Clothing retailer Kathmandu has explained its unexpected profit forecast as the result of key investments in refurbishing stores and expanding inventory in order to increase sales, in an announcement that delivered some much-needed optimism for retailers.
The company’s shares increased by 25% yesterday after the company announced it expects its full-year profit to be between $NZ124 and $NZ126 million, which represents an increase of between 16.3-18.2% from the previous corresponding period.
The announcement came alongside another positive result from Super Retail Group, which owns the Supercheap Auto and Ray’s Outdoors chains. The company predicts its net profit after tax for the half year to January 1 will be between $24.5 million and $25 million – a substantial increase from the $15 million recorded during the previous corresponding period.
Analysts have pointed to the results as examples of positive growth in a year of discounts and downgraded retail profits.
Kathmandu chief financial officer Mark Todd says the result comes after the company has spent months investing in its stores and refurbishing current establishments, along with a focus on inventory in order to boost sales.
“We’ve said regularly to market investors that we’ve continued to invest in new products and new stock. Those are the things we’ve said we’re doing,” he says. “These are the growth strategies we’ve outlined before, and we believe those to be working.”
The strategy is similar to that of The Athlete’s Foot, which has maintained unusually positive results over the past year despite a negative trading environment where discounts are rampant. RFG chairman Ivan Hammerschlag has repeatedly told SmartCompany the franchise has been able to thrive due to locating stores that perform particularly well and then refurbish those to sell more products.
Kathmandu has done the same. Todd says while the company can’t necessarily comment on consumer confidence and the general mood of the market, he says expanding the store footprint has allowed it to gain an advantage.
“We couldn’t make a comment on consumer confidence…. but we’ve said before that we are satisfied with the performance,” he said. “Expanding the store footprints is a key part of our strategy.”
Retail Doctor chief executive Brian Walker says this is a strategy other struggling retailers need to adopt.
“Without a doubt. One of the key factors in managing retail is that you need to identify the stores where you are performing well demographically, and then identify those areas where you have the most potential for growth.”
Walker says chains need to identify organic growth, but equally important are those sites where the transaction volume is higher than normal.
“Your ability to maximise the trading in those sites needs to be implemented. Typically retailers will look at their sites, and then take a benchmark of profit per square metre as an indicator.”
“Then, they will quickly determine what is the best strategy to expand the size of that site, or if you need to contract it, or if you need to expand the overall number of sites. Some chains put themselves into difficulty by expanding too quickly… but the devil is in the detail.”
The company has also pinpointed its gross margin as another key factor in the sales, which have remained high due to the strong dollar in both Australia and New Zealand.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
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