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Kathmandu Financial Statement Analysis
- 1. Induction Briefing Kathmandu Holdings Limited Prepared by Dina Nurgazina BUSMGT 733. Assignment 1. FutureFunds
- 2. Content0 1. Company Brief: Kathmandu Holdings Ltd. 2. Industry key success factors 3. SWOT Analysis 4. Porter’s five forces – industry analysis 5. Operating Performance 6. Non - Operating Performance 7. Ratio Analysis 8. Summary
- 3. Company Brief: Kathmandu Holdings Ltd.1 A retailer of outdoor apparel and equipment Established in 1987 162 stores across AU, NZ and UK Listed on ASX and NZX in 2009 Share Market Price $1.89 (20-Jan-17) Dividend in 2016 NZ 11.0 cps (FY15 NZ 8.0 cps) 0 0.5 1 1.5 2 2.5 3 3.5 4 31-Jul-14 31-Aug-14 30-Sep-14 31-Oct-14 30-Nov-14 31-Dec-14 31-Jan-15 28-Feb-15 31-Mar-15 30-Apr-15 31-May-15 30-Jun-15 31-Jul-15 31-Aug-15 30-Sep-15 31-Oct-15 30-Nov-15 31-Dec-15 31-Jan-16 29-Feb-16 31-Mar-16 30-Apr-16 31-May-16 30-Jun-16 31-Jul-16 31-Aug-16 30-Sep-16 31-Oct-16 30-Nov-16 31-Dec-16 Kathmandu Holdings Ltd. Shares Historical Prices
- 4. • Established Brand • Significant market share • Loyal customer base • Attractive quality products • Effective use of digital technologies • Efficient cost management • Experienced workforce INDUSTRY KEY SUCCESS FACTORS2 0 20 40 60 80 100 120 140 160 Competitors, number of stores New Zealand Australia
- 5. • Strong brand image in NZ and AU. • Mature profitable company. • High gross profit margins. • Loyal customer base. • Diversified product range. S O International expansion through: • realising online potential; • wholesale distribution; • licensed or franchised retail stores. SWOT Analysis3 • Potential new players in AU and NZ. • Stronger competition in international markets. • Online shopping continues to erode sales of conventional retailers. T W • Significant operational costs. • High sale expenses. • Failure to establish brand in European market in UK. • Inability to attract new costumers.
- 6. Porter’s five forces – industry analysis4 Threat of new entry – Moderate • Low fixed costs. • High selling costs. • Brand equity valued by customers. Bargaining power of buyers - Moderate • Large number of individual buyers. • Low trade receivables balance. • Indirect power to bargain. Threat of substitution – Low • Most ‘substitution’ in the fashion industry is competition. • Alternative technologies are costly. Bargaining power of suppliers - Low • Large number of suppliers. • The trade payables balance is high. Industry competition - Strong • One of the key players in AU and NZ • High international competition.
