Ann: ADDRESS: KMD: KMD 1H FY14 results conference

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• Summary: ADDRESS: KMD: KMD 1H FY14 results conference call transcript
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					KMD
25/03/2014 09:53
ADDRESS

REL: 0953 HRS Kathmandu Holdings Limited

ADDRESS: KMD: KMD 1H FY14 results conference call transcript

Conference Transcription
24 March 2014
Kathmandu Ltd
Kathmandu Half Year Result Analyst Call

Time & Date of Recording: 24 March 2014 @ 8:30am (AEST)
Subject/Title: Kathmandu Half Year Result Analyst Call
Length of Conference (minutes): 46
Turnaround: Sameday
Billing Code: 9578002
Company Name: Kathmandu Ltd
Moderator Name/Client ID: Peter Halkett / 9578002
E-mail recipients of transcript:
Other notes:
Start of Transcript
Operator: This is PGI. Please stand by, we are about to begin.  Good day
everyone and welcome to the Kathmandu half year results analyst call.  At
this time all participants are in a listen-only mode.  There will be a
presentation followed by a question-and-answer session at which time if you
wish to ask a question you need to press star followed by the number 1 on
your telephone keypad. Today's call is being recorded.  At this time for
opening remarks I would like to turn the conference over to your moderator
today Mr Peter Halkett.  Please go ahead, sir.
Peter Halkett^ Thank you, Maia and welcome everybody, welcome to the call.
With me today on the call is Mark Todd, our Chief Financial Officer.  We're
going to be discussing our results for the six months ended the 31st of
January 2014.  We'll be talking to the results and the half-year presentation
we filed this morning on the ASX, NZX and on our corporate website.  I
presume most people have either got that or can access and follow me and Mark
as we work through the presentation.  We will be presenting the results in
New Zealand dollars, a slightly different view than if we were presenting in
Australian dollars given the exchange rate movement, but yes, we will be New
Zealand denominated.  The presentation will be approximately 30 minutes
followed by 15 minutes of questions.
Let me just start by running through the contents for today; this is on page
2.  We'll do a quick overview of the results no doubt you've already had a
quick look at. I'll go through the key line items, the country results, our
cash flow balance sheet and the dividend.  I'm going to talk about our growth
strategies, both update, where we're at and how we see those strategies over
the next 12 months, the outlook and then we'll have time for those questions.
 If we could just move through to page 4, which is the results overview.  We
thought it was a very solid result in a relatively difficult trading
environment, and something we felt worth highlighting is the growth potential
Australia is really starting to demonstrate with the 28% uplift in profit,
and Mark will talk to that when we get to the country section.
Our new stores are performing well; they continue to perform well, and I'm
jumping the gun a little bit but you will have seen in the growth strategies
that we've our store rollout up from 170 to 180, and I think we've got a lot
of confidence that our new stores continue to perform very well and through
various trials has allowed us to increase that further.  Gross margin was at
the top end of our range, probably a little surprise for some of you.  We
know that when we look back at the Christmas trading period there was a lot
of discount activity and we can see that some reasonable sales were achieved
by other players in the market, but some of that came at the expense of
margin.  In our case we didn't need to discount to that level so we were
really pleased at that level, and it's certainly at the top end of our range.

Probably something once again that will have surprised some people is we had
a very significant exchange rate impact on our earnings.  In fact, it was
approximately a 15% impact year-on-year.  You'll see our Group EBIT was
effectively reduced by $2.2 million as a result of that movement, so given
the increases we delivered, taking that into account I think it was a really
solid performance.
Just moving through to sales, at a constant exchange rate basis our sales
grew by 10.5%. Obviously when the conversion - as we report it's only a 1%
increase but on a like-for-like type basis it's 10.5%. On a same store
growth basis we're at 5.4% and once again, when we report it will be minus
3.5% and gross margin, as alluded to before, was 63.9%; that's absolutely
nudging the top of what we'd ever indicate to you.
Operating costs were in line with our expectations.  In some ways those costs
are a little higher than some people might expect; they might have been
expecting half a per cent less, but we are continuing to invest and we are in
the middle of an IT transformation that's going to allow us to become a full
omni-channel retailer. That doesn't come for free.  So we were happy with
that operating cost performance.  At a profit level EBITDA was up 8.1% to
22.6% and net profit after tax was up 10.7% to 11.4% and that's at the actual
exchange rate.
Just moving through to the look year-on-year, on page five.  You can see
sales at $167 million, that's the 1% alluded to before.  We know that if we
looked at it on a country-by-country basis it's a constant rate of 10.5%.
