Outdoor clothing chain KMD Brands (formerly Kathmandu) has battened down the hatches with the end of the financial year in sight, as a sales recovery stalls and earnings slide.
The company informed the ASX and NZX on Friday morning that it anticipates earnings before interest, tax, depreciation, and amortisation (EBITDA) of around $NZ50 million for the year ending in July.
If that’s the eventual outcome at the July 31 balance date, it will be less than half the $105.9 million of EBITDA reported for the 2022-23 financial year. This, in turn, means the company will report a significant bottom-line loss for the year, potentially including write-downs of unsold inventory.
KMD is the second retail chain this week to reveal financial pressures from weak demand and rising costs. The much smaller City Chic Collective is trying to raise $27 million in new capital from investors to help tide it over, on top of selling a US asset for $18 million and taking a book loss.
KMD is not in such a fraught position, but it has asked for help from its banks to allow it to run up more debt and tolerate a fall in earnings for the 2023-24 year.
KMD CEO Michael Daly blamed the continuing cost-of-living crisis, especially in New Zealand, for the slowdown and made it clear the company had hunkered down to ride out the slump.
"Alongside immediate trading priorities, our focus remains on tightly controlling operating costs, moderating working capital, and maximising cash flows,” he said in Friday’s statement.
After an initial improvement in the early months of the second half, the company says sales have stagnated.
"Whilst second half sales have improved on the first half trends, the Group has not seen the continued improvement expected at the start of Kathmandu’s key winter trading period.”
The EBITDA forecast of $NZ50 million is “based on the most recent sales trends across all brands.” However, the company pointed out that it still has “six weeks of peak Kathmandu winter trade and Rip Curl Northern Hemisphere summer trade to come.”
"Group gross margin remains resilient, with operating costs tightly controlled,” KMD emphasised.
Despite this, management is not confident about the eventual result for the year. In Friday’s statement, it said it "has taken pre-emptive action with the support of its banking group to lower the FCCR covenant ratio for the next three measurement points."
"Funding headroom at July 31, 2024, is expected to be approximately $NZ200 million.”
Translated, this means the company expects sluggish sales to result in lower cash flow and a rapid rise in working capital to finance unsold stock. Consequently, it has asked for and been given permission by its banks to break the funding restrictions at the next three test points (usually every six months) to allow for a rise in debt and leverage compared to the lower EBITDA result.
By pointing out that it has “funding headroom” of around $NZ200 million, the directors aim to reassure investors, analysts, and suppliers that the company has the capacity to ride out losses, drops in cash flow, and any write-downs.
CEO Michael Daly remains hopeful, stating, “With six weeks of peak trade still to come, we remain focused on optimising our Kathmandu winter and Rip Curl Northern Hemisphere summer results in a challenging consumer environment.”
"We are seeing a prolonged impact of cost-of-living pressures on consumer sentiment globally, but particularly in New Zealand, and we continue to respond tactically to competitive market dynamics.”
