Outdoor clothing retailer Kathmandu Holdings Ltd (ASX: KMD) has been a surprisingly terrible investment since listing in November 2009 at $1.70. The shares reached a peak of $3.85 in early 2014 but have since climbed back down hill to trade at around $1.30.
What Happened?
Kathmandu's management was reasonably successful at growing its business during its first five years as a listed company. Revenue jumped from $197 million in the 2010 financial year to $358 million in 2014 and profit nearly doubled from $20 million to $38 million. The problem is that a warm winter last year, followed by a hot summer, combined with poor consumer sentiment has culminated in a net loss after tax of NZ$1.8 million for the first half of the 2015 financial year.
What does this mean for investors?
Well, investors should probably get ready for the dividend to be slashed from the 11.2 cents last financial year to closer to 6 cents this year. While Kathmandu's trailing yield of 8.5% fully franked is appealing, investors should prepare for a yield of around 4.6% this year, grossing up to nearly 7%.
4.6% is pretty good, some may say, and I'd agree with you. I think investors with a long-term horizon might look at Kathmandu and see a great opportunity. Here's my rationale:
- Kathmandu is as much a brand as it is a retail company, and it is in firm control of the brand. Unlike others, think Billabong International Limited (ASX: BBG), Kathmandu products are only sold through Kathmandu stores, giving the company ultimate control of price and stock levels. Pain felt clearing stock in the first half has set the group up for a strong second half if conditions improve.
- Similar to competitor brands like North Face, Kathmandu's sales are impacted by the weather AND consumer sentiment. If Australia has a nice cold winter and a dry autumn, demand for Kathmandu's products should improve. Readers should note that Canada had one of the worst snow seasons on record, massively impacting sales of comparable companies.
- Experts are predicting profit of over $20 million for the financial year ending in July. This corresponds to earnings per share of 11.3 cents and puts Kathmandu on a price to earnings ratio of just 12.
- The company is expanding into the UK with some promising results. This expansion could provide earnings upside, however it's some way off yet.