- 7. Operating Performance5 $0 $100 $200 $300 $400 $500 FY2012 FY2013 FY2014 FY2015 FY2016 NZ$m Sales, EBIT & NPAT 2012-2016 SALES EBIT NPAT 278,428 141,682 5,483 32,868 35,134 -541 -50,000 0 50,000 100,000 150,000 200,000 250,000 300,000 AUSTRALIA NEW ZEALAND UNITED KINGDOM NZ$’000 Sales vs EBITDA by Regions For the year ended 31 July 2016 Sales from external customers
- 8. 0% 20% 40% 60% 80% AU NZ UK GROUP Gross Margin, % FY15 FY16 0% 20% 40% 60% 80% 100% AU NZ UK GROUP Total operating expenses (excl. depreciation), % of sales FY15 FY16 Operating Performance5
- 9. Non - Operating Performance6 -20,000 -10,000 0 10,000 20,000 30,000 40,000 50,000 2014 2015 2016 Profit after income tax Movement in cash flow hedge reserve NZ$’000
- 10. Ratio Analysis7 2016 2015 RNOA 8% 6% ROE 4% 11% Disaggregation of RNOA NOPM 6.98% NOAT 1.18 Benchmarks WACC 14% Cost of equity 16% Disaggregation of ROE RNOA 8% FLEV 0.16 Spread -28%
- 11. Summary8 Outdoor apparel and equipment industry characterized by high competition Share Price dropped over two years period Strong brand equity in NZ and AU is not easily translated on international market Capital-light expansion and effective cost management are vital Losses over several reporting periods in the United Kingdom Aggressive sales in Australia do not result in high profits Stable profitability in New Zealand Ineffective hedging deteriorates comprehensive income attributable to shareholders The company operating activities remain profitable, but productivity needs improvement FutureFunds
- 13. Please see the attached file for detailed calculations. Kathmandu Holdings Limited Balance sheet as at 31 July 2016 Group Summarised Reformatted Balance Sheet 2016 2015 Average16 2014 Average15 as at 30 31 July 2016 $000 $000 Total assets 413,253 430,451 408,297 Less: Non-operating asset (Cash and derivatives) (6,891) (15,337) (7,202) Operating (non-interest bearing) liabilities (52,296) (45,584) (40,228) Net operating assets 354,066 369,530 361,798 360,867 365,199 Non operating liabilities or Debt 51,824 57,896 65,775 Less: Non-operating asset (Cash) (6,891) (1,700) (7,192) Net Non-operating Obligations (NNO)(Net Debt) 44,933 56,196 50,565 58,583 57,390 Equity 309,133 313,314 311,224 302,146 307,730 Total capital 354,066 369,510 361,788 360,729 365,120 NOPAT calculation 2016 Operating Financing Debt Equity NOPBT 50,881 3,556 47,325 Income tax expense 14,800 996 13,804 After tax 36,081 2,560 33,521 OCI item (6,384) 15,891 (22,275) Inclusive of OCI (NOPAT) 29,697 18,451 11,246 NOPAT calculation 2015 Operating Financing Debt Equity Before tax (NOPBT) 33,177 2,745 30,432 Income tax expense 10,782 769 10,013 After tax 22,395 1,976 20,419 OCI item 1,034 (12,415) 13,449 Inclusive of OCI (NOPAT) 23,429 (10,439) 33,868 RNOA calculation 2016 2015 NOPAT 29,697 23,429 Average NOA 361,798 365,199 RNOA 8.21% 6.42% Disaggregation of RNOA 2016 2015 NOPAT 29,697 23,429 'Sales 425,593 409,372 NOPM = NOPAT / Sales 6.98% 5.72% Av NOA 361,798 365,199 NOAT = Sales / Av NOA 1.2 1.1 RNOA = NOPM * NOAT 8.21% 6.42% ROE calculation NPAT 11,246 33,868 Average equity 311,224 307,730 ROE 3.61% 11.01% Disaggregation of ROE RNOA 8.2% 6.4% FLEV = Av NNO /Av Equity 0.162470058` 0.18649303 Spread = RNOA -NNE/AvNNO NNE/AvNNO 36.49% -18.19% Spread -28.28% 24.60% ROE = RNOA + (FLEV*Spread) 3.61% 11.00% WACC 14.00% Market Risk Premium 8% Risk Free Rate Of Return 4% Equity Beta 1.7 Cost of equity 16%
Notas del editor
- Kathmandu Holdings Limited is a designer, marketer and leading retailer of clothing and equipment for travel and adventure in New Zealand. The company was founded by John Pawson and Jan Cameron in 1987. The Group has no reliance on any single major customer. It operates in New Zealand, Australia and the United Kingdom and currently owns 162 stores in total. Kathmandu Holdings is a limited liability company incorporated and domiciled in New Zealand. The Company is listed on the New Zealand Stock Exchange and Australian Stock Exchange. As shown on the graph to the right, there was a drop in the company ordinary share price from around $3.5 NZD per share in 2014 to about $1.5 NZD per share in 2015, followed by slight recovery to $1.89 NZD per share as of the 20th of January 2017.
