Is Kathmandu Holdings Ltd a bargain at today’s prices?

Oh dear,” I thought when I saw the ominously named ‘Trading Update’ from Kathmandu Holdings Ltd (ASX: KMD) this morning – “they only updated the market last month and they have to update it again?!”

‘Trading Updates’ too often presage a downgrade, but it would seem that I didn’t read the original announcement carefully enough, as Kathmandu stated they would provide a further update in August once the group’s full year of trading finished.

With greater certainty now that the financial year is behind them, Kathmandu had this to say about its upcoming results:

  • Earnings Before Interest and Tax (EBIT) will be between $50 million and $51 million (previous guidance $49m-$53m)
  • Net Profit After Tax (NPAT) will be between $33 million and $34 million (previous guidance $32m-$35m)
  • Same store sales growth was 1.6% on constant currency basis (was up 2.6% at 47-week mark)
  • Total sales grew 4% to $425.5 million compared to the previous year
  • Annual report to be released on 21 September 2016

A bargain?

Although shares are up substantially since the initial profit guidance, Kathmandu still looks cheap as it trades on a fraction over 10 times its full year earnings. This is substantially below the ASX average, and the group also yields 4.3% at today’s prices which could make it attractive to dividend hunters.

All that glitters is not gold

Unfortunately readers might be better off continuing to wait on the sideline. An investor knowledgeable in the business and in retail trends might be able to find value here, but without special insight it’s tough to argue that Kathmandu is a better buy than other businesses out there.

Kathmandu has struggled to generate decent returns since it listed and anaemic sales growth of 1.6% suggests the group is operating in a fairly mature or competitive segment. Higher gross margins this year are great news for shareholders, but there’s only so much a retailer can grow by widening its margins.

Kathmandu could still generate decent returns for investors as its gearing is conservative and its dividends affordable, but without sales growth, the market has obviously priced Kathmandu accordingly. In a competitive retail market it’s also tough to see a catalyst (other than today’s announcement) that might move Kathmandu’s valuation higher – unless consumers race out and start spending the savings from the recent rate cut on water bottles and winter jackets.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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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