Wednesday, January 19, 2011

Kathmandu Holdings: Profit Upgrade lacks accurate comparison

The Kathmandu Holdings Ltd [KMD.NZX] trading update out today is positive for investors but it really didn't warrant a rise in share price today of nearly 14%.

I say this because the figures disclosed today are compared to last years figures which are based on Pro forma accounting methods.

I have discussed pro forma accounting before in relation to Kathmandu and it is important to note that the main feature of pro forma figures is to disguise the true nature of how a business is run.

This is part of what I wrote about KMD and the figures they used in their IPO Prospectus towards the end of 2009:

Pro Forma figures - figures based on an "as if" scenario rather than reality - are used throughout the document.

Pro-forma figures do not show investors the true state of a companies books and this alone should have prospective investors running for the hills (without a Kathmandu backpack).

I will go on however.

For example pro forma sales figures from 2007 and 2009 indicate that in 2007 Kathmandu sales were $A151.4 million and in 2009 A$215 million and respective store numbers were 58 and 82. That works out roughly the same level of sales per store for each of these years. Very hard to get this sort of consistency in any sector of the economy, least the retail industry. These particular figures have clearly been manipulated or "smoothed" to make things look good and we can safely assume this for other comparisons made. This makes the figures misleading to say the very least.

Kathmandu Holdings: Market Update Misleads Share Investor Blog, August 5 2010

So when looking at the release today we need to take into account that even though same store sales have increased by around 9% , to make a fully accurate and meaningful comparison we need to use actual raw figures from 2010 to make our comparison not the pro forma ones KMD are using in today's release.

I am of the view that we need to look at the 2011 second half year for the company when we can use raw figures from mid 2010 to make an accurate reading of how the company is going.

It will be March 2012 though before we can see a full year of results and compare them to raw accurate data from the year before.

Until then investors need to be cautious at these share price levels.

Kathmandu @ Share Investor

Kathmandu Holdings Ltd: The First Year
Kathmandu Holdings Ltd: 2010 full year profit analysis
Chart of the Day: Kathmandu Holdings Ltd
Kathmandu Holdings: Market Update Misleads
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

c Share Investor 2011

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