- The well-established brand is the key performance driver. Kathmandu Holdings Limited have a distinctive brand, that is easily recognisable in Australia and New Zealand. The company is one of the leaders on New Zealand Market and have stores all over Australia and New Zealand. Permanent store numbers totalled 162 at 31 July 2016: Australia 114, New Zealand 47, and UK 1. As shown on the graph the number of stores is significantly larger than most other outdoor retailers have, such as Torpedo7, Macpac, Bivouac and Rays Outdoors. The only competitor with a more extensive coverage is North Face: 54 stores in New Zealand and 143 in Australia. Loyal customer base contributes significantly to the company success. Kathmandu has 1.6 million Summit Club members who represent around 70% of Kathmandu’s annual sales. The large sales number to returning customers is achieved through delivering quality products, optimising product ranges, utilising personalised digital marketing campaigns and social media engagement. With the growing number of online sales, the retail industry requires companies to constantly search for more efficient cost and margins optimisation strategies as well as utilise capital-light business models.
- Strengths Kathmandu is an active player in the outdoor apparel and equipment markets of Australia and New Zealand with a strong brand image. The company continues to be profitable over the years with high-profit margins. Profitability is achieved through loyal customer base with Kathmandu Summit Club members comprising 70% of the sales. The product range is highly diversified and consists of women’s, men’s and kid’s clothing, footwear and accessories along with equipment for camping, hiking, travelling, skiing and other activities. Weaknesses Despite high gross profit margin, the large operating costs and sale expenses, in particular, drag company’s net income down. Therefore Kathmandu should focus on cost efficiency. The unprofitable operations on UK market along with significant sales percentage of the Summit Club customers may indicate that Kathmandu is not able to attract new customers and promote their brand internationally. Opportunities International expansion remains a key growth opportunity for Kathmandu. Taking into account UK experience, preference should be given to capital-light models, such as online stores, wholesale distribution, licensed or franchised retail stores. Threats Kathmandu should continuously implement strategies to maintain its position in Australia and New Zealand to avoid deterioration of market share due to the entry of new players and import from abroad. Kathmandu have to develop innovative approaches to penetrate international markets, which are characterised by stronger competition and presence of local brands. Additionally, the popularity of online shopping continues to erode sales of traditional retailers, like Kathmandu. Hence improvement of e-commerce platform is a must.
- While Kathmandu has achieved success in the outdoor apparel and clothing industry, this Porter’s Five Forces analysis reveals that the company must continue to innovate to ensure long-term sustainability. Industry competition – Strong The retail industry is characterised by intense rivalry. There are many firms of different sizes competing in this industry environment. Kathmandu is one of the leaders in New Zealand and Australian markets, so they need to protect their market share and profitability in New Zealand and potentially improve market share in Australia. North Face is one of the major competitors in AU and NZ. Other competition represented by companies, that are smaller in scale, such as Torpedo7, Macpac, Bivouac, Rays Outdoors. Kathmandu has not shown to be capable of sustaining international competition on UK market. There are larger firms on the international arenas, such as Columbia Sportswear company, that distributes its products in more than 72 countries and 13,000 retailers. Threat of new entry – Moderate A new entry of retail firms is easily achieved due to low fixed costs since store premises can be leased. Small retailers can penetrate the market and compete by convenience, location, speciality, and other factors. However, to become successful in the industry significant selling expense are required to increase awareness of the product. Brand development is also costly for a new entrant. Bargaining power of suppliers -Low According to Kathmandu sustainability report, the company has around 80 significant suppliers. Additionally, the high trade payables balance indicates weak bargaining power of suppliers. Large firms like Kathmandu can easily affect the suppliers, that face fierce competition among themselves. Bargaining power of buyers – Moderate A Large population of buyers and small trade receivables balance indicate the weak intensity of the bargaining power of buyers. The large number and high diversity of customers along with the small size of individual purchases make it difficult for them to impose significant pressure on retail firms. However, buyers have large amounts of indirect power to bargain with — i.e. plenty of choices. Hence Kathmandu has to perform promotional activities and provide discounts to customers. Threat of substitution -Low The threat of substitution has weak intensity in affecting the retail industry environment. There is little to substitute clothes with. Most ‘substitution’ in the fashion industry is just competition. New technologies are being developed, such as 3D printing, but at the moment they are costly. This Porter’s Five Forces analysis has shown that while there little supplier bargaining power and the threat of substitution, the industry is highly competitive and buyers have significant indirect power as they have the abundance of choice and low incentive to stay with one particular shop. The retail market is effectively nearing saturation. Kathmandu must create new strategies that develop and sustain the company’s competitive advantage in the long term.
