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Kathmandu set to benefit as retail sector woes continue

Outdoor adventure retailer Snowgum, which has around 19 stores located predominately in Victoria but also in New South Wales, Queensland, Tasmania and the ACT has been placed in voluntary administration. The chain competes with the likes of Kathmandu (ASX: KMD) and Ray’s Outdoors, owned by Super Retail Group (ASX: SUL).

A Farifax Media report quoted Snowgum Managing Director Mr Ross Elliot highlighting weak discretionary retail sales, severe competition and high costs of doing business as all contributing to a damaging business environment for Snowgum.

Many of Snowgum’s shops are located within prime retail locations, including Westfield (ASX: WDC)-owned shopping malls. Although not naming Westfield, Mr Elliot singled out “high rent shopping centres, all of which increase their rents by 5 per cent or more each year under their five-plus rental agreements, during a period where sales in discretionary retail have declined in Australia.”

Along with rental rates, Mr Elliot also singled out the damaging effect of high wage costs, which now run to $40 an hour for a casual employee on a Sunday. However, perhaps the most insightful comments — from an investor’s viewpoint at least — were Mr Elliot’s thoughts on Kathmandu. Mr Elliot suggested that Kathmandu had “perfected the art of pricing a product at an exorbitant retail price then offering it at 60 per cent off to attract buyers…. The adventure wear category has traditionally maintained integrity in retail pricing, but Kathmandu has changed all that…. The Kathmandu high-low pricing model where products are constantly on 50, 60 and 70 per cent discount, all year round, has forced the whole category to follow suit.”

Foolish takeaway

The need to drive foot traffic and customers into stores is intense. Department store Myer (ASX: MYR) regularly holds promotional events such as its ‘Super Saturday’, which entice significant numbers into stores. For investors, the high level of discounting makes the need to focus on margins rather than revenue growth all the more important, as while stores may be successful in reporting comparative store sales growth, it is ultimately profit growth that matters.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.