Analysts at investment bank Canaccord Genuity are waiting to see stronger operating performance and more certainty on the earnings outlook at KMD Brands before shifting its hold position.
In a note to investors, Canaccord analysts gave a thumbs up for improved sales at KMD Brands’ Rip Curl and Kathmandu businesses through the first half of FY25, where second quarter sales lifted by 6.5 per cent and 6.9 per cent respectively.
For both brands, the second quarter lift followed sales declines in the first quarter, with Rip Curl’s Q1 sales down 6.7 per cent and Kathmandu’s Q1 sales down 2.7 per cent.
The analysts said the overall sales improvement through the first half for KMD was enough to drive a beat to recently provided EBITDA guidance and an improved net debt position, but not enough to pull the business out of EBIT and NPAT loss territory.
“In our view, improving top-line momentum is by far and away the most important potential earnings driver and sentiment catalyst given the high degree of operating leverage inherent in the business,” the analysts wrote.
“Kathmandu winter trading (2Q and 3Q to date performance early green shoots) and North American wholesale conditions (look to be shaping better into FY26E) are the predominant factors here.”
For the first half, Rip Curl sales lifted overall by just 0.1 per cent to $278.5 million, with its EBITDA at $23.6 million with a margin of 8.5 per cent. Its gross margin lifted by 20 basis points.
“D2C was strong once again (+4.1 per cent), which was offset by weak wholesale sales (-7.9 per cent),” Canaccord analysts wrote. “Bulls would read the result more positively, in our view, as a key competitor in North America faced operational disruptions stemming from its Chapter 11 filing (we perceive there to have been stock liquidations).
“EBITDA margin continued to slide on operating expense growth. Net net, we see FY25E as still being challenged (broadly flat sales in the first seven weeks) from an earnings perspective, but we look for improvement in the wholesale channel into FY26E (management notes positive order take for 1Q26E).”
As for Kathmandu, total sales for the half lifted by 3 per cent to $156.8 million. EBITDA was down $12.8 million, a further slip from negative $8.3 million in the first half of FY24.
The outdoor wear brand’s gross margin decreased 40 basis points, which was reportedly relating to more intense promotional activity.
“Previously implemented brand restage (improved breadth and depth of offering) appears to be helping, albeit with some additional spend,” Canaccord analysts wrote. “We see more tough trading ahead (risk of competition/discounting from peers remains) and remind readers 2H is traditionally very important to FY earnings given the winter trading window.”
KMD Brands also manages Oboz Footwear, a smaller subsidiary in terms of revenue. For the first half, the footwear brand’s sales dropped by 6.3 per cent to $35.6 million, with EBITDA slipping further to negative $2.2 million.
The brand’s wholesale challenges persisted, with revenue in the wholesale arm down 10.6per cent despite in-season buying improving.
Gross margin decreased 570 basis points as clearance stock rolled off – around August 2024 – whilst core product margin maintained.
“We are encouraged by early progress with D2C sales,” Canaccord analysts said of Oboz. “The inventory profile looks to be reset.
“Wholesale recovery, additional upside from online sales and, in time, D2C channels should see improved performance from here, in our view.”
For KMD overall, Canaccord reported that the outlook statements are still cautious, while waiting on wholesale improvement. This comes as DTC sales for the first seven weeks at Kathmandu and Rip Curl were up - 5.2 per cent and 0.7 per cent respectively.
“We note this was impacted by tropical cyclone Alfred (100 lost trading days, albeit not overly meaningful to shape of growth) and caution extrapolating February/early March performance given it is a non-significant trading period,” Canaccord analysts wrote.
“Management was cautious on gross margins (particularly Kathmandu).”