Global Opportunities Beyond the Radar

12% Surge: Why the Kathmandu Share Price Is Up Today

 

Kathmandu Holdings Ltd [NZX:KMD] has a chain of retail stores across New Zealand and Australia. It sells clothing and equipment for travel and adventure. And has a strong reputation with customers, having been in the marketplace some 30 years.

Around the world, we’re seeing increased appetite for investors to move from defensive holdings like cash and fixed interest into equities.

However, a retail business in this environment is possibly at the riskier end of many equities. But this has not stopped the Kathmandu share price staging a steady recovery from a March low of 49c.

The company currently has a market capitalisation of $800 million, and the current share price sits at $1.28.

 

Why has the [NZX:KMD] share price risen today?

 

The company announced positive progress to the market today:

In particular, same-store sale results for the last six full weeks from 18 May to 28 June 2020:

Other key takeaways are as follows:

 

Where could [NZX:KMD] go from here?

 

What we’ve seen globally is plenty of pent-up demand flooding back into retail stores once they reopen. Given the reporting period in this announcement, this is evident with Kathmandu.

Fiscal stimulus has likely helped too — in the form of national wage support. This is coming to an end.

The key risk to the share price now is reinfection and specific areas — e.g. Victoria — reinstating some degree of lockdown.

Beyond this, the retailer faces a tougher trading environment after pent-up demand and government money works its way out. This could mean slow winter and spring trading. And closed borders reduce the demand for travel equipment.

We note that the update mentions only gross margin — not net margin. Over the past couple of years, Kathmandu has maintained net margins around the 10% level.

This is reasonable but not exciting.

According to Shop Ethical, aproximately 80% of Kathmandu products are manufactured in China. In Australia, there is increasing backlash against China. We wonder if that too will impact Kathmandu’s business. Any move of supply away from China could come with increased cost.

Kathmandu continues to exhibit some pretty attractive fundamentals. P/E sits at around 7. Basic DCF analysis on the revenue projections suggests some value gap. However, with no dividends currently in place, it will need to continue to deliver some growth to please the market.

The retail sector can be tough, but Kathmandu does show promise. Could this be time to buy or top-up? We see a high-risk environment for this business in the medium-term. And have some concerns around margin pressure and possible supply chain backlash over the longer-term.

In our view, there could be better investments that balance risk with growth and income potential. You can discover these by subscribing to our Inner Circle Newsletter.

 

Regards,

Simon Angelo

Editor, Wealth Morning

Exit mobile version