Adventure gear retailer Kathmandu Holdings Ltd (ASX: KMD) gave investors little reason to cheer as its latest profit results and outlook sounded eerily similar to fellow embattled retailer Myer Holdings Ltd (ASX: MYR).
While the weak result had been well flagged to the market, it still wasn't enough to save Kathmandu from a 10% crash this morning to $1.42 when management confirmed that its first half result had swung into the red.
The problem is that there still isn't any light at the end of the tunnel with Kathmandu reporting a weak start to the second half of its financial year.
Same store sales (sales from established stores opened for a year or more) are 2% weaker on a constant currency basis in the seven weeks to March 15 when compared to the same time last year, and the first week of its Easter sales event in Australia is being reported as "soft".
The Easter and winter sales period is critical to the retailer's full year performance, and there's a real worry that the weak first half will carry through to the current half.
While sales for the first six months to end January gained 7% to $NZ179.4 million ($174.3 million), Kathmandu's earnings before interest and tax (EBIT) tumbled 97% to just $NZ600,000.
Heavy discounting from lackluster Christmas trading explains the divergence between revenue and earnings with the group reporting an interim net loss of $NZ1.8 million compared with a net profit of $NZ11.4 million for the same period last year.
The margin squeeze is alarming as it is not only driven by the big discounts the company had to offer to bring customers through its doors.
Operating expenses increased 17.8% to $NZ99.5 million while management admitted that it got its product mix wrong.
It's not just fragile consumer confidence that is weighing on sales. Customer feedback indicated that the clothes and gear that were being sold at its stores did not appeal to customers.
The heavy discounting, margin squeeze and poor trading conditions is like an echo from department store owner Myer, which also turned in a disappointing result.
Kathmandu is fixing its product selection issues but I don't think we will see much relief on the cost front as the company is looking to roll out 11 new permanent stores in the second half compared with eight in the first half.
The company is also continuing to invest in expanding its UK and online operations.
International sales could be a bright spot for the group, but this won't be enough to pull Kathmandu out of the funk given that around 60% of group revenue.