There's the margin performance and 63.9% compared to 62.7% last year, so not
only was it at the top of our range but we did grow margin compared to last
year, and as you can the expenses are slightly up in percentage terms, but
that's as a result of planned activities and the transformation taking place
on our IT platforms are largely responsible for that not being in line.
EBITDA I've mentioned at $22.6 million, up on last year.  EBIT $17.6 million,
up 11.4% on last year and we've already talked about net profit after tax.
Permanent stores are now at 130 - well, at the end of the period should I say
were 139.  We've subsequently opened some more stores, and that compared to
129 the previous year, 10 more.  I'll just highlight the note below.  You'll
see that the conversion rate this year is - the rate is the equivalent of
$0.91 whereas last year it was $0.79.  So that's the 15%, a pretty major
difference for us to absorb.  Once again, if we were reporting this in
Australian dollars we'd have some pretty big percentages in the last column.
If we can just go through to sales breakdown, just to reinforce that we can
see out of New Zealand, when we look at the New Zealand reported numbers we
see the $167.6 million but if we break it into the country we see where the
increases are really coming through.  Australia's gone from A$81 million to
A$93 million in the first half, and New Zealand got some growth, it's gone
from $59 million to $62.3 million.
Just moving through to slide 8, what everybody's interested in, the same
store growth, the two charts at the top, they report in actual exchange rates
and so you can see Australia over the years has bounced around a little bit
starting at - going back to FY10 it was at 9.9%, currently 6.6% - but a
pretty generally consistently strong same store sales despite a fairly
extensive store rollout.  New Zealand once again bounced around, I'd say that
14% and 12% were pretty high.
I think where we're sitting now is realistically given the state and the
maturity of the New Zealand business as a pretty consistent performance and
are pretty comfortable with that.  It does tend to bounce around a little
more in the first half; as you know, it's a lower proportion of our sales so
movements tend to get exacerbated.  From a same store sales point of view as
I said before, overall it was 5.4% but you can see Australia at 6.6% would be
considered pretty good in the environment over the last six months.
I'll just move through and we'll take a look at gross margin.  Once again,
Australia, it's the second highest margin we've delivered in the last five
periods at 67.4% and as you will be aware, Australia is growing as a greater
and greater proportion of our business and therefore helps support a
consistent and solid gross margin overall.  New Zealand had an uptick this
year; you probably would see that there was a bit of a downward trend and
we'd like to think we've turned that around, and 58.6% combined with the
Australian total sits pretty comfortably where we would expect it to be.
The UK, once again it looks a bit like a staircase heading downhill but the
margin, this period was impacted by a lot of clearance activity as we shut
some stores and you will be aware, those that follow us, that we're down to
our four core stores, that's where we're going to sit and really, future
growth is all around online and what we're doing with marketplaces and other
partners.  So I think we'll see that margin go up in the future.  Overall,
when we look at the share of business the only reason that Australia has
dropped as a share of business is because of the exchange rate impact,
otherwise it would have grown significantly again based upon the same store
sales and all the new store rollout.
Cost of doing business; when it comes to spending money I like to hand that
over to Mark Todd who's going to speak now.  Thank you.
Mark Todd: Cheers, Peter.  It was a very satisfying period as far as
operating cost management goes.  We were actually within 1% of our budgeted
targets for the half-year when measured on actual exchange rates looked at in
the individual countries.  As Peter has already alluded to, because there was
a 15% weakening in the Australian exchange rate, there's actually - if you
compared it on a constant basis you'd have about approximately a 10% effect
on consolidated Opex in sales and the like because two-thirds of the business
is Australian domiciled.  So other than our redirection of spend into systems
platforms as we continue our rollout of the Microsoft AX project, that was
the only area of significant uplift in expenses and one of the offsets this
year was obviously having closed our UK stores and again because of the
benefit of exchange rate our rental as a percentage of sale reduced, or not
so much the exchange rate, the fact that we had a lesser portfolio of
Australian stores this year.
So moving on from the cost of doing business into earnings overall, the key
thing to point about here is that - obviously on page 11 - is the overall
trend, apart from our stellar year in 2011, it's a strong message of
consistent earnings growth, consistency in operating cost management, steady
margin always within that 62% to 64% target range leading to strong
year-on-year growth in earnings with an outstanding year in FY11 followed by
three strong, steady years of growth [unclear].
Talking about the country-by-country results, one of the keys things to
highlight is we only opened five stores in the first half of FY13 in
Australia compared to nine in the previous year, and the nine in the previous
year were primarily more major city stores and this year we've got two outlet
stores amongst the five.  So the pattern of store openings this year is
actually weighted towards the second half in Australia as opposed to the
first half and they were stronger set of new stores opened in the first half
of last financial year.  So you won't see the same aggregate growth in
earnings in FY14 from new store openings in Australia as you did the previous
year, simply because of the timing of new stores this year and the particular
mix.  But other than that, obviously it's a very satisfying result to achieve
a 28% improvement in earnings in the year in the Australian market and for
all the reason's Peter's already talked about, strong same store sales growth
coupled with improvement in gross margins.
