Yesterday, the well-known Kiwi brand, Kathmandu announced its result for the year ended 31 July 2012. The result was above market expectations and the stock price rallied 2.9% before finishing the day on $1.75.

Group sales were up 13.4% compared to FY11, but net profit after tax (NPAT) was down 10.7% for the period. This result has proved that the company has the ability to grow sales in a tough environment but at the expense of margins and NPAT.

The NZ and Australian retail environments have been difficult, and the outlook for Australia is that it will get worse before it gets better.

With over 60% of Kathmandu’s sales in Australia, this large exposure is concerning in a deteriorating Australian market. The latest result revealed that Australian earnings before interest, tax, depreciation & amortisation (EBITDA) were down 6.5% year on year, while NZ recorded a 0.3% increase in EBITDA. According to CEO, Peter Halkett, “this was a solid result given the difficult economic environment”.

The company’s focus going forward must be on its biggest market if it hopes to be able to produce a better result for the 2013 financial year. Other NZ retailers, such as Hallensteins Glassons and Pumpkin Patch, also have a large Australian presence. These two companies report next week and the consensus is for similar results to Kathmandu.

Kathmandu also faces increased competition in its sector. Fishing Camping Outdoors, owned by Australian based Super Retail Group, Macpac and Mountain Designs have all increased store roll outs in the last year.

Kathmandu has managed to weather the current environment rather well. However, with no clear signs that the Australian market is improving, it could be a while before the company experiences a significant increase in earnings.

Victoria Harris

Research Analyst

Disclosure of interest: Milford Asset Management holds shares in  Kathmandu on behalf of clients.