suspect channel seasonality is direct to consumer weighted in 1H and wholesale 2H. Should current momentum be maintained we see scope for upside to our assumptions, although weigh that against continued lockdown and economic uncertainty.</li>
</ul>
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</ul>
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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>
</div>
</div>
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Kathmandu Holdings Rip Curl Swells into Southern Summer

OUTPERFORM
Kathmandu's (KMD) 1Q21 trading update contained more positives than negatives, with the seasonally important Rip Curl delivering strong sales growth, offsetting weakness at Kathmandu. Heading into the Christmas quarter, we expect category exposure to continue to benefit Rip Curl, with a re-allocation of international travel spend likely to favour outdoors and surf. In addition, wholesale order books have recovered which is supportive of positive trading momentum into 2H21 led by the Northern Hemisphere summer. We reiterate our OUTPERFORM rating.


What's changed?&nbsp;



Earnings:&nbsp;Headline earnings changes reflect the inclusion of IFRS-16 to our forecasts. Our underlying earnings forecasts are effectively unchanged.



EBITDA in line with prior year


KMD announced mixed 1Q21 trading with ongoing COVID-19 disruption, offset by wage subsidies and strong sales in key categories. Group (pro-forma) direct to consumer 1Q21 sales fell -24% (wholesale -14%) on the prior comparable period. Despite weaker sales, group (pro-forma) EBITDA is flat on the prior year, although more reflective of wage subsidies offsetting the impact of temporary store closures, rather than material underlying margin movements.&nbsp;


Strong Surf sales, with Outdoors lagging (in a seasonally low period)



Outdoors —&nbsp;1Q21 same store sales (SSS) fell -7.6% on the prior comparable period (adjusted for store closures, -40% unadjusted). Weakness was largely driven by travel exposed categories, insulation and&nbsp;rainwear, and more than offset&nbsp;momentum in core outdoors, camping and footwear.&nbsp;Oboz&nbsp;performance has been robust, and encouragingly the forward order book is tracking ahead of pre-COVID-19 levels.

Although headline sales appear weak, this is a&nbsp;seasonally quiet period for the Kathmandu brand (1H/2H profitability split c. 25%/75%). We expect soft sales to remain a feature in 2Q21&nbsp;(border closures impacting travel linked products). Winter sales trading is key to performance, and whilst it is early, category performance indicates trading should improve into 2H21.&nbsp;


Surf (pro-forma) —&nbsp;Rip Curl delivered exceptional direct to consumer SSS growth, up +27%&nbsp;on the prior comparable period (adjusted, -1.7% unadjusted).&nbsp;Total wholesale orders fell -14% on the prior comparable period, however, the wholesale order book has recovered ahead of pre COVID-19 levels, a positive signal into 2H21.

Earnings seasonality for Surf is more evenly weighted across the halves, however, given the geographic spread we suspect channel seasonality is direct to consumer weighted in 1H and wholesale 2H. Should current momentum be maintained we see scope for upside to our assumptions, although weigh that against continued lockdown and economic uncertainty.







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




Kathmandu Holdings: Rip Curl Swells into Southern Summer