Conference Transcription
20 September 2012
Kathmandu Holdings Limited
Full Year Results Announcement- Media
Conference
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Start of Transcript
Operator: This is PGI. Please standby we are about to begin. Good day
everyone and welcome to the Kathmandu Holdings Limited Full Year Results
Announcement Media Conference. Today's call is being recorded. At this
time [for remarks] I'd like to turn the conference over to your moderator
today the CEO of Kathmandu, Mr Peter Halkett. Please go ahead.
Peter Halkett: Thank you Troy and welcome everybody. With me today on
the call is Mark Todd our Chief Financial Officer. We're going to be discussing
our results for the 12 months ended 31 July 2012. The presentation that I'm
going to be talking to is posted on the ASX, NZX and our corporate website.
I'm going to presume most people have got that.
And just before I sort of outline the order of events today just we're going to
be I guess editing the presentation. I'm going to be talking primarily around
the Summary and the Outlook so that we can allow as much time as possible
for questions. In total we have 30 minutes so given the limited time I'll kick
off now.
If we just turn to the Highlights page a few things I'd like to sort of
emphasise, first of all we think it was a very solid result in quite a difficult
economic environment. I think that's evidenced by the performance of many
other retailers.
The second half performance was a significant improvement on the
difficulties we encountered in the first half and in fact the EBIT result was up
on the second half of the previous period which as I've highlighted was a
good improvement relative to the first half. And also it was a year in which
we really stepped up our investment program in terms of new stores,
relocated stores, IT and online investment. In some ways that's yet to come
to full fruition as far as delivery to the bottom line.
Just talking about sales and margin - sales grew by $41 million - that's
13.4%. Same store sales - this is something that's obviously been very well
received - were 7% and at an actual exchange rate basis that was 5.7%. It
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was a year where we implemented our enhanced loyalty scheme for our
Summit Club members. This did cost us in terms of margin but it also grew
our membership which we believe is more important by 30%.
Our gross margins albeit that they came down were within the range that
we've indicated to the market for several years now that we felt that sitting
somewhere between 62% and 64% would be considered a good performance
and we feel that while it's come down, we're very happy with that outcome
particularly as we've enhanced our incentives scheme.
From an operating costs point of view, the costs that increased in the first
half - that wasn't replicated in the second half. Some of those were one off
and so the second half operating expense performance was very good. Most
of those one offs related to our new enterprise resource planning and our
new warehouse management systems which are really about coping and
dealing with the growth of the business over the years.
At a profit level, it was $66.5 million EBITDA down 6.9%. At a net profit
after tax it was down 10.7% to $34.9 million. Our depreciation cost is up $2
million - that's due to our increase investment program, our capital
expenditure total of $21.8 million. Our major projects were the new
distribution centre, the implementation of flagship stores in prime locations,
our rebranding and our brand refresh and investment in our enhanced online
platform which actually launched yesterday.
Now I'm just going to go to the Outlook section and then I'm going to take
sections so just bear with me a moment. So from an outlook point of view,
our new stores in FY13 will be coming on stream earlier than FY12. The
online sales growth we expect that to continue at a fairly rapid rate and just
from a costs point of view, we don't see the same rate of cost increase in the
coming year that we saw last year so our investors will be very happy with
that.
Capital investment that will stay at the level of $20 million plus and you can
see the types of things we're investing which is mainly store related but it
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will be further on investment online and some more flagship stores we're
completing.
If we look at the market, we see the current economic conditions as the new
normal. I think anybody waiting for a significant turnaround or a lift is going
to be holding their breath - if they are holding their breath for that they're
probably going to run out of air pretty quickly. This is the new world and
there's every chance that things could get a little more difficult. Having said
that, our category - the outdoor category remains very resilient otherwise we
wouldn't have increased total sales by 13%. We see that locally and we see
that globally. It's a very good category. It's very much on trend.
Having said that, because it's a great category we have a lot more people - a
lot more competitors diving into this space. Having said - we've seen that
over the last five years with lots of competitors coming in, lots of start ups,
lots of expansions so there's nothing new about that but it's just worth
highlighting to you that it's a good category and that it is attracting more
competitors.