Moving on to the New Zealand result, again a steady result.  More than - same
store sales growth over 3%.  The one store opened in New Zealand is our first
small format store in New Zealand, in St Luke's Mall in Auckland and that
store has gone well and is a precursor of several other stores of a similar
type to come, one of the reasons why we're confident enough lifting our store
network plan to 180, and earnings growth of just over 10% for the year.
Then talking about the UK, the key thing in the UK is no change in the store
profile as Peter has already talked about.  The sales ongoing are from the
four existing stores but when we get back to growth strategies Peter will
talk a little bit more about what we're doing to invest in that market in
terms of growing online sales and moving into marketplace websites and the
like.  Clearly that's the future for that business and we're more than happy
to make that level of investment at this point in time with the opportunity
that the online platform provides.
Then the nitty gritty stuff around cash flow and balance sheet.  We spent
less money in capital expenditure in the first half of this year compared to
the previous year, primarily as I've already talked about in new stores, $1.9
million this year compared to $6.4 million in the previous period, all about
the fact that we opened fewer stores in Australia and two of those five
stores opened were outlet stores compared to nine mainly central city and
mall stores in the same period last year.  Offsetting that, a significant
uplift in our IT spend as we continue our rollout of all the various
Microsoft AX systems applications.  We went live with our new point-of-sale
platform in the period between Christmas and Easter, so point-of-sale is not
on retail AX and we've got further applications to roll out before the end of
the financial year.
So we will expect to expend significantly more into capital expenditure in
the second half of the year compared to the first, in line with our overall
budget for the year, and that will primarily be driven by the fact that we
will have more new store openings in the second half of the year than in the
first half.  It's just simply a different weighting between the years.
Then to obviously - on the operating cash flow side the main area of
expenditure year-on-year increase within inventory and we'd like to flag that
virtually all of this was planned investment, particular opportunities to
take in key categories like insulation, wovens and fleece.  A small part of
it is actually due to the fact that of course we didn't sell as much because
we actually improved our margins year-on-year as well, but most of it is all
about the opportunity we've taken to improve core stock and the levels of
clearance the business has at this time compared to last year is actually
less.  So we've actually up-weighted investment in key categories.  We also
have to reflect a degree of conservatism every year as to where our new store
profiles fall and so sometimes obviously our new store openings don't
necessarily fall exactly where we want to buy the stock but the key message
in inventory is it's good inventory and it was planned investment in core
categories.
Other than that nothing really much going on in the balance sheet or in cash
flow over all for the year.
Dividend is unchanged for the period, a $0.03 interim dividend and as - a
NZ$0.03 interim dividend - and as we flagged this time last year, this
dividend although it's fully franked for Australian shareholders won't be
imputed for New Zealand shareholders but we're fully confident we'll continue
for the foreseeable future to be able to fully impute end-of-year dividends
for New Zealand shareholders.
Our hedging profile going forward, the deterioration in the Australian dollar
is relatively consistent into the first half of '15 compared to the second
half of '14 and you may remember we were hedging at about dollar for dollar
this time last year.  So we've been already able to absorb a 5% approximate
weakening in the Australian dollar and our selling prices and margins in the
first half of this year, with no adverse effect as you can see, and remain
confident in being able to do so looking ahead into the second half of this
year and into FY15.  The New Zealand dollar continues to be the stronger of
the two currencies and so our effective hedge rate for Kiwi against US is
basically unchanged.
All right.  I'll pass back to Peter to talk about growth strategy.
Peter Halkett: Thank you, Mark.  If we go to page 22, the first growth
strategy to update you on is our new store rollout and as I alluded to in the
opening we've revised the total from 170 to 180 and that's mainly as a result
of our small format stores working very well for us, working well for us, and
malls working well for us in I guess what you'd call secondary mall locations
and regional towns as well as small format working and strip locations in
more regional towns.  So we haven't discovered another major market.  They're
not going to be large CBD stores, these additional stores; they are going to
be smaller regional towns but they are important for generating additional
profit.  They are very profitable because they tend to be lower rent, lower
cost so we've extended that.
