UBS and Evans & Partners (E&P) analysts are “disappointed" with KMD Brands’ $1.1 billion sales prediction, despite the fashion group claiming this as the first time it will pass $1 billion in annual sales.
The $1.1 billion guidance is reportedly around $50 million less than UBSe predictions, and $65 million below E&P predictions.
The guidance is driven mainly by weak Australian consumer sentiment in the fourth quarter of FY23, according to UBS analysts, paired with a relatively warmer June winter month which has resulted in lower sales for Kathmandu.
This follows a strong performance during the first three quarters of the year.
Due to the newly released guidance, UBSe has lowered its underlying earnings before interest, tax, depreciation and amortisation (U'EBITDA) estimates for FY23, FY24 and FY25 by -20%, -30% and -23% respectively.
This is driven by lower sales estimates, especially in the fourth quarter of FY23 and the first half of FY24 for Kathmandu, alongside higher operational expenditure as a percentage of sales.
“Although we still believe KMD should see an improved U'EBITDA margin over time, we now estimate an U'EBITDA margin of 12% in FY25E (where we previously believed management could achieve its 15% U'EBITDA margin target by FY25E)," UBS analysts write.
Due to the weaker result, UBS analysts significantly lowered its earnings estimates and one-year forward price target. However, it maintained its 'Buy' rating as it reports continued upside to its price target due to KMD's strong medium-term sales and margin improvement, which is expected to double the group’s U'EBITDA over the next five years.
“We do, however, acknowledge the near-term earnings risk, and expect a share-price re-rating once the market gets greater clarity and comfort on Australian consumer sentiment and, in turn, earnings growth.
“Commentary suggests group gross margins remain resilient and are expected to be in line with last year (FY22: 58.9%), pointing to gross profit of ~$647m (-5% below UBSe).
“Especially disappointing, however, was the lower U'EBITDA guidance in the range of $105m-$110m (-19% below UBSe in the mid-range).”
Meanwhile, E&P analysts say KMD sales have been “volatile” and trending down since the end of May, noting that it is not cold enough in Australia and New Zealand.
“The winter sale is the peak period of operational leverage for the Kathmandu brand, so missed sales come straight off the bottom line,” E&P analysts write.
The analysts say that KMD’s U’EBITDA of $105-110 million misses E&P’s equivalent forecast of $131 million. It added that gross margins are in line with last year’s at around 59%.
“At that margin, the sales shortfall of NZ$65m should have cut EBITDA by $38m, but the fact it was only $20m-25m implies better than expected cost control.
“The company is preparing for another 6 months of tough trading conditions and is looking to further reduce the fixed cost structure.
“Inventory levels remain elevated (est. NZ$30m too high), with most of the excess believed to be in Rip Curl and Oboz, following cancellation of wholesale orders.
“This will be corrected in FY24, driven by a mix of production cutbacks and stabilising sales.
E&P analysts say the weaker result is disappointing, particularly after KMD Brands’ positive trading update issued mid-May.
“As much as KMD is now well diversified by hemisphere and brand (Kathmandu is <40% of sales), it doesn’t seem able to escape the reliance on winter in ANZ.
“Given KMD's strong balance sheet, there is plenty of scope (and desire) to further diversify the revenue base, but until such time, the long expected re-rate will be delayed.
“We retain our ‘Positive’ rating, but acknowledge the share price recovery will be somewhat of a grind.”