Kathmandu warns of slow Christmas trading in Aust   22 Dec 2014

By Paul McBeth and Suze Metherell

Dec. 22 (BusinessDesk) - Shares of Kathmandu Holdings plunged near a two-year low after the outdoor equipment retailer reported a slowdown in sales growth after a subdued start to Christmas shopping in its Australian market.

The Christchurch-based company's year-to-date sales rose 14 percent as at Dec. 21, slowing from a pace of 19 percent as at Nov. 16, due to lower same-store sales in Australia over the past five weeks, it said in a statement. The shares dropped as much as 21 percent to $2.19, the lowest since January 2013 and close to half its March peak of $4.05. The stock recently traded at $2.22.

"Basically it's a profit downgrade but they don't say by how much," Rickey Ward, New Zealand equities manager at JB Were said. "The trading update alludes to Australia showing further signs of deterioration and no imminent sign of improvement. Given a large portion of their earnings come from Australia it has taken a bit of a tumble on that."

Australia is the outlier for Kathmandu, with same store sales in New Zealand the UK tracking ahead of the same period a year earlier, and at similar gross margins, Kathmandu said.

"Due to both the subdued start to Australian trading in Kathmandu's Christmas sale promotion, and the reduced gross margins achieved across the full year to date in Australia, the company will experience a substantial reduction in the gross profit earnings in the pre-Christmas Day trading period compared to the equivalent period in FY2014," it said. "Kathmandu anticipates any recovery in trading from now till 31 January 2015 will not be sufficient to make up the shortfall in gross profit experienced to date in 1H 2015."

Kathmandu expects Australia to remain tough for some time and is reassessing its sales and pricing strategy for the second half of the 2015 year and beyond. Across the Tasman investment in the mining sector is slowing down, while tumbling iron ore prices, its main export commodity, has further weighed on the Australian economy.

"This is a company that is linked heavily towards lifestyle and climate and all those sorts of wonderful things" JB Were's Ward said. "The retail sector in Australia in part hasn't been too bad, but it is an economy that's struggling. It has been a two-speed economy for quite some time and unfortunately the second gear is stuck in reverse at the moment, being the resource sector."

Retailers, particularly those in the rag trade, have said they need Christmas sales to come through, to boost earnings, as they squeeze margins to offer discounts and lure the consumer back from cheaper, online bargains. Pumpkin Patch, the unprofitable childrenswear company, told shareholders at its annual meeting if Christmas sales don't deliver it is at risk of breaching its banking covenants.

Kathmandu's peak season, unlike other retailers, is autumn, when it holds its Easter sale with shoppers buying expensive jackets and other warm clothes ahead of winter.

"Easter is their Christmas period - 25 percent of their earnings come through in the first-half and 75 percent in the second-half because it incorporates their Christmas period which is Easter," Ward said.

In September, the retailer posted a 4.5 percent decline in annual profit to $42.2 million, as earnings were hurt by a warmer start to winter, which dented trading of seasonal goods through a period when it holds its biggest annual sale, while a strong New Zealand dollar against the Australian currency, where it generates the majority of its revenue, crimped earnings.

(BusinessDesk)

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