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NovaPort on Kathmandu Holdings

Alex Milton [1]
Alex Milton

How long have you held the stock?

NovaPort Capital’s portfolios have held Kathmandu (KMD) since its IPO in November 2009.

What do you like about it?

Kathmandu is a vertically integrated apparel retailer with a history dating back to 1987. The investment appeal for NovaPort Capital is based on four key factors.

[2]First is its focus on the outdoor, travel and adventure segments of the retail apparel sector. These are some of the faster growing segments based on an increasing consumer appetite for travel experiences and desire to take on a healthier approach to lifestyle.

Second, while it does retail some third party products, as a vertically integrated company, Kathmandu designs and manufactures its own range of products. This gives the company the ability to respond to changes in consumer preferences, whereas some local competitors don’t have that flexibility.

Third, store rollout driven by network growth as it expands from New Zealand to Australia has given Kathmandu a meaningful earnings driver in what has been a difficult retail environment since the GFC.

Lastly, and very importantly, Kathmandu owns its brand. Unlike a range of retailers that face the dual headwind of increasing online migration and a strong Australian dollar (offshore shopping), a customer cannot buy Kathmandu product online from anyone other than Kathmandu. This gives the company protection against a structural challenge currently impacting the sector.

How is it better than its competitors?

Its edge over many competitors in the sector stems from a combination of brand ownership, an in-house design and product development team, and established offshore manufacturing relationships. This enables Kathmandu to manage key earnings levers such as inventory range, volumes, quality and pricing in an environment where many competitors are beholden to global suppliers to varying degrees.

What do you like about its management?

In assessing management teams, NovaPort seeks out boards and managers who take a longer term view in the execution of business strategy, even though at times it may come at a cost to short-term performance. While the stock is currently trading at all-time highs, Kathmandu has, in the past, posted results below expectations.

Whether this has been from higher than expected levels of investment, or a reluctance to reduce costs (such as advertising spend) in order to bolster short-term earnings, we believe these have been the right calls from our perspective as long term shareholders.

What is your target price on the stock?

Continued store rollout, increasing portion of sales from the online channel, expansion of product range and likely improvement in consumer sentiment as interest rate cuts work their way through the economy, underpins our price target of $2.80 per share.

At what point would you sell it?

Maturation of the store rollout potential, as well as high sales per square metre, based on close to optimal product ranging would be signals to us that the upside to valuation at that point in time is limited. The potential to hold the shares from that point onwards would, most probably, rest on success in driving online sales, thereby taking market shares to levels above expectations.

How much has it added to your overall portfolio over the last 12 months? Where do you see the value?

Kathmandu is a relatively liquid stock so achieving our desired portfolio weighting has not been hampered by stock scarcity. Its share price is up over 100% since June last year making it one of our top 10 portfolio contributors over that period. Nevertheless, despite this share price appreciation, Kathmandu still trades at a material discount to highly regarded peers. For NovaPort, the upside from here will likely come from a re-rating by the market, as it becomes more comfortable with the company’s reliance on three key selling periods to generate earnings (Christmas, Easter and Winter sales).

By Alex Milton.

Alex Milton is principal and co-portfolio manager at NovaPort Capital. He has 17 years investment experience, including stints as senior analyst at Challenger and Macquarie Securities Australia.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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