- Kathmandu result solid given tough conditions
- Earnings growth to be driven by new stores, refurbishments
- Stock seen as offering value at current levels
- Buy ratings continue to dominate

By Chris Shaw

Retail conditions have been tough for some time, so the fact Kathmandu Holdings ((KMD)) delivered a solid full year earnings result was well received by the market. Profit for the year of NZ$39.1 million was up 24.5% relative to the previous corresponding period, earnings being driven by higher inventory investment, favourable weather conditions and better performance from newly opened stores.

New store opening will be a key to earnings growth going forward, RBS Australia noting Kathmandu plans to open 15 new stores in FY12. This would equate to 13% store space growth, while product category expansion is forecast to be about 10% per year.

The new store rollout will require higher capex, Macquarie noting Kathmandu expects to double capex in FY12 and FY13 for both new store and refurbishments and re-branding of the existing store network. This investment is seen as critical for the longer-term health and growth potential of the Kathmandu brand.

The major risk for earnings in the view of UBS is pressure on gross profit percentage given the difficult retail environment at present and the fact weather conditions in FY11 were very favourable. On UBS's estimates, a 100-basis point change in gross profit percentage equates to a 5.6% change in earnings per share.

Given Kathmandu's result had been well guided and no specific earnings guidance for FY12 was provided, there are only modest changes to earnings forecasts post the result. In earnings per share (EPS) terms RBS has adjusted its forecasts for FY12 by just over 1%, while Macquarie has trimmed its numbers by 2% and UBS has made no changes.

Kathmandu reports in New Zealand dollars and EPS forecasts for FY12 range from NZ21c to NZ23c, while for FY13 the range is NZ$24-NZ$27c. This compares to the result for FY11 of NZ$19.5c.

Price targets in Australian dollars range from $1.90 to $2.20.

Post the Kathmandu result there have been no changes in broker ratings, the FNArena database showing four Buy recommendations and one Hold rating. The hold comes courtesy of UBS, the broker suggesting investors should look for a lower entry point into the stock given strong share price performance.

The Buy argument is in general a valuation call, as the brokers covering the stock accept retail conditions will remain tough for some time. Both RBS and Deutsche Bank estimate Kathmandu is trading on a FY12 earnings multiple of less than 10 times, which is attractive relative to the market.

Macquarie suggests current valuation for Kathmandu is not demanding, especially given the full year result delivered increased confidence in the business model and the positive medium-term growth outlook.

Credit Suisse agrees, seeing no reason why the factors that drove solid growth in FY11, which included store rollouts and refurbishments and solid sector trends, will not continue through the coming year. Management supports this view given a positive outlook for the year ahead.

The current share price implies upside of around 22% to the $2.08 consensus price target in the FNArena database.

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