KMD Brands enters FY27 in a materially stronger position than when it started FY26 – but according to UBS Research, the harder part of the turnaround is still ahead.
In a note published the day after KMD's full-year results, UBS titled its assessment "Getting back on track," and the reasoning holds up: the group's underlying EBITDA grew 137.7 per cent to NZ$42 million in FY26, Kathmandu returned to EBIT profitability, and Oboz swung back into the black. Even Rip Curl is holding its own.
Just as significant, UBS points to KMD's balance sheet as genuinely de-risked, following the group's equity raise earlier this year and tariff refunds – a marked shift from a year in which KMD was refinancing under pressure and diluting existing shareholders to do it.
The fixed balance sheet adds to why UBS has retained its buy rating, but the investment bank conceded this is also on valuation grounds. UBS slashed its 12-month target price for KMD shares by 27 per cent to NZ$2.55, which is still reasonably above KMD’s current share price of NZ$1.92.
Essentially, UBS analysts think KMD stock is cheap relative to what they think it is actually worth.
In the numbers, the analysts claim KMD’s FY26 performance showed some tangible gains from its ‘Next Level’ turnaround across Kathmandu sales and underlying gross margin in a challenging retail environment.
Kathmandu led group sales growth with DTC sales up 11.1 per cent in FY26 despite four fewer stores. On a constant currency basis, total sales were up 1.7 per cent year-on-year.
The group also reported channel and product-driven margin improvement, improved sourcing, and favourability in input cost FX supporting growth, inclusive of $8 million of tariff refunds.
Meanwhile, group gross margin grew by 120 basis points to 57.7 per cent.
“Positively, Kathmandu 2H26 sales were ~7% ahead of UBSe with stronger DTC across both NZ and Australia coupled with greater NZ $ tailwinds,” UBS shared in its note.
“FY26 Rip Curl sales (+4%) were in line with UBSe and had constant currency decline of 1% with pressure on Ozmosis same store sales (-5%).”
KMD also shared FY27 guidance in its recent trading update, targeting revenue of NZ$1.055 billion to $1.075 billion, EBITDA of between NZ$52 million and NZ$55 million, and capital expenditure of between NZ$15 million and NZ$16 million.
UBS analysts believe the mid-point revenue growth of 1 per cent on FY26 looks “somewhat conservative” against early DTC trading, with Kathmandu DTC sales up 7 per cent and Rip Curl up 1 per cent in the first seven weeks of FY27.
The analysts also point to wholesale stabilisation and the Next Gen Rip Curl product releases. They think the conservative guidance most likely reflects the challenging retail market.
The investor note also predicted that outdoor sales are not expected to recover to near pre-pandemic levels by FY28, putting another dampener on KMD’s future growth prospects.
Its analysis suggests outdoor sales will grow by 2 per cent CAGR for FY26-FY28. They believe outdoor sales remain somewhat constrained by store rationalisation, cautious ANZ consumer demand driven by geopolitical uncertainties, a promotional environment limiting share gains, and likely FX headwinds in FY28.
“Digital growth is supportive, but largely offset by physical store pressure," the note shared.
UBS also predicts challenging but gradually improving economic conditions and group sales for KMD. This comes as consumer confidence in both New Zealand and Australia remains subdued, while discretionary spend is hampered, which has recently been further impacted by heightened global uncertainty, including ongoing geopolitical tensions and higher fuel prices.
While industry data shows early signs of stabilisation, with Stats NZ's recent electronic card transaction data indicating low-single-digit growth in NZ retail sales, the analysts believe this is supportive rather than transformational for group revenue.
"Over the longer term, we continue to see a return to growth driven by improving brand relevance and demand conditions. Google Trends data suggests Rip Curl remains one of the most popular surf brands in key markets, while UBS Evidence Lab data points to improving Australian net consumer spending intentions for clothing and footwear over the next 12 months."