I would comment, as Mark has alluded to, that in the first half of this year
we haven't had as many stores and they've tended to be a little smaller.  As
we roll through the - heading towards the 180 target we need to become more
discerning, we're much more cautious around what the impact of online will
be, particularly as our own only business is growing well.  We're very much
aware of what's happening with rents and rent structures.  So in some cases
we, while we make a commitment to 15 stores a year they don't necessarily
always come exactly as we'd like, exactly as we've modelled.  So we are
determined to negotiate really well and to get the right deals and to get the
right equation.
The other thing I should mention in new stores is we do have new format in
terms of layout and design and we're just about in Melbourne to open a new
store in the Emporium Centre.  We've got new formats and various locations,
prime cities, into Pitt Street.  We've got new fit-outs and new market in
Victoria Street in Auckland, and those new fit-outs have really calibrated
the brand as well.  It's all part of the investment for future growth and I
guess that's what allowing us to keep moving forward when others may be
struggling.  We are on track for 15 this year and as I said before, small
formats are working well for us; they're very efficient.
If we look at optimising the existing store network, we've obviously got a
lot of existing stores, and in fact between 10 to 15 of our leases come up
every year, which is an opportunity to realign with our latest thinking and
our latest strategies in terms of store size, in terms of location, in terms
of getting the new design into those stores.  So we'll be pursuing that and
making sure we improve the efficiency of the operation each year as these 10
to 15 leases roll over.  But we also have - part of our investment in
Microsoft AX and some of the accompanying tools, we've been able to put in
place forecasting and planning and inventory management systems that allow us
to better target ranges based upon store size and in time demographics and
weather and that will improve the performance of stores on a sales per square
metre, and that obviously supports same store sales growth.
So to date that's probably an area where we've adopted a one size fits all in
terms of range planning.  More and more we're getting more sophisticated.
You can only do that when you have systems and you can only buy those systems
if you're making good profits. So it's a bit of a cycle and we're on the
front foot at the moment.  I'm really pleased that we're able to afford the
technology to improve our business.  Talking technology, digital online, this
is an area that has got a lot of focus in the Company. You'll see that we
grew 49%; you'll also be aware it's now 4.7% of our sales, it's grown
rapidly.
When we think about online, there's online in terms of how we can become an
omni-channel retailer in New Zealand and Australia and to a degree in the UK,
about how everything is integrated, online sales in the store or click and
collect, all the things you've heard before, that we're moving down that
track. That takes a lot of investment to have the sort of infrastructure in
place to support what sounds on a piece of paper very simple to do but it's
actually very complicated and you have to be able to invest a lot of money.
We are part way through that investment and we've got a little bit more today
but we're well down the track and we're close probably within the next 12
months to becoming a full omni-channel retailer in New Zealand and Australia.

But it's more than that; we've just launched international shipping and that
allows us to start to ship to overseas markets.  We're well-suited to that,
we get a lot of tourists in our stores.  We've already got 13,000
international Summit Club members; they are members of our database that are
neither UK, New Zealand nor Australia. They might reside in Germany, they
might be in Canada, they might be in the US; they could be anywhere.  We've
just introduced international shipping.  We haven't put a lot of marketing
effort behind it yet but we will be, and the intention is to grow our
international Summit Club database.  We've got those 13,000 without even
trying; we're just about to move into a phase where we get proactive.
Clearly this is a very profitable business, we don't need staff, we don't
need stores overseas and it may lead to further development of online where
we put specific online offering into those marketplaces rather than just
internationally ship.  So really exciting, and we're doing very well with new
marketplaces.  You'll be aware we've launched on Amazon in the UK, we're
actually on the Next website, that's been fantastic for us; our own website
in the UK is growing, and we have opportunities further beyond that on to
EBay and other European sites. So when you're a vertical brand of
Kathmandu-ers and you are competing in a segment that's I guess generally
considered a growing category globally, we are in a very strong position.  We
can afford the technology, we're putting the building blocks in place, and if
there's a theme out of this presentation it's that we are going for that
whole digital online space very aggressively and the progress we're making
I'm very, very pleased with.
Having said that, if we move to page 23 it's still all about product.  You
can have a fantastic distribution through online and stores, you can have
fantastic distribution through marketplaces but you still need fabulous
product with the latest technology, the latest designs.  So we are not just
investing in distribution, we're investing in the core of our business which
is product and brand.  We've established our product roadmap for the next
three years.  We've recruited more resources in terms of technical resource,
research and development.  We've brought in a new head of design out of
Germany, they'll be starting with us shortly.
We are really putting a lot more effort into making sure our product is
cutting edge and could sit on a shelf anywhere in the world and hold its
place. In parallel with that we're also making a significant investment in
sustainability.  It's become critical and in my view in two to three years'
time it's going to be a mandatory.  We need to begin that process now. So we
have made quite a lot of investment in just sustainability and transparency.
