The share price of Kathmandu Holdings Ltd (ASX: KMD) has fallen 10% to $2.11 following yesterday's release of the company's first-half result for the period ended 31 January 2019.
Underwhelming result
Kathmandu reported sales growth of 13.3% to NZ$232 million for the first-half of FY19 with gross profit up 9.4% to NZ$141.9 million.
Normalised net profit after tax rose 7.3% to NZ$13.2 million which was in line with guidance provided in January where the company projected an increase of between 4% and 8% following soft trade over the Christmas period.
Operating cash flow declined NZ$16.2 million which was attributed to changes in working capital including an increase in inventory and the timing of supplier and tax payments.
Whilst the headline numbers appear strong, investors should note that they include a material contribution from footwear brand Oboz which Kathmandu acquired in April 2018. Management has reported that Oboz continues to perform strongly and is the fastest growing major hike footwear brand at North America's largest outdoor retailer, REI. Furthermore, Oboz is also the fastest growing footwear brand at Kathmandu stores.
For the first-half, Oboz reported pro forma sales growth of 38.6% to NZ$29.2 million with earnings before interest and tax (EBIT) up 77.1% to NZ$4.7 million. Oboz is projected to be neutral to group earnings per share in FY19 and accretive in FY20.
After backing out Oboz's contribution from North America, group sales and EBIT were down by less than 1% in Australia and New Zealand. Despite strong same store sales growth at the beginning of the financial year, the soft trading conditions over Christmas have materially impacted Kathmandu.
For the first-half, Kathmandu reported total sales growth of 2.7% in Australia whilst sales in New Zealand fell 1.9%. Same store sales growth in Australia was 1.2% whilst New Zealand experienced a decline of 2.2%.
Despite the challenging operating environment, the company saw an 80 basis points improvement to 64.2% in its retail gross margin. The increase was attributed to less promotional discounting that resulted in higher average selling prices.
Foolish takeaway
The Kathmandu share price is down 19% in 2019 following January's trading update and the release of its half-year earnings. This was a disappointing result for the company that has been factored into its share price.
At current prices, the stock is trading at an inexpensive valuation of around 9 times FY19 earnings. However, I would like to see an uplift in same store sales growth before buying the stock.
In light of this result, investors seeking exposure in the retail sector may want to consider other retailers such as Accent Group Ltd (ASX: AX1) and Super Retail Group Ltd (ASX: SUL).
