Investors who purchased shares in KMD Brands at the conclusion of the pandemic lockdowns have experienced a significant decline of over 80% in their investments during that period. However, a resurgence in the company’s shares following its latest financial results suggests that investors may believe the toughest times are behind them. While it’s challenging to draw definitive conclusions, there appears to be a strategic plan in place aimed at recovery.
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KMD Brands, previously known as Kathmandu, debuted on the stock market in 2009 under that name. The company is widely recognized for its outdoor clothing and gear. KMD Brands also includes Rip Curl, a surfing label, and Oboz, a North American outdoor footwear brand. The rebranding was intended to encapsulate its vision as a “family of global outdoor brands,” with aspirations to expand beyond Australasia and transition from a single-brand retailer to a more diversified global entity. The company boasts over 300 stores worldwide across its various brands, spanning all six continents, and is one of only 90 B Corp-certified companies globally.
Peaking During COVID, But Downhill Ever Since
Examining the company’s performance over the past few years reveals a troubling trend. In FY19, KMD Brands reported sales of $545.6 million and a profit after tax of $57.6 million, reflecting increases of 10% and 14%, respectively. Shortly after these results, Rip Curl was acquired for $350 million. In FY20, sales surged to NZ$801.5 million, largely due to Rip Curl, but the underlying profit plummeted to $31.5 million as a result of COVID-19 disruptions, prompting a $200 million capital raising in April 2020. Online sales, however, increased by 63% to $106.4 million. FY21 marked the zenith of profitability, with an underlying profit of $66.3 million (a 110.2% increase) and revenues exceeding $900 million. Despite continued revenue growth, underlying profit declined to $36.2 million in FY22 and $43.3 million in FY23, culminating in a significant $48.3 million loss in FY24, with EBITDA falling by over 50% to $50 million. Revenue, which peaked at $1.1 billion in FY23, subsequently fell below the billion-dollar mark within two years.
Why KMD Brands Has Fallen
Since the onset of COVID-19, discretionary retailers have faced heightened challenges, and outdoor apparel falls squarely within this category of consumer spending. With rising living costs, inflation, and tighter budgets, the demand for outdoor gear has been adversely affected. For instance, while puffer jackets initially saw strong sales, demand has since waned. To move inventory and maintain sales volume, the company has resorted to aggressive discounting, which, while sustaining sales, has eroded profit margins. Additionally, sales have declined not only in direct-to-consumer channels but also in wholesale markets, such as retailers like Myer. Further complicating matters, KMD Brands has faced impairments, including a $40 million hit related to Oboz in FY24. Economic conditions in Australia have also been challenging post-COVID, and this trend extends to New Zealand, where consumer behavior indicates a strong inclination towards seeking bargains, as demonstrated by Baby Bunting (ASX:BBN).
Reasons for Optimism?
Despite the relatively lackluster FY25 results, which showed a mere 1% increase in sales to $989 million, a 65% decline in EBITDA to $17.7 million, and a loss of $28.3 million, there are signs of potential recovery. The company’s recent leadership overhaul, now under Brent Scrimshaw, has instilled a renewed sense of direction. Scrimshaw directly addressed investors after spending months assessing the necessary changes for revitalization. He identified several optimistic indicators, such as positive brand recognition, while also acknowledging challenges, some of which are beyond the company’s control—like tariffs and inflation. However, others, such as product differentiation and effective brand integration, are manageable. KMD Brands plans to close underperforming stores and implement various growth and cost-cutting strategies, including the launch of a new surfing watch integrated with a dedicated app under the Rip Curl brand, as well as opening a dedicated women’s store in Bondi Beach. The company’s three-pronged strategy aims to prioritize brand leadership, informed decision-making, and responsible financial governance. By mid-2028, KMD Brands aims to achieve approximately a 60% gross margin and an EBITDA margin exceeding 10%, while keeping net working capital below 16% of sales. In the immediate future, KMD has indicated that it expects gross margins in the first half of FY26 to surpass those of the second half of FY25, although the latter half of FY26 may see impacts from tariffs; they anticipate an expansion in EBITDA margins, particularly in the second half of FY26, and a reduction in net debt to below $40 million from $52.8 million at the end of FY25, with capital expenditures projected between $25 million and $30 million. Analysts monitoring KMD Brands have set a mean target price of A$0.29, indicating potential growth compared to the current price of A$0.24, although this remains significantly lower than historical highs. Expectations for FY26 include another loss, but with projected revenue of $1.03 billion, followed by a slight profit of $0.01 EPS (approximately $7 million) and revenue of $1.078 billion in subsequent years. The company’s EV/EBITDA multiples for FY26 and FY27 are projected at 4x and 3.2x, respectively, while the P/E ratio is anticipated to be 10.5x for FY27 when the company is expected to return to profitability.
Conclusion
This situation presents a classic example of a retail turnaround opportunity. It’s crucial to note that we refer to this as an “opportunity” rather than a definitive “buying opportunity,” as confidence in the investment remains uncertain. While there appears to be a structured plan for recovery, which was not as clear six to twelve months ago, numerous factors must align for success. The company’s return to profitability may take time, and despite a target of a 10% EBITDA margin, the details surrounding net income remain vague. Analysts predict that achieving profitability could take a minimum of two years, with margins expected to be thin. Additionally, the outdoor retail sector is highly competitive and sensitive to various external factors, including weather patterns, travel trends, inflation, tariffs, and overall consumer spending. A single adverse season or unexpected event could have significant repercussions. KMD Brands must focus on product innovation, maintaining brand relevance, and exercising cost control to regain investor confidence.
