Kathmandu shares hit a wall just prior to Christmas. The road ahead could be rocky, writes The Motley Fool.
What happened on the 22nd of December that caused Kathmandu Holdings Limited (ASX:KMD) to crash 25 per cent?
At first glance it seemed that investors might have over-reacted due to disappointing sales during Christmas. Kathmandu forecast EBITDA to be less than the NZ$23.2m compared to the same period achieved last year.
Recent profit warnings have been dragging down the share prices of retailers – such as JB Hi-Fi (ASX: JBH) – and Kathmandu is the latest addition. Owing to the uncertainty of the U.S. and European economies, consumer spending has been on a declining trend. To make things worse, a recent earthquake in Christchurch could have forced Kathmandu to close some of their shops during Christmas and lose even more sales.
The ups and downs of retail
The retail industry has always been classified as cyclical, where sales and profits rise and fall according to economic growth. If you buy into a cyclical company at the wrong part of the cycle, it may take years before you'll get a return on your investment
Unless the company is selling something essential, I hoped you heeded Dean's advice back in July and refrained from investing in the retail sector during such economic times. But if you must, do your homework. Visiting the stores in your neighbourhood to observe how sales are going might give you a better idea.
Kathmandu's Chief Executive Officer Peter Halkett said that the retail environment had become increasingly difficult both in Australia and New Zealand.
"Our trading performance throughout the Christmas period to date has been below expectations, which is a reflection of weaker consumer spending."
In their December presentation, while Kathmandu states that EBITDA is below expectations, they claimed their growth strategies are successful and full year growth profit is achievable.
Time will tell. If management are true to their word, and do turn things around, shares in Kathmandu may be worth a closer look. For now, I'm happy to sit on the sidelines and watch the action unfold.
For investors looking to upgrade from Kathmandu, our free special report — "The Motley Fool's Top Stock for 2012" — highlights one such company. Grab a free copy of that report by clicking here.
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This article was written by Motley Fool contributor Jonathan Lee. Jonathan does not own any shares in Kathmandu. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.