From an earnings point of view, we remain very confident in the Kathmandu
business model and ongoing growth strategies. In fact they are very
consistent with what we outlined when we IPO'd the business three years
ago. Several of the FY12 costs and initiative that affected our profit last year
won't be repeated. So that obviously gives us confidence to talk about our
cost structure.
But we also need to highlight that the proportionality of how much profit we
make in the first half compared to the second half that trend of lower
proportion in the first half that will continue into this financial year despite
the overall profit growing. So providing there's no further deterioration in
the economic conditions and following our investment program in FY12
Kathmandu expects an improvement in performance of our business in FY13
compared to FY12.
I've rushed through that to ensure that we had plenty of time for questions.
So I will open up now for questions.
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Operator: If you wish to queue for a question, you may start by pressing *1
on your telephone keypad at this time. Once again that's *1 to queue for a
question. We'll pause for a moment to assemble a queue. [Pause] The first
question comes from Sue Mitchell from The Financial Review. Your line is
open, please go ahead.
Sue Mitchell: (Financial Review, Journalist) Hi, Peter I wondered if you could
tell me just what changes you made to your Summit Club investment or
customer loyalty program and why it had the impact on margins that it did?
Peter Halkett: Well basically we've increased the benefits and the discounts
that our Summit Club customers get through introducing an incentive to essentially when they spend a certain amount of money we give them a
rebate and so the cost of that over the number of Summit Club customers we
already have was quite significant.
Having said that, it's part of our plan to get to one million Summit Club
customers. I guess you can imagine why that's important particularly as we
move into the online world is that having customers names and addresses
and email addresses so that you can communicate with them is (a) obviously
a lot cheaper than traditional media forms sorry to say that to all you
newspaper people. But knowing our customers and putting them in as part
of our customer relationship program is very worthwhile.
So yeah they are a very high proportion of our total sales, they spend more
so we saw it as a very good investment and clearly by growing our Summit
Club base by 30% that strategy is working well for us and assisted us in our
sales increase.
Sue Mitchell: (Financial Review, Journalist) Can you give any figures on how
much of your sales they do account for and what their spending patterns
are? Are they worth sort of two or three times the usual one off customer?
Peter Halkett: Well we don't disclose too much of that Sue for fairly obviously
reasons - it's fairly competitive. But what I can tell you is they're over half of
our total sales and they generally spend 50% to 100% more than non
Summit Club customers.
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Sue Mitchell: (Financial Review, Journalist) Right 50% to 100% more. Okay
and your UK sales were down. Does that just reflect the depth of the
recession in the UK retail sector or is there something else going on there
with the offer? Is there more competition or...
Peter Halkett: Look it's mainly what's happening with the wider economy but
there's also partly we're in the middle of restructuring that business as you
will see from the notes. We've undertaken a lot of change. We're managing
that business primarily out of New Zealand and Australia now so no doubt
that had a little impact on it. But we see that as a short term impact and it's
really about implementing our new strategy going forward which is primarily
about driving sales online supported by a small store network.
Sue Mitchell: (Financial Review, Journalist) Okay so you wouldn't withdraw
from that market altogether and just have online?
Peter Halkett: No.
Sue Mitchell: (Financial Review, Journalist) Okay. Sorry did you give a
number somewhere in the presentation as to what your online sales are now
as a percentage of total sales?
Peter Halkett: We haven't given that but what I can tell you is that after a
relatively short period of time it's already across New Zealand and Australia
it's our largest store in the business.
Sue Mitchell: (Financial Review, Journalist) Right.
Peter Halkett: But you can assume that that's well less than 5% though.
Sue Mitchell: (Financial Review, Journalist) Do you have any thoughts on
what you could achieve over time in terms of online sales?
Peter Halkett: Obviously we've made a significant investment because we
see it being a big part of our business in time. Whether that takes two
years, five years, 10 years but it will be quite a portion of our business. But
in the short term it's difficult to say what share of business it will be. They'll
be - there are sort of two aspects one is what share of our New Zealand and
Australia business it will become and then how much business we can get in
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the UK and other international markets which our new site allows us to
pursue.
