Thursday, August 5, 2010

Kathmandu Holdings: Market Update Misleads

I hate to say it but I warned prospective investors in Kathmandu Ltd [KMD.NZ] before the IPO last year that the pro-forma figures used in their 2009 Prospectus were suspect and it turns out that an announcement today by Kathmandu management indicating that projected figures used in the prospectus were mostly not met by the company.

While revenue was up by more than 13% - on the back of opening 14 more stores - for the year ended 31 July 2010 to NZ$245.5 million, same store sales for the year were up 1.3% and sales from all stores exceeded the forecast issued in the prospectus by NZ$5.5 million. All these figures of course are compared to the inaccurate pro-forma accounting method used in that same prospectus, so these positive figures made in yesterday's NZX release could well be misleading.

Every other key indicator KMD made in the prospectus has been missed, with EBIT for the FY2010 year, which excludes one-off costs incurred from the IPO, to be between NZ$47.0 million and NZ$48.0 million, which will be around 5% to 7% below the prospectus FY2010 pro-forma forecast. Kathmandu’s prospectus pro-forma forecast EBIT for the FY2010 year was NZ$50.6 million. The all important profit margin is expected to be round 63%, this is below the 64% projected in the prospectus.

Please also note that the nearly $17 million cost of the IPO is not included in the $47-48 million EBIT calculation or the interest charged on the large debt (larger now due to 14 extra stores being opened) the company holds on the balance sheet.

Also, keep in mind, once again KMD are using pro forma figures which make things very difficult to accurately compare year to year figures but even these comparisons make KMD look bad.

Using EBIT figures can also be a way of hiding negative news from shareholders and the broad use of them in the KMD release yesterday must also be taken into account when trying to assess the health of the company.

I am not saying there is anything underhand going on but the way the market update was put together means investors are getting far from an accurate picture and shareholders need to either give KMD a call to see what they really mean (because they have the actual raw figures untainted by pro-forma smudging and EBIT covering) or do some calculations of their own.

The reasons for the lower figures are being blamed on the overall retail downturn by Kathmandu management:

“Throughout the final four months of the financial year, in all 3 countries that Kathmandu trades in, the retail environment has been very challenging, and more difficult than we experienced in the first half of FY2010”. Chief Executive Officer Peter Halkett

Well, duh! this was not unforeseen when the prospectus figures were being compiled and projections made. We are currently enduring one of the worst recessions in recent history and every other retailer is having high rotation sales in the hope revenue keeps turning over because people have their wallets shut.

I must repeat what I have said in other commentary made on Kathmandu (see links below). Shareholders will not see an accurate picture for the company until financials can be compared like for like (with non pro-forma figures) in the full year result September 2011.

Until then we can only gauge the health of the company from the inaccurate figures currently used by KMD management and accepted by the NZX as sufficient disclosure to investors (it aint).

The market didn't like this of course and marked KMD shares down 23c or 17% to $1.82. This is below the $2.13 IPO price and a mid April high of $2.56.

There could be value to be found in the company as the share price eases.

Kathmandu @ Share Investor

Chart of the Day: Kathmandu Holdings Ltd
Kathmandu's 2011 Results Under Pressure from Jan Cameron
Kathmandu IPO: Prospectus Analysis
Kathmandu IPO: Jan Cameron lands a blow to IPO
Kathmandu IPO: What is it worth?
Kathmandu IPO: Retail Interest High
Kathmandu IPO: A tough mountain to climb
Kathmandu No.1 but IPO should get the Bullet
Download the detailed Kathmandu Value Cruncher Report - Requires free registration at Share Investor Forum to download
Download Kathmandu IPO Prospectus
KMD Investor Presentation to Macquarie

Discuss Kathmandu @ Share Investor Forum

Download KMD Company Reports


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