Kathmandu can-do

Back in the 1980s, a trip to the outdoors was more of an endurance than an adventure, with heavy packs, wet clothing, unsuitable boots and sweaty oilskins. Kathmandu’s (ASX: KMD) founders were driven by the desire to use new quick-drying materials such as fleece and thermal wear to make the experience more comfortable and better suited to the local conditions.

The company continues in this vein, with new products sent off on real life adventures, to see how they perform. Additionally, all components are lab tested in a slew of international tests.

To cater for the demand for its products, the first Kathmandu store was opened in Melbourne in 1987, and the company’s first foray into New Zealand was in Christchurch in 1991. In 1994, the Summit Club loyalty program was launched, as enthusiasm for the company’s products grew.

Kathmandu has now become a retailer of sporting goods and outdoor apparel squarely aimed at those “weekend warriors” heading out into the bush, onto the beach and ski slopes, or otherwise “adventuring”. That growth has translated into around 120 stores located mainly throughout Australia and New Zealand, while the company also has six stores in the UK.

Strong financial results

The rise of the weekend warrior has certainly paid dividends for Kathmandu, with Australian sales growing by 22%, online sales at a whopping 50% and New Zealand at a more sedate pace of 8%. For the six months to January 2013, Kathmandu reported a NZ$10.3 million net profit after tax, with overall sales rising 13%.

Full year results are expected to be underpinned by continued growth in the Australian market, improving brand penetration and performance of new stores opened during the year. Second half results typically generate the lion’s share of earnings, with analysts expecting the company to generate NZ$41 million in net profit for the full year.

Where’s the growth?

Kathmandu has opened 40 new stores in the past 18 months, with 130 company-owned stores currently. Ultimately, Kathmandu has plans for around 170 stores across Australia and New Zealand. On average, it opens 10 stores a year, suggesting Kathmandu has at least another four years of new store rollouts.

Additionally, the company has increased the number of products by 30% since 2010, with 5,000 items currently, as well as adding more in-house designers with the establishment of an Australian design team.

Kathmandu has reported that its six retail bricks-and-mortar stores in the UK haven’t been a great success, and these are likely to close, with the market instead served by online stores and possibly a small number of flagship stores. Expansion into other markets is also possible, but is likely to be an online presence only in the early stages, with the company flagging a focus on Australasia in the short term.

Online is growing strongly, but from a small base, representing less than 5% of sales. Kathmandu is evaluating marketplace sites like Amazon, TradeMe and eBay, and has implemented international shipping capability in its new online platform.

A captive audience

Sales are currently split 60/40 between apparel and equipment, and the company is maintaining its focus on its apparel business. The Summit Club loyalty scheme currently has 800,000 members, who represent more than 50% of all sales. Kathmandu is targeting 1 million members by 2015, and is on track to achieve that target. Membership has more than doubled in the past four years, while average spend per member has also risen.

Kathmandu has a winter sale in June/July each year, which is its largest promotional event, with weather a key factor for the success of the sale. NZ ski fields are already looking at a bumper year, and Australian ski fields have reported early snowfalls, which should bode well for Kathmandu’s winter sale.

Foolish takeaway

Currently trading on a forecast P/E ratio of around 11, and paying a fully franked dividend yield of 4.6%, Kathmandu has yet to reach its peak. With substantial growth still to come from store rollouts, rising numbers of loyalty club members, potentially more products and rapidly growing online sales, Kathmandu would make a worthy addition to your watchlist.

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Motley Fool writer/analyst Mike King does not own shares in any company mentioned here.

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