Conference Transcription
20 September 2012
Kathmandu Holdings Limited
Full Year Results Announcement- Media Conference
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 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 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.
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.
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 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.
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.