Acquisition of Oboz not without risk

Peter McIntyre
Peter McIntyre
From sales in the doldrums and being a hostile takeover target, high street sports and leisure retailer Kathmandu has had a roller-coaster four years. Craigs Investment Partners broker Peter McIntyre  speaks to  senior business reporter Simon Hartley  about the company’s plans for acquisition of US company Oboz Footwear, for more than $100 million.

Kathmandu's purchase of Oboz Footwear about three weeks ago, for up to $US75 million ($NZ103 million) has been welcomed by analysts, but comes with some risks.

Oboz is a  designer and wholesaler of specialised outdoor and hiking footwear. Kathmandu has been selling the brand since 2007, and it is Oboz’s largest wholesale customer outside North America.

In calendar 2017, Oboz’s revenue increased 36% to $US30.3 million.

Craigs Investment Partners broker Peter McIntyre said the Oboz acquisition in March was expected to be 3% earnings per share accretive in full year 2019.

"We see the acquisition as a reasonable fit within Kathmandu’s brand and wholesale strategy.

"It’s a good platform to continue pursuing its offshore growth strategy," Mr McIntyre said.

Kathmandu has said the acquisition would help transform the company from  an Australasian retailer to a more global brand, especially in underdeveloped markets such as Asia and Europe.

The latest acquisition and expansion plans are a far cry from Kathmandu’s trading in recent years.

Through 2013-14 Kathmandu was plagued by unseasonal weather, which left it holding more inventory than predicted. This undermined profit margins when sold later. All the while with a languishing share price and repetitive profit downgrades.

While its shares hit a $4 high in May 2014, early in 2015 they had  traded down from $1.75 to about $1.30.Its withering market capitalisation in early 2015 knocked $100 million off its value and its shares halved in value from the same time a year earlier.

Then 19.9% shareholder Rod Duke, of Briscoes, launched a hostile $362 million takeover offer in mid-2015, amid much criticism. It was eventually shaken off as the small cash component did not gain other shareholder acceptance.

Speculation remains rife Mr Duke is continually running the rule over Kathmandu, for another tilt.

Kathmandu’s shares, since the acquisition announcement, were up almost 25% on a year ago, trading around $2.44.

This week, Mr McIntyre described Kathmandu as now "outperforming the market", and said continued momentum was likely.

However, the Oboz acquisition was not without its risks, he said."In particular there is a reliance on key people and customers," he said of senior Oboz management, who are staying on with the company.

"However, Kathmandu’s management have demonstrated a strong record in managing a brand successfully and the business already distributes Oboz products," he said.

He believed Kathmandu’s management had a credible strategy for pursuing the low-risk offshore expansion with Oboz. Craigs maintains a "buy" recommendation on the stock, with a 12-month target price of $2.70.

A fully underwritten $40 million institutional share placement had since been completed by Kathmandu, following the acquisition announcement.

At the time Mr McIntyre said the purchase did not seem "cheap", but noted the deal was financed mainly though equity raising, which was completed within days, and with $10 million added to debt, although the earn-out could cost up to a further $15 million.

For full-year 2018, Mr McIntyre forecast 56% of earnings before interest and tax would be from Australia, 41% from New Zealand and 3% from Oboz.

Other negative risks ahead in general included the weather’s potential impact on Kathmandu’s key winter sale period and also any "significant weakening" of both the New Zealand and Australian dollars against their US counterpart.

simon.hartley@odt.co.nz 

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