Retailers Back in Action or Inaction: KMD, WOW, CCX

Summary

• Kathmandu Holdings experienced strong sales recovery, while wholesale business continues to face challenges. It is expecting an adjusted EBITDA of over $70 million in FY20.
• Woolworths Group paid $1 million for breaching telemarketing standards to the Australian Communications and Media Authority.
• City Chic has negotiated rental terms with landlords and announced closure of 14 stores.

Retailers have also been significantly hit by COVID-19, and rising unemployment is among the risks on spending decisions of households, especially discretionary spending. Some may not return to stores for some time, as shift to digital has been intense.

Investment decisions of firms will change over the near term, as consumer behaviour adjusts to lower income period and structural shifts. Firms that rely on tourism have strong headwinds with continuing international travel restrictions.

Related: How is the buying pattern changing during the COVID-19 pandemic?

Reporting season is set to kick-off soon, and there will be more clarity as market awaits management commentaries of Corporate Australia. Firms that have not tapped investors for capital yet may follow up with funding plans and investment thesis.

Kathmandu Holdings Limited (ASX:KMD)

Kathmandu Holdings has released a trading update, highlighting that COVID-19-led social distancing has impacted sales of the group this year. However, since reopening, the trading has exceeded management expectations in store and online sales, adding additional liquidity.

Since lockdown measures were lifted, the group’s majority of store network has begun trading, except for airport stores. KMD continues to emphasise on health, wellbeing and safety of its team members and customers through in-store safety measures.

Except closed stores, in the six weeks to 28 June 2020, same store sales for Rip Curl were up by 21%, of which retail stores were up by 5.1% and online sales were up by 151%. Online sales contribution to direct to consumer same store sales was 22.6%.

Likewise, Kathmandu same store sales were up 12.5%, constituting a 2.2% increase in retail stores and a 78% increase for online sales. Online sales contribution to direct to consumer same stores sales was 21.4%.

In the period to end of May, wholesale business has been significantly impacted by the crisis, and recovery lags compared to expected retail sales. KMD is not in a position to estimate the medium-term impact on wholesale demand.

In April, Kathmandu Holdings completed an equity capital raising of NZD 207 million to strengthen liquidity and balance sheet position. It expects to have available liquidity in excess of $300 million at the end of financial year.

Considering present business challenges, KMD expects to report FY20 adjusted EBITDA of over $70 million. Gross margin of the Kathmandu business is anticipated to be in the lower end of the target range of 61% to 63%.

Management perceives significant downside risks over the future economic conditions due to lower foot traffic, subdued tourism, conclusion of stimulus package, travel restrictions, and small outbreaks.

On 3 July 2020, KMD last traded at $1.140, down by 2.979% from the previous close.

Must Read: Spiral for ASX Retailers, Re-Openings and Jump-Starts

Woolworths Group Limited (ASX:WOW)

Woolworths was issued with a $1mn notice by the Australian Communications and Media Authority (ACMA) for breaching spam laws. The authority found over five million breaches of the act related to marketing emails to customers who had unsubscribed earlier.

ACMA had warned compliance issues to the group, but the supermarket giant failed to act. Woolworths has agreed to appoint an independent expert to review its systems and processes, as well as procedures with improvements to be report to the authority.

Breaches of telemarketing laws result in infringement notices, formal warnings, and actions in the federal courts. Businesses who are repeat offenders may face fines of up to $2.2 million a day.

The company expects to book significant items of $460 million in 2HFY20, taking the total to $591 million for FY20. Majority of these items include grocery supply chain and Endeavour Group transformation costs.

Woolworths is also reviewing the payments made to its team members that require further analysis of historical years across the group. It is expecting around $390 million for cost of remediation, excluding interest and other costs.

After AASB 16 and excluding significant items, the group expects to report EBIT between $3.20 billion and $3.25 billion. Estimates are subject to further review, including audit. Full-year result disclosure is expected on 27 August 2020.

On 3 July 2020, WOW last traded at $37.720, up by 1.452% from the previous close.

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City Chic Collective Limited (ASX:CCX)

Last month, the company announced that negotiations with landlords were finalised. They have agreed on reduced rent during the closure and market appropriate rent going forward. CCX has decided to close 14 stores where negotiations did not yield any outcomes.

City Chic stated that customers are diverted to online channels and nearby stores, and due to the closure of 14 stores, impact to future earnings would be minimal. Management continues to focus on acceptable store economics and is committed to open new stores and large format stores with appropriate deals.

They recognise the shift to digital channels and the business is well positioned to execute its online strategy. Its portfolio of 92 stores in ANZ had started trading after the restrictions were eased.

On 3 July 2020, CCX last traded at $2.850, down by 2.73% from the previous close.

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(All financial information pertains to Australian Dollars unless stated otherwise)