PAUL MCBETH: KMD tries to ride a tsunami in share issue

Paul McBeth is the editor of The Bottom Line and Curious News, and previously worked at BusinessDesk for 15 years.

Before KMD Brands embarked on its multi-brand strategy to transform into a proper multinational retailer with some pricey acquisitions, it described its preference for a capital-light push into global markets.

Almost a decade later, it’s more than doubling its shares on issue with dirt-cheap stock to keep its bankers at bay as the anticipated synergies from buying US footwear firm Oboz and Australian surf staple Rip Curl have taken longer to appear than initially thought.

That’s probably not quite what the directors had in mind.

The owner of Kathmandu has been in the spotlight for the past couple of weeks after the usual suspects across the Tasman first started reporting on leaked details of the upcoming capital raising, coming at a time when the share price was already touching new depths.

That ultimately contributed to a savage discount of 69% to the last trading price – or 47% if you’re charitably using the theoretical ex-rights price – at 6 cents per share as the retailer looks to raise $65.3 million to put towards its $90 million-odd of net debt making its bankers uncomfortable.

We can’t wait for June

The leaks by Aussie investment bankers didn’t help matters, but KMD’s shrinking margins – both gross and at an earnings before interest, tax, depreciation and amortisation level – left much to be desired in the investment community,

Its gross margin of 57% compares well to the likes of homeware and sporting goods chain Briscoe Group’s 39%, or big-box retailer Warehouse Group’s 32%, but KMD’s underlying ebitda margin of 2.3% hurts when it’s more on par with the Red Sheds’ 2.6% and well south of Briscoes’ 12%.  

And it’s still a long way from clothing chain Hallenstein Glasson Holdings’ 61% gross margin and 15% ebitda margin, or jeweller Michael Hill International’s 61% gross and 19% ebitda margins.

In fact, cast your mind back to the end of 2009 when KMD listed – back when it was Kathmandu – and it was generating a gross margin of 64% and earnings margin of 23% when the country was in the midst of a double-dip recession and the unemployment rate spent the next three years above 6%.

Back then, the company was a much simpler entity, with a strong brand across New Zealand and Australia as the place to buy your outdoor equipment – even after three years of private equity ownership – and was making tentative steps farther afield with a few stores in the UK.

We’ll all be planning out a route

The first couple of years were a slog in tough economic times and as the Canterbury earthquakes rattled the Christchurch headquarters, but the shares soon rocketed up to a record $4.05 on an unadjusted basis in late 2013 as the retailer steadily boosted its Australian footprint and notched up a few records on the way, while spitting out some healthy dividends.

A stumble at the end of 2014, with skinnier margins in a subdued Australian environment, saw the share price tumble and brought out the canny Rod Duke, who lobbed in a $363 million offer that was heavy on scrip in a bid to build a diversified trans-Tasman retailer.

Kathmandu’s relatively fresh board chaired by David Kirk rejected Duke’s overtures, and the 5,600 shareholders weren’t overly enamoured by the offer, which attracted just 2.3% of acceptances on top of the near-20% stake Briscoes built ahead of the takeover bid, consigning the deal to the history books.

The outdoor equipment chain was in for some more change, with Xavier Simonet taking over the reins as chief executive not long after the Briscoes’ play, which put the retailer on the path to a more aggressive international push than the softly-softly approach under the previous management and board.

The Oboz acquisition in 2017 seemed to align with the great outdoors push Kathmandu wanted to make in North America and Europe, with the footwear brand hailing from the great wide open of Montana, albeit at a hefty price tag of US$60 million, plus potential earnouts of another US$15 million.

If everybody had an ocean

That was followed up in 2019 with the more transformational A$350 million purchase of surf giant Rip Curl, which was kind of outdoors-y, but brought with it a global retail and wholesale and a summery feel to sit alongside the more wintery feel of Kathmandu’s feathery jackets and sleeping bags.

The covid pandemic and accompanying emergency capital raising the following year was the kind of curveball sent to test everyone, but the addition of the high-profile surf wear brand seemed to capture investors’ minds, with the retailer’s register soaring from about 3,900 shareholders in late 2019 to almost 16,700 by the middle of 2020.

And that doesn’t even take into account the burgeoning Sharesies brigade held under the wealth platform’s nominee entity.

The thing is, the tie-up has felt forced from the get-go. You might see surfers gliding down a mountain on a snowboard if they’re not chasing an endless summer, but they’re not the immediate bedfellow that comes to mind when looking at the hikers and campers you see populating Kathmandu’s annual reports through the 2010s.

And where Kathmandu’s margins were always relatively healthy when not caught out by broader economic doldrums, Rip Curl’s larger wholesale channel tended to deliver slimmer earnings margins than the outdoor equipment chain.

We’re on safari to stay

At the time, the goal was for each brand to plug a gap that the other did well, be it Kathmandu’s online capabilities, or Rip Curl’s wholesale network – synergies were something of a dirty word. Then-chief financial officer Reuben Casey stressed* the deal didn’t rely on stripping out duplication and Simonet called it a big opportunity to leverage each other’s strength.

Of course, when things turn south and cutting costs becomes the lever that management teams pull to preserve their air of infallibility, it’s little wonder that stripping out $27.5 million of annual expenses is top of mind for KMD’s brain trust in trying to sell a hospital pass of a capital raising to investors.

With a steady outflow of shareholders on KMD’s register since the 2020 peak – there were about 8,900 at the end of March – the drums have been beating for the retailer to do more than simply keep the banks at bay, with activist investor Allan Gray and its 16% stake continuing to push the retailer to sell assets, even as it took up its full entitlement in the offering.

Rip Curl and Oboz have been touted as the obvious sale candidates, along with the wetsuit factory in Thailand.

And if KMD Brands still had the Kathmandu culture, that might ring true.

Everybody’s gone surfin’

But the dispersion of the retailer’s team across its three main bases in Christchurch, Bells Beach near Melbourne in Australia and Bozeman in Montana has made this a far cry from that much simpler organisation that went public in 2009.

That begs the question as to why Kathmandu remains a sacred cow?

Rip Curl is delivering KMD more than half of its revenue and is the only unit delivering positive margins for the group, even if management remain eternally optimistic that the 36% of revenue from Kathmandu and 8% from Oboz will filter down into black ink.

The company’s heritage might lie in Christchurch, but that doesn’t mean KMD’s future has to.

If anything, Kathmandu might benefit from a bit more trans-Tasman focus than KMD is willing to provide given the company’s goal has been tapping into those greener fields overseas for some time now.

Briscoes might not have picked up its entitlement in the fire sale of a capital raising, but it’s hard to look past Rod Duke as someone capable of breathing life into the ailing outdoor equipment maker.

KMD chair David Kirk signalled his exit from the board later this year, having been the one to spurn Duke’s overture all those years back. In the quest to climb out of penny stock status, his successor might want to see if Briscoes is still keen on its own pathway across the Tasman.

Image from byronetmedia on Unsplash.

This column has been updated to fix some grammatical mistakes.