Once again, it's an investment you don't see a payback for today but it's an
absolutely requirement.  In fact for our category and for our type of
customers sustainability and transparency is vital.  So we're doing these
things to make sure we're well and truly prepared to go global.
Then finally our customers, the most important part of our business in many
ways.  We're continuing to grow our database; it's a critical part of online.
 We're improving our customer experience online and in terms of our Summit
Club customers.  We've got new programs coming in place.  It's not just about
discounts anymore, it's about engagement, relationship, and a cycle of
management of customers and understanding their spend and what they want from
us, data mining, all of those things you've heard from other retailers, which
I'm sure everybody's doing but it does take investment, it takes resources.
The good thing, and the thing I'm proud of, is we're well down the track in
this area as well, and our Summit Club customers, they are very loyal to us,
they are a very high proportion of our spend and that's why the goal of
actually growing international Summit Club membership when we get so many
visitors in our stores that we can leverage is such a good opportunity for
us.  So a lot of things going on in Summit.
They're essentially our five core growth strategies that haven't really
changed since the IPO. That's probably becoming a bit repetitious from your
perspective that they're the same boxes and they're the same five strategies,
but I can assure you the content and the thinking and the evolution under
each of those strategies has changed quite significantly and none more so
than in terms of online and what we're doing with our product.
If I just move through to the outlook, once again there's not a lot on this
page because it is a very difficult environment to predict.  I guess in some
ways we're feeling a little more positive about what's going on in New
Zealand at the moment with the economy looking strong, looking pretty robust,
all off the back of milk.  Whereas in Australia - there's probably a majority
of people on this call from Australia- there's a great deal of uncertainty
and I guess not a great deal of confidence.
It's been a little bit like that in the six months as well so I think we've
shown that we can still perform in a tough-ish market and I think that's
partly due to the next point, which is the outdoor category.  It's a really
resilient strong category both locally and globally and we've talked - in
fact we talked at our last investor presentation about why that was and the
types of customers and what they're doing and how lifestyles are changing and
that's really helping the category.  We do have a couple of big promotions to
come before the end of this financial year - well, we're well and truly in,
we've had a good start to the year.  We do have our Easter sale and our
winter sale where they're a high proportion of sale and we need them to fire.
 So there's still plenty of work for us to do.
So a positive start.  We're determined and continuing to invest in strategies
to deliver future growth and the growth we're getting today is as a result of
investment decisions we made two and three years ago.  You can't just flick a
switch on and off and expect to get sales and profit increase. You can get
sales or you get can profit; you don't generally get them both together.
They happen as a result of investment and well-considered investment and
we're continuing to do that.  Once again we remain very confident in our
business model and our growth strategies are delivering, and it's fair to say
that as long as there's no further or significant deterioration in economic
conditions we'd expect to deliver a strong performance for the full FY14
year.
I will now open up for questions I think.  I'm passing back to the moderator
who has some priority order to take the questions in.  We've got 15 minutes
to go, folks.  Thanks.
Operator: Thank you.  To ask a question please press star-1 on your telephone
keypad.  That's star-1 to ask a question.  If you are on a speakerphone
please be sure your mute function is turned off to allow your signal to reach
our equipment. Once again, that's star-1 to ask a question.  We will now a
pause a moment to assemble a queue.  We have our first question from the line
of George Batsakis from Goldman Sachs. Please go ahead.
George Batsakis: (Goldman Sachs, Analyst) Good morning Peter and Mark. Just
a question on gross margin.  Could you expand a bit further on your gross
margin comments?  The very strong result there in gross margin, was it just
better than expected consumer spending and you sold more at full margin or
was it better mix?  Could you expand on that, on those comments?
Peter Halkett: Well, Mark, do you want first crack?
Mark Todd: Yes.  In the end if you revert back to the sale model on the
management of our sale process George, we found our trading through our sale
- key promotional period, Christmas through New Year to be very strong.  So
the luxury of the - the benefit of having the three key sales in the air and
the control that that gives you over your pricing is we went into that event
with a target to improve margins and we were able to do so.  So there wasn't
one absolute.  Certainly some of the investment in stock that I also talked
about in terms of stock categories was with better margin category groups in
mind, so there was a little bit of that as well.  So there's a bit of both.
George Batsakis: (Goldman Sachs, Analyst) Great.
Peter Halkett: In summary, George, we didn't discount because we didn't need
to.  We were comfortable with our performance. We were in a [unclear]
position as we didn't have a lot of clearance stock.  We didn't have a lot of
clearance activity in January which we would normally have.  Sales were made
at full margin so we were comfortable with our level of trading and we kept
our powder dry.
