Kathmandu Holdings Ltd climbs on results – Is it the ASX’s best retailer?

Kathmandu appears to be the outstanding retailer on the ASX. But why?

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Outdoor clothing and adventure equipment retailer Kathmandu Holdings Ltd (ASX: KMD) today posted a 10.7% jump in net profit for the half-year ending January 2014. Sales were marginally up on the prior corresponding period but improved gross margins and cost management contributed to the bottom line growth.

Being New Zealand-based has been something of a double-edged sword for Kathmandu, as the appreciating Kiwi dollar has lowered Australian sales and earnings when translated back into its NZD reporting currency, however, the surging Kiwi economy likely contributed to rising sales in its home market.

While other mainstream clothing retailers like David Jones Limited (ASX: DJS) or Myer Holdings Ltd (ASX: MYR) have suffered declining sales in the face of increased high-street competition and online headwinds, Kathmandu appears to have a carved out a successful niche serving the quality outdoor equipment and clothing market. Super Retail Group Ltd (ASX: SUL) as owner of the BCF, Boating Camping Fishing stores, has disappointed in recent times, the stock price down around 7.5% from a year ago.

Kathmandu’s competitive advantage over other retailers appears twofold. Firstly, as a niche business it faces far less competition from low-cost, lower-quality competitors, that other mainstream apparel retailers have faced from European fast-fashion phenomenons like Zara and Topshop. This allows it to grow sales while maintaining and growing healthy margins.

Secondly, the online headwinds maybe less, as I suspect adventure equipment like backpacks and outdoor apparel are the kind of items people like to purchase in store, rather than online through cheaper but less recognised retailers. People are perhaps also more willing to pay a premium for one-off type necessary cost purchases such as travel equipment.

Australia and New Zealand make up almost all of total sales and the UK business has been a big disappointment. In my opinion the UK is not a natural market for a retailer like Kathmandu and the business may need to reconsider its strategy there once and for all. Other global markets such as North America would appear a much more natural fit for the Kathmandu business and although the monetary impact of the UK problems is relatively small, it’s significant in that its first venture outside of Australasia has not worked out well.

The overall outlook for Kathmandu remains promising though. People will want to travel more and the group continues to grow organically through new store openings. Online sales are growing strongly and the big long-term opportunity remains for Kathmandu to develop its brand potential and online sales globally.

The group said trading has continued to be in line with expectations since the end of January with shares were up around 11% in trade today to $3.47. It will pay an interim dividend of NZ three cents per share fully franked for Australian shareholders, the payout represents 50%-60% of earnings leaving plenty left over for capital investment in further growth or increasing future dividends.

Foolish takeaway

Kathmandu’s UK business remains a loss-making headache that needs to be addressed as soon as possible. If necessary it could simply retrench to Australia and New Zealand while it refocuses its strategy.  It looks to be trading around fair value after today’s results and given the growth potential in Australia, New Zealand and online globally, it remains one of the best retail stocks available on the ASX.

Motley Fool contributor Tom Richardson owns shares in Kathmandu. You can find him on twitter @tommyr345

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