Sue Mitchell: (Financial Review, Journalist) You've mentioned in the
presentation that you're looking at - I just want to find it - looking at doing
something with eBay, Amazon et cetera, Trademe - what's the aim there?
Peter Halkett: Well if you - once again if you go to an Amazon or an eBay site
particularly in the US or the UK you'll see all the leading brands are
represented on their site. Sometimes it will just be their clearance products,
sometimes it will be an edited range of what they offer in their retail stores,
sometimes it will be a full range. But what they do offer is access to millions
and millions of customers where you can expose your brand but may not
automatically and naturally go to your website.
So it offers another channel to market that's sort of halfway between
wholesale and retail. We haven't committed to any of these channels but
given that many of our competitors and many of the leading brands offer
their product on these sites, it would be something that we'd want to be
considering pretty seriously.
Sue Mitchell: (Financial Review, Journalist) Okay that's it from me. Thank
you.
Peter Halkett: Great thank you Sue.
Operator: Your next question comes from Tim Boreham from The Australian.
Your line is open, please go ahead.
Tim Boreham: (The Australian, Journalist) Yeah hi peter.
Peter Halkett: Hi Tim.
Tim Boreham: (The Australian, Journalist) Yeah g'day. I'm surprised you
haven't mentioned the weather anywhere in the presentation which most
retailers seem to and I would imagine that it's more justified in terms of your
business. So I'm just wondering what sort of effect that had - sort of the
weather and the snow I guess. It was a good snow season here.
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Peter Halkett: Yeah it was - if we looked across the whole 12 months and we
looked across our whole store network in all the locations we are from Cairns
to Invercargill, I would say the impact of the weather was minor to neutral.
There were differences like it was a very hot Easter in New Zealand. It was a
cold start to winter in New Zealand and then all the snow evaporated on the
ski fields in New Zealand.
Tim Boreham: (The Australian, Journalist) Right.
Peter Halkett: So there was ups and downs but overall Tim the reason we
didn't comment is we don't think it had a material impact on the result.
Tim Boreham: (The Australian, Journalist) Sure okay. As a general rule you
prefer cold weather I...
Peter Halkett: We like cold weather. We like cold weather in summer too.
You know a big part of our business is apparel now whether it be fleece,
some thermals and rainwear. You know the market for t-shirts and shorts is
pretty well covered by a lot of other people including the Rip Curls and the
Billabongs so we like to get into those colder weather customers which
customers recognise us for...
Unidentified Participant: And rain.
Peter Halkett: And wet.
Tim Boreham: (The Australian, Journalist) Right okay. Okay great. Just look
one other thing, I'm not sure whether you mentioned it to Sue but you're not
- you're not disclosing a figure for the Summit Club members at the
moment? You said you've got a target of one million and they've risen 30%
but...
Peter Halkett: Yeah we don't tend to believe that that's something we want
public. It just helps our competitors. So we know we're aiming for a million.
We know we're growing rapidly - we don't feel there's a need to put a specific
number out in the market place.
Tim Boreham: (The Australian, Journalist) Right, so I presume that 30% is
growing from a low base?
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Peter Halkett: Well, no, we're probably a decent part of the way through to
the million. We just don't feel we need to commit ourselves to disclosing
precisely what that number is. I think if you track through our IPO and
where we did actually disclose that number and then look at performance
you could probably work it out but we don't want to establish a precedence
now that we continue to tell our competitors how many customers are on
that database.
Tim Boreham: (The Australian, Journalist) Yeah, okay fair enough. So what
was the IPO number?
Peter Halkett: It was about half a million at that point in time.
Tim Boreham: (The Australian, Journalist) Okay.
Peter Halkett: Across both countries including [inaudible]. Sort of
somewhere in that order.
Tim Boreham: (The Australian, Journalist) Sure. Okay. All right. Thanks
very much for that.
Peter Halkett: Okay.
Operator: The next question comes from Teresa Ooi from The Australian.
