Kathmandu Holdings Ltd set to climb on profit upgrade

Shareholders in adventure wear business Kathmandu Holdings Ltd (ASX: KMD) will be enjoying the view this morning with the NZX-listed scrip up 12% in early trade after the group upgraded its full year profit outlook.

For the financial year ending July 31 2016 Kathmandu now expects to post a net profit between NZ$32 million to NZ$35 million. That is around 60% higher than the NZ$20.4 million achieved in the prior corresponding year. The group stated that year-to-date same-store sales growth for the 47 weeks ending June 26 2016 is up 2.6% on a constant currency basis. The growth is a positive although it is notable that it is cycling off a generally weak performance in the prior financial year.

A better-than-expected gross margin acted as the main driver behind the substantial uplift in this year’s net profit, while less promotional activity or sales discounting helped to improve the bottom line forecast. It generally charges premium prices for its products in something of a niche market and the return to growth suggests the business model is healthy.

This result is more impressive given a lot of investors suggested that the warmer-than-usual autumn weather in Australia would negatively impact Kathmandu’s sales as a specialty outdoor apparel retailer. However, today’s news confirms that getting the products, pricing, supply chain and inventory management right is far more important to retailers than vagaries in the weather.

Typically, fashion and general apparel retailers will stock new season spring / summer wear by late July, when winter clothing will be getting marked down to sell. This is why Kathmandu’s sales results tend to be focused on key winter months and why the business chooses to rule off its books at the end of July.

Overall, Kathmandu retains a strong brand and has a decent track record in Australia and New Zealand. However, its attempts to expand into the UK have not gone well, unsurprisingly, given it’s a nation where most people’s idea of an outdoor activity is drinking on the verandah.

Internationally, it would probably be better off focusing on growing the margin-boosting online sales rather than costly bricks-and-mortar expansion.

It remains one of the better retail businesses on the stock exchange, but as an investor in this space I would prefer Solomon Lew operated retail conglomerate Premier Investments Limited (ASX: PMV) .

It is expertly managed and appears to have two growth dynamos in its Smiggles and Peter Alexander retail businesses, while it also retains a majority holding in kitchen appliance retailer Breville Group Ltd (ASX: BRG). The balance sheet is formidable and it offers a fully franked yield in the region of 3.5% with a consistent track record of dividend and earnings growth.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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