ASX dividend stock KMD Brands Ltd (ASX: KMD) has suffered heavily. It's down 13% this year, 36% in the last year and 60% from October 2021.
That's painful for the ASX retail share. It's interesting to me that this retail company is down so much when various others have risen strongly in the last few weeks or months like Wesfarmers Ltd (ASX: WES), JB Hi-fi Limited (ASX: JBH), Lovisa Holdings Ltd (ASX: LOV), Myer Holdings Ltd (ASX: MYR), Premier Investments Limited (ASX: PMV) and Temple & Webster Group Ltd (ASX: TPW).
Still, I think KMD Brands could pay significant passive income in a year or two.
KMD Brands is the business behind the businesses of Kathmandu, Rip Curl and Oboz. In other words, its products are for the outdoors when it's cold, the outdoors when it's hot and for hiking.
What's going wrong?
KMD Brands reported in December 2023 a trading update that group sales were down 12.5% year over year, reflecting "ongoing weakness in consumer sentiment".
The ASX dividend stock has had trouble beating its comparable sales after record sales in FY23. Wholesale sales for Rip Curl and Oboz have declined, with retailers reducing inventory holdings in the short term.
At the time of the update, the company said its group underlying earnings before interest, tax, depreciation and amortisation (EBITDA) for FY24 to date was $16 million lower than last year.
One of the positives from that update was that the overall gross profit margin improved, with "operating costs well controlled and actively managed".
It also advised that its group working capital had decreased 10.2% year over year – it's making progress towards its target of 18% of sales for the full year, which the company is expecting to drive strong cash flow generation in the second half.
How big could the dividends be?
When the share price of an ASX dividend stock falls, it boosts the prospective dividend yield. For example, when an ASX share with a 5% dividend yield falls 10%, the yield becomes 5.5%. A company can avoid this becoming a potential dividend trap as long as its fundamentals are sound.
I think KMD's earnings can rebound in FY25 and beyond when retail conditions hopefully improve, particularly if interest rates fall. Demand for KMD's products may not be as consistent as food demand at Woolworths Group Ltd (ASX: WOW), but I think KMD Brands can still make a decent profit in FY24 and then recover in the subsequent years.
Commsec forecast numbers suggest it can make earnings per share (EPS) of 6.5 cents in FY25 and 8.3 cents in FY26, putting it at 9.5x FY25's estimated earnings and 7.5x FY26's estimated earnings.
The low price/earnings (P/E) ratio means the future payouts could be huge. At the current KMD share price, it could pay dividend yields of 7.6% in FY25 and 9% in FY26, according to Commsec.
If the company's earnings can rebound (in the next couple of years) I think there's a good chance the ASX dividend stock could deliver strong outperformance at these levels.