Your line is open, please go ahead.
Teresa Ooi: (The Australian, Journalist) Hi, Peter, how are you?
Peter Halkett: Good thanks, Teresa, how are you getting on?
Teresa Ooi: (The Australian, Journalist) Excellent. Look, how much of the
sales were driven by discount because you had a sharp increase in sales?
Peter Halkett: Well the proportion of total sales sold under sale was no
different to the previous year or two years or three years for that matter. So
there's no radical shift in that if that's the point of the question?
Teresa Ooi: (The Australian, Journalist) Okay. Can you give us a bit of the
colour on the market sentiment? Do you still find that consumers are not
shopping? Are they spurred by discounts or are they more fearful of the
uncertainty in the economic climate?
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Peter Halkett: Look, it's a pretty tough time for retail, there's no doubt about
that and most retailers are probably working harder than they've ever
worked and they have got to be smarter, savvier, more creative. You know
in our case because we're a brand, you know we're very much on the
products we design, you know making sure we're getting the styles, the fits,
the colours, the investment in the different categories appropriate. So it's
certainly a period where you have to work very hard and customers are more
discerning and more cautious than they've ever been.
Teresa Ooi: (The Australian, Journalist) Do you think that it has bottomed
out and now there's only some light at the end of the tunnel?
Peter Halkett: Well if I read your paper and other papers that talk about
what's happening in the mining industry we've still got some pretty tough
times to overcome.
Teresa Ooi: (The Australian, Journalist) And especially in the non-mining
industry?
Peter Halkett: Well I guess the mining industries in many ways has been
firing up the economy. We see that in our performance, particularly in those
States. So, yeah, I think it's going to be a difficult time depending what
happens in that area. So our job - you know how category is as I highlighted
in the presentation is a strong category. We've probably got it easier than
some other retailers because that category is very much on trend. The
important thing for us is to continue to promote strongly, continue to offer
value, make sure we get the products right, be communicating, building
great stores, supporting the brand, all those things.
Some other retailers don't have that opportunity, they are carrying other
people's brands, so they are reliant upon offers that come from third parties,
whereas we control our destiny and so in simple terms that's why we're still
growing at a rapid rate. We're in a good space and we do control our
destiny.
Teresa Ooi: (The Australian, Journalist) Okay. How much of your sales are
due to your increase in your Summit members?
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Peter Halkett: Well, look we don't disclose the detail of that. We've
disclosed that our Summit Club members grew 30% and we sort of have
indicated on average they spend more than the average but we don’t actually
disclose that, Teresa.
Teresa Ooi: (The Australian, Journalist) Okay. The UK, that is still a bit of a
problem for the company?
Peter Halkett: I'm not sure I'd describe it as a problem. I think it's been an
opportunity waiting for us to turn our attention to it. As a business we've
been very much focused on New Zealand and Australia, rolling out stores,
building the profitability. The UK we've really sat there on the back burner.
I think I've even used those terms in a couple of these presentations. We've
started to make some changes. We began that last year. We've incurred
some costs in some of those changes. We certainly see the opportunity for
us to achieve sales and profit growth in the UK via online. Our new UK
online site launches in the next week or so, so we're really only starting to
get ourselves in the starting blocks for the UK. So it's early days to say it's a
problem. It certainly hasn't helped our profit but then we haven't put a lot of
effort in either, so we're really in a position where we're starting to turn our
attention to that now.
Teresa Ooi: (The Australian, Journalist) How many stores have you got
there now and how -Peter Halkett: There are six stores in the UK.
Teresa Ooi: (The Australian, Journalist) Six stores? Are you expecting to
hold on to the six stores or are you agreeing to close some of them and
switch them to online?
Peter Halkett: Well, we see the future in the UK as basically internet sales,
supported by a network of stores. Exactly how big or small that will be will
be will be determined over the next couple of years.
Teresa Ooi: (The Australian, Journalist) Could you say that again? Internet
driven, supported by smaller number of stores?
Peter Halkett: By a small number of stores.
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Teresa Ooi: (The Australian, Journalist) Right.