- As shown on the graph one, sales were growing consistently over the period from 2012 to 2016. At the same time, the EBIT and NPAT had been fluctuating. Kathmandu underperformed in profit in 2015; there was a dramatic decrease in EBIT and NPAT, followed by recovery in 2016. The decline in 2015 was explained by promotional activities and selling below the full price. In 2016 EBITDA were $64.8m an increase of 37.6%. And net profit after tax was $33.5m, a 64.2% increase over FY2015. Despite the recent improvement, the EBIT and NPAT in 2016 were below than corresponding figures in years 2012-2014. On the graph two, sales and EBITDA are broken down by the geographical regions the Group operates in. Despite the fact that sales in Australia were almost twice as high as sales in New Zealand in 2016, the EBITDA for New Zealand are higher than for Australia. This disparity may indicate operational deficiencies in Australia, which need to be looked into.
- Gross margin for the group has improved by 110 bps in 2016 and amounted 62.6%. This was achieved through the increase of full price sales, less clearance and careful management of promotional activity. Australia was a leader concerning growth margin with 64.1%, followed by New Zealand and UK with 60.1% and 50.9% accordingly. At the same time, total operating expenses (excl. depreciation) as % of sales were higher for Australia 52.3% than for New Zealand 52.3%. This may indicate either operating inefficiency in Australia or possibly higher advertising and other sale expenses in an attempt to gain higher market share. While in New Zealand the company is simply maintaining its current position. Overall total operating expenses as a percentage of sales decreased from 50.0% in 2015 to 47.4% in 2016. This was achieved partly through reduction of promotional spending. Decreasing promotional spending may decrease awareness of the brand and negatively impact sales in the future.
- The Group operates internationally and is exposed to foreign exchange risk concerning the AUD, USD and the GBP. Over 90% of the company purchases are in USD. To manage risks the company uses derivative financial instruments. The gain or loss relating to the ineffective portion of changes in the fair value of derivatives is recognised in the statement of comprehensive income. In 2016 movement in cash flow hedge reserve amounted 47% of profit after tax and negatively impacted total comprehensive income attributable to shareholders. This effect was caused by the appreciation of the USD against AUD and NZD. As the result, total comprehensive income attributable to shareholders in 2016 was three times lower (11 246 NZD) comparing to 2015 (33 868 NZD).
- RNOA has to be greater than WACC for the company to be profitable. For Kathmandu, RNOA is significantly lower than WACC, which indicates decreasing company value. A company can only create shareholder value, economic profits, if the ROE is greater than its cost of equity capital. For Kathmandu ROE is significantly lower than the cost of equity. Mover the ROE for 2016 has decreased dramatically comparing to 2015 from 11% to 4%. The amount of net non-operational expense in relation to net non-operational obligations is significantly higher than the return on net operating assets, what resulted in a negative spread. The financial leverage of company can positively affect ROE only if the spread is positive. Net operation profit margin (NOPM) for Kathmandu shows that for that from each sales dollar the company earns 6.98 cents profit after all operating expenses and tax, which is higher than median NOPM for all publicly traded firms of 6 cents. Therefore the company is profitable. Net operating asset turnover (NOAT) indicates that for each dollar of net operating assets the company received $1.18 in sales, what is lower than the median for a publicly traded company of $1.4. This indicate inefficient productivity of company operations.