Induction Briefing

Kathmandu Holdings Limited

Prepared by Dina Nurgazina

BUSMGT 733. Assignment 1.

FutureFunds

Content0

1. Company Brief: Kathmandu Holdings Ltd.

2. Industry key success factors3.SWOT Analysis4.Porter’s five forces – industry

analysis5.Operating Performance6.Non - Operating Performance7.Ratio Analysis8.Summary

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)31

-Jul-1

4

5-Sep

-14

11-Oct-

14

16-Nov-

14

22-Dec-

14

27-Ja

n-15

4-Mar-

15

9-Apr-1

5

15-May-

15

20-Ju

n-15

26-Ju

l-15

31-Au

g-15

6-Oct-

15

11-Nov-

15

17-Dec-

15

22-Ja

n-16

27-Fe

b-16

3-Apr-

16

9-May-

16

14-Ju

n-16

20-Ju

l-16

25-Au

g-16

30-Se

p-16

5-Nov-

16

11-Dec-

16

16-Ja

n-17

00.5

11.5

22.5

33.5

4

Kathmandu Holdings Ltd. Shares Historical Prices

• 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

Kathm

andu

Torpe

do7

Northfa

ce

Macpac

Bivoua

c

Rays Outd

oors

0

20

40

60

80

100

120

140

160

Competitors, number of stores

New Zealand Australia

• Strong brand image in NZ and AU.

• Mature profitable company.• High gross profit margins. • Loyal customer base.• Diversified product range.

S

OInternational 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.

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.

Operating Performance5

FY2012 FY2013 FY2014 FY2015 FY2016$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

Sales, EBIT & NPAT2012-2016

SALES EBIT NPAT

NZ$m

AUSTRALIA NEW ZEALAND UNITED KINGDOM-50,000

0

50,000

100,000

150,000

200,000

250,000

300,000 278,428

141,682

5,48332,868 35,134

-541

Sales vs EBITDA by Regions For the year ended 31 July 2016

Sales from external customersEBITDA

NZ$’

000

AU NZ UK GROUP0%

10%

20%

30%

40%

50%

60%

70%

Gross Margin, %

FY15 FY16

AU NZ UK GROUP0%10%20%30%40%50%60%70%80%90%

100%

Total operating expenses (excl. depre-ciation), % of sales

FY15 FY16

Operating Performance5

Non - Operating Performance6

2014 2015 2016

-20,000

-10,000

0

10,000

20,000

30,000

40,000

50,000

Profit after income tax Movement in cash flow hedge reserve Total comprehensive in-come for the year at-tributable to sharehold-ers

NZ$’000

Ratio Analysis7

2016 2015 RNOA 8% 6%ROE 4% 11%

Disaggregation of RNOA

NOPM 6.98% NOAT 1.18

BenchmarksWACC 14%

Cost of equity 16%

Disaggregation of ROERNOA 8%FLEV 0.16

Spread -28%

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

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Please see the attached file for detailed calculations.Microsoft Excel

WorksheetKathmandu Holdings LimitedBalance sheet as at 31 July 2016

GroupSummarised Reformatted Balance Sheet 2016 2015 Average16 2014 Average15as at 30 31 July 2016 $000 $000Total 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 FinancingDebt 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 FinancingDebt 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 ROERNOA 8.2% 6.4%FLEV = Av NNO /Av Equity 0.162470058` 0.18649303Spread = 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%