Analysts Await Stronger Performance from KMD Brands
Investment bank Canaccord Genuity is closely monitoring KMD Brands, anticipating improved operational results and a clearer earnings forecast before changing its current hold rating. In a recent communication to investors, the analysts expressed optimism regarding the enhanced sales performance of KMD Brands’ Rip Curl and Kathmandu divisions during the initial half of FY25, with sales in the second quarter increasing by 6.5% and 6.9% respectively. This positive momentum follows earlier declines in sales for both brands during the first quarter, where Rip Curl experienced a 6.7% drop and Kathmandu saw a 2.7% decrease in sales.
Sales Improvements but Ongoing Losses
The analysts noted that while the overall sales growth in the first half was sufficient to surpass the previously set EBITDA guidance and to strengthen the net debt situation, it still did not lift the company out of the losses in EBIT and NPAT. They emphasized that the rising revenue momentum is critical for future earnings and could significantly influence market sentiment, given the considerable operating leverage inherent in KMD’s business model. The analysts pointed out that the performance of Kathmandu during the winter trading period and favorable conditions in North American wholesale are key factors influencing the outlook.
Rip Curl and Kathmandu Performance Analysis
In the first half, Rip Curl’s sales experienced a slight increase of 0.1%, totaling $278.5 million, with an EBITDA of $23.6 million and a margin of 8.5%. The brand saw a minor improvement in its gross margin by 20 basis points. Canaccord analysts highlighted a strong direct-to-consumer (D2C) performance, rising by 4.1%, which was somewhat countered by a 7.9% decline in wholesale sales. They suggested that optimistic interpretations of the results could stem from the operational disruptions faced by a major competitor in North America due to its Chapter 11 bankruptcy filing, which likely led to stock liquidations. However, the analysts cautioned that the EBITDA margin continued to decline due to rising operating expenses. They anticipate challenges for FY25, with sales remaining largely stagnant in the initial seven weeks but expect improvements in the wholesale sector for FY26.
Kathmandu’s Struggles and Competitive Landscape
Kathmandu’s total sales for the half increased by 3% to $156.8 million, although its EBITDA decreased to a loss of $12.8 million, worsening from a negative $8.3 million in the first half of FY24. The brand’s gross margin fell by 40 basis points, attributed to heightened promotional activities. Canaccord analysts noted that the previously executed brand revamp, enhancing the product range and quality, appears beneficial, albeit with increased expenditure. They warned of continued tough trading conditions ahead, highlighting risks from competitive pricing and discounting from rivals, especially since the second half of the year is typically crucial for annual earnings due to the winter sales period.
Oboz Footwear’s Performance and Future Outlook
KMD Brands also oversees Oboz Footwear, which, while generating lower revenue, has also faced challenges. For the first half, Oboz’s sales declined by 6.3% to $35.6 million, with EBITDA further slipping to a loss of $2.2 million. Despite improvements in in-season purchasing, the wholesale segment faced a 10.6% revenue drop. The gross margin saw a significant decrease of 570 basis points as clearance stock from August 2024 was phased out, although the core product margin remained stable. The analysts expressed encouragement regarding the early developments in D2C sales for Oboz, indicating a reset in inventory levels. They believe that recovery in wholesale, along with potential growth from online and D2C channels, could lead to better performance moving forward.
Cautious Outlook for KMD Brands
Overall, Canaccord conveyed a cautious outlook for KMD Brands while awaiting improvements in wholesale performance. They noted that direct-to-consumer sales for the first seven weeks at Kathmandu and Rip Curl were up by 5.2% and 0.7%, respectively. However, they acknowledged that these results were affected by the impact of tropical cyclone Alfred, which resulted in 100 lost trading days, though they deemed this not significantly influential on growth trends. The analysts also highlighted management’s caution regarding gross margins, particularly for Kathmandu.