George Batsakis: (Goldman Sachs, Analyst) Great, thanks for that.  Just a
question on Capex.  Mark, you mentioned Capex will be higher in the second
half of the year.  So full year, would it be in that range of $20 million to
$22 million, somewhere...
Mark Todd: Yes, it will.  Yes.
George Batsakis: (Goldman Sachs, Analyst) Great.  Thank you.
Operator: Your next question comes from the line of Sandra Ulrich from First
NZ Capital.  Please go ahead.
Sandra Ulrich: (First NZ Capital, Analyst) Morning guys.  Just a couple of
admin questions just to clarify.  In the full year result outlook it says our
trading performance, we are targeting an improve profit outcome in FY14 after
adjusting for the effect of the exchange rates, just if you could clarify
that comment.  Secondly, you also say that Opex over - as a percentage of
sales in FY14 higher than FY13.  Can you just provide a bit more information
around those two?  Thank you.
Mark Todd: Yes.  The first point Sandra is that it's highly likely that the
full year New Zealand dollar-denominated result will be a worse exchange rate
for Aussie dollars barring some miracle strengthening of the Australian
dollar between now and 31 July than it was in the previous year.  So as we've
already highlighted, on an EBITDA level it had over a $2m effect in this
first half.  The Kiwi dollar only started to strongly appreciate against the
Aussie dollar in the last couple of months of the last financial year. So we
were around $0.84 I think at 31 July and we're at $0.94 today. So you're
going to see that continue in the second half. So that's that point.  What
was your second - I didn't really quite understand what your second question
was.
Sandra Ulrich: (First NZ Capital, Analyst) Just so I can clarify that. So
what you're saying is that maybe a couple of - will be - just in terms of the
seasonality, if you say a couple of million negative impact on let's just say
30% of earnings, would that be $4 million impact on...
Mark Todd: Yes, yes.
Sandra Ulrich: (First NZ Capital, Analyst) Would that be right, on the second
half?
Mark Todd: Yes, that's right.  Yes.
Sandra Ulrich: (First NZ Capital, Analyst) So $2 million potentially and then
$4 million?
Mark Todd: But entirely dependent on what the exchange rate is and when it
falls because it's an [unclear] full year.
Sandra Ulrich: (First NZ Capital, Analyst) Okay, so overall that could be $6
million.  The second one was just - it said here, the full year operating
cost as a percentage of sales are expected to be slightly higher than FY13.
So that was on the...
Mark Todd: As they were for the first half, so the first - the key thing at
the moment is in the system space we're basically running software and
development costs and the like for two separate platforms in a number of
areas. We've got quite a substantial uplift in systems costs, licensing and
people year-on-year.  That's the primary reason.
Sandra Ulrich: (First NZ Capital, Analyst) Yes, okay.  That's okay, and...
Mark Todd: It's not - it's only 30 basis point this year.  We're not talking
a significant number.
Peter Halkett: Sandra, I think as you can see, it's a little higher but it's
not a lot higher.
Sandra Ulrich: (First NZ Capital, Analyst) No, that was okay.
Peter Halkett: The new system is to become an omni-channel retailer to build
the things we've talked about in our growth strategies, including Summit Club
stuff, those systems are a lot more expensive than our old systems.  So there
is going to be a step change in costs, plus for a period of time we're
running our old systems and our new system in parallel.
Sandra Ulrich: (First NZ Capital, Analyst) Yes, crossover.
Peter Halkett: So that's the nature of that.  As we continue to roll out more
stores that sort of cost, that higher IT-related cost will come down to a
similar percentage as it was in the past, but at the moment that transition
is a little painful for us.
Sandra Ulrich: (First NZ Capital, Analyst) Okay, and just the last one.
Again, George asked you about Capex but I just missed that in terms of your
FY14 target.  Did you say - can you just reiterate that one?
Mark Todd: We continue to expect to spend more than $20 million for the year.

Sandra Ulrich: (First NZ Capital, Analyst) Okay, thank you.  Thank you very
much.
Peter Halkett: Thanks, Sandra.
Operator: There are no further questions in queue, but as a reminder if you
would like to ask a question please press star-1.  Okay, we now have a
question from the line of Chelsea Leadbetter from Forsyth Barr.  Please go
ahead.
Chelsea Leadbetter: (Forsyth Barr, Analyst) Hi.  Morning guys, a very good
result.  I just wanted a quick question really about what you've seen in the
competitive landscape over the period and perhaps a bit of commentary around
market share and how you - it appears you've gained some share.  Is that
correct?