Peter Halkett: Exactly how many we'll determine that over the next couple
of years.
Teresa Ooi: (The Australian, Journalist) Okay. So you don't see any closure
among the six stores that you have right now?
Peter Halkett: Look, anything is possible, Teresa. We're in that planning
stage at the moment but as we sit here today we've set the strategy as very
much online supported by a small network. How big or small that small
network needs to be has yet to be designed.
Teresa Ooi: (The Australian, Journalist) Okay. Where do you see your
growth coming from then? Just internet or are you seeing some growth
maybe in the emerging markets like Asia?
Peter Halkett: You might need to - where do I see growth coming from?
What, in New Zealand and Australia or in terms of -Teresa Ooi: (The Australian, Journalist) Yes.
Peter Halkett: -- or in terms of - well, we see growth in a number of areas.
We see growth - we are still growing in New Zealand and in fact over the last
12 months New Zealand outgrew Australia, be it that it's more penetrated.
In Australia we haven't finished our store roll out and we sell approximately
one third per head of population to Australian customers that we sell to New
Zealand customers. So we've still got a long way to go in Australia. Our new
website allows us to sell internationally. Now we will probably target that at
specific markets but at this time clearly for a vertical retailer who controls
their own brand that international opportunity could be quite significant for
us but at this point in time that's untested. So it's unrealistic for me to put
any numbers on that and the UK we already know we do around the GBP4
million.
So we do that mainly through our stores, so the goal there is to get that on
to a more efficient basis through our online. So the growth opportunity for
us in New Zealand, Australia and the UK and internationally are all very good
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but the single greatest growth opportunity we have sitting in front of us
today still remains Australia.
Teresa Ooi: (The Australian, Journalist) Okay. I know you were asked this,
internet sales, did you give a proportion of how much is your internet sales
roughly?
Peter Halkett: No, we don't really do that, Teresa, not at this point in time.
We have said that it's our biggest store but that doesn't mean it's a high
proportion of our business.
Teresa Ooi: (The Australian, Journalist) Okay. Is there a target? Do you
expect 10% of sales to go via internet?
Peter Halkett: We haven't firmed up a target at this point in time. There's
so much uncertainty about the rate of take up and what's going on. I mean,
some retailers today it's 1% of their business and other retailers it's 30% of
their business. Some of them are retailers selling other brands and some of
them are vertical. Some of them are represented globally; some of them are
represented regionally. To put a percentage on it for us would purely be
guesswork and certainly I wouldn't want to put a guess out there in the
market.
Teresa Ooi: (The Australian, Journalist) But you think it will be significant
enough for you to invest - how much have you invested in the past year?
Peter Halkett: Well in the past year in both the IT and online we've disclosed
that we've invested about NZD3 million but there's no doubt that it will be a
reasonable proportion of our sales that will justify a return on investment.
The question is will it become 5% of our business or will it become 30% of
our business. Only time will tell as that market continues to emerge but
there's no doubt that's the way that people want to do business more and
more but there will still be a strong place for bricks and mortar within that
environment though.
Teresa Ooi: (The Australian, Journalist) With the recognition that internet
sales are going to be much stronger does that impinge on your bricks and
mortar stores or are you still rolling them out?
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Peter Halkett: No, we're still rolling them out but we're being a lot more
cautious and we're making sure the terms and conditions of those are a little
more flexible.
Teresa Ooi: (The Australian, Journalist) You're talking about leases?
Peter Halkett: Yeah.
Teresa Ooi: (The Australian, Journalist) Okay. Thank you.
Peter Halkett: Thanks, Teresa. Now I have to give a three minute warning I
think, so I'm not sure how many more questions there are to go but
apologies but we are getting close to time. Have I lost you, Troy?
Operator: We have no further questions at this time.
Peter Halkett: Well done, team. I really appreciate everybody dialling in to
today's call and I know I'm catching up with some of you separately so I look
forward to that conversation. Thank you for your time.
Operator: That concludes today's call. Thank you all for your participation,
you may all disconnect.
END OF TRANSCRIPT
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