Peter Halkett: Well, our business - part of our business competes in what
we'd call the traditional outdoor area and when we sell hiking boots and
backpacks and sleeping bags, and then part of our business, things like our
wovens and our clothing compete more in the wider lifestyle space where we're
competing against more mainstream players.  So if you were to talk the
outdoor category we've certainly seen companies like Snowgum, they have gone
into receivership.  We don't really know how other direct players like Macpac
and Mountain Design are trading.  I really can't talk for them.  Clearly on
the fringe, and we consider them fringe, people like Supercheap retail, they
have the BCF, the Ray's and in New Zealand they have FCO.  Their results have
been published and I think you can draw your own conclusion but certainly our
same store sales are higher than theirs.
I think generally within our space I would imagine we're probably taking
share and doing a good job, but the key really is about our success in
apparel in the wider space.  That's why we are opening smaller format stores
and putting them in malls so we're getting our technical apparel offering in
front of people that otherwise mightn't travel to a technical destination
hiking store, if I can put it that way.  That's really where we're growing
and that's where we're continuing our efforts as well as obviously online.
So I think we are taking some share.  We don't know that, we don't know the
performance of our more direct competitors but we can tell from the retail
stats our total growth and our same store growth we're taking business from
someone somewhere.
Sandra Ulrich: (First NZ Capital, Analyst) Okay, thank you.  Then I guess
just a further question, on those small format stores. I just wonder if you
could remind me on the split between the apparel and the equipment in those
stores?
Peter Halkett: Well, I think we've published recently that we're about 70%
apparel and about 30% equipment, depending upon where you put footwear.  If
you put footwear into apparel as we tend to.  Whereas I think that percentage
probably is another 5% at least higher when you go into a small format mall
store. We just don't sell tents, we don't sell technical hiking packs, we
don't sell the same degree of hiking boots but we sell a lot more wovens, we
sell a lot more fleece and those sort of clothing categories.  For our space,
once again if you look globally, the growth is coming from apparel in our
space.
That might be the difference between us and other players who are still
trying to sell lots of camping gear and folding chairs; that space isn't
growing as rapidly as technical outdoor gear moving into the mainstream.
Most of you have heard me talk about the reasons for that, which is both a
combination of product and the customers who are buying those products and
the money they've got to spend, which are those baby boomers looking for
experiences in travelling and hiking and they're doing the trail rail and
they're going to France.  They're doing all sorts of things which are not
necessarily what would traditionally be done in our space and then they're
buying the associated gear with it.
Mark Todd: If I just add one little thing too about effectively the
competitor space.  One of the clear benefits in the product area is
Kathmandu's scale of business where it's substantially larger than the direct
competitors.  So if you think about a category like apparel, which is all
around design and development and R&D and all those things, there's a huge
capability that Kathmandu has to invest, and rework and improve in that
space. So it's hard for the competitors to do because they haven't got the
same scale, same thing that applies in the system space.
Peter Halkett: For some of our smaller competitors the level of investment
required to become an omni-channel retailer - I should say, an efficient
omni-channel retailer. You can do these things off the back of fag packet
but you'll never be able to scale it up.  The fact of the matter is it
requires millions and millions of dollars, which we have spent and are
spending, to make sure the brand is well-positioned as online grows and grows
and grows, and we're almost demonstrating that.  When you're a smaller player
that funding and that capability to employ the resources and employ the teams
to run these things is very challenging.  Anyway, we can talk about more of
that on our upcoming road show, those that would like to find out more about
what we're doing.
Sandra Ulrich: (First NZ Capital, Analyst) Thank you very much, guys.
Peter Halkett: Thanks, Chelsea.
Operator: Your next question comes from the line of Adam Simpson from
Macquarie.  Please go ahead.
Adam Simpson: (Macquarie Group, Analyst) Hi guys, a good result.  A couple of
questions just on the inventory if you don't mind.  Firstly, with the
weakening of the Aussie dollar, is that inventory increase a little
understated?  I presume you're translating your inventory position back into
- the Aussie dollar inventory position back into New Zealand dollars at a
lower amount.  Then secondly to that, should be expect to that inventory per
store level come down in the second half at full year?
Mark Todd: Well, to the first point, Adam.  There's another way of also
measuring it, which is the unit investment.  Because when I talked about it
before, most of the investments we chose to make were in high unit dollar
cost categories.  So on a unit basis the increase is nowhere near as
substantial as it is if you measure it on constant currency basis.  But
you're right, on a constant currency basis it would be higher. The point is
we made some very specific choices around investment in certain categories
and yes, they're slightly masked by the New Zealand Australian dollar
conversion, but on a unit basis they're not out of the ball park with the
year-on-year growth.  The answer to the end of the year question is we would
expect an increase in level of inventory per store, not quite as high as
we're at right now but it would still be up.
Adam Simpson: (Macquarie Group, Analyst) So up relative to last year but
potentially down from the current law on a dollar per store basis?
Mark Todd: Yes, slightly.
Peter Halkett: Just remember, Adam, we didn't quite have the store opening
profile, and had less stores at the last year than we otherwise would have so
you would have had another multiplier effect, plus the sales from those
stores.  The other thing I'd highlight is that 4.5% of our sales in the first
half came from online. We don't even count that as a store in those
traditional stats.  So if you were to say those sales were the equivalent of
five or six stores and divided that again your stock per store would come
down and be I guess more in a range that people would expect.  But in the
future we'll need to think of a way to show you efficiency of stock, not just
store numbers, because online as it grows and grows [and essentially] our
business doesn't fit into that traditional evaluation methodology.
Adam Simpson: (Macquarie Group, Analyst) Okay. I guess that's one of the
beauties of online though is you're probably trying to hold less inventory to
support the online sales than you would for the same in a store.  Can you
talk about that?
Peter Halkett: You don't have the same display stock but you've still got to
have the same stock to sell to have the numbers.  So you don't have floor
stock but you need selling stock.
Adam Simpson: (Macquarie Group, Analyst) Yes.  All right, that's great.
Thanks guys, well done.
Peter Halkett: Thanks, Adam.
Operator: Your final question in queue comes from the line of Ken Wegener
from Phillip Capital.  Please go ahead.
Ken Wegener: (Phillip Capital, Analyst) Good morning Peter and Mark.  Just a
question on online, whether you're able to comment on the relative
profitability of online relative to your bricks and mortar stores, and in
particular on the I guess gross margin.  I would be thinking that apparel
would be a greater proportion of online sales and as such you'd have a higher
gross margin.  I wonder if you'd just comment on that please.
Peter Halkett: Well, we fully cost our online business so we can track the
profitability of our business. At a gross margin level, it's generally the
same as our business because we have - for online we have an integrated
pricing policy.  When you're an omni-channel retailer based certainly in New
Zealand and Australia the price is the same.  We don't offer different prices
just because you buy it online.  We have the odd online only special.  We
also offer clearance online.  The product mix is a little different but not
radically different.  Funnily enough we sell a lot of tents and camping in
summer because people actually don't want to have to pick those up from our
stores, they want it delivered to their doorstep.  So from a gross margin
point of view it's not radically different and from a profit point of view,
because it doesn't have rent and it doesn't have staff but it does have IT
cost and it has the direct online team, it does have some operating cost and
delivery cost but it's still hugely profitable.  The EBITDA percentage would
be higher than for a store.
Mark Todd: Certainly it's not as strong as our best stores, Ken, but it's
certainly better than the average.
Ken Wegener: (Phillip Capital, Analyst) Yes, but you'd expect that to grow
over time as you leverage the fixed cost component within that...
Peter Halkett: The higher sales you can do the more you can spread the IT
costs across it and also a lot of the management team. We've got an
acquisition manager, we've got a social media manager, we've got a trading
manager, we've got a fulfilment manager.  We've got all those roles within
that team that if you do twice as much you don't need to double the team
size.  Whereas in a store when you double the sales you generally have to put
a lot more sales people on.
Ken Wegener: (Phillip Capital, Analyst) Yes.  No, that's fine. Just one
final thing on - just wondering about your new stores that opened in the
half.  Were they skewed towards the end of the half?  I'm just trying to
reconcile that inventory number as well.  I'd appreciate...
Mark Todd: Yes they are.  They are skewed towards the second half, the last
quarter of the year, yes.
Peter Halkett: That's why there's quite a small gap between same store sales
and total sales increase directly.  It would have been a bigger gap because
we would have opened - well, as we said, nine stores, and if you open them in
September that's quite a difference than when you open then in December and
January, and that's partly the answer to Adam's question before about stock
is that we'd have had nine stores and they'd opened in September we would
have had less stock than opening four stores in January.
Ken Wegener: (Phillip Capital, Analyst) Yes.  No, that's how it looks.
Thanks guys.
Peter Halkett: Cheers, thanks. I think that's time, moderator.
Operator: Yes sir, I'll hand the call back to yourself for any additional
closing remarks.
Peter Halkett: Well, thank you everybody for dialling in.  I know we're going
to meet up with several of you over the next three or four days.  I'm looking
forward to that and thank you once again for dialling in and appreciate your
support and interest.  Thank you.
Operator: That does conclude our conference for today. Thank you for
participating. You may all disconnect.
END OF TRANSCRIPT
End CA:00248665 For:KMD    Type:ADDRESS    Time:2014-03-25 09:54:14