1. Michael Luke, Michael Sutton, Logan Van Rynbach Kathmandu

2. Our Recommendation: Sell Based on the following factors -Lack of future earnings clarity -Decreasing margins -Large debt levels -Highly Competitive industry -High price relative to fair value Kathmandu Holdings Ltd (KMD)

3. Kathmandu is one of Australia and New Zealand’s leading retailers in outdoors and adventure clothing and equipment. They have a strong brand reputation for high quality fashionable clothing making it popular with consumers in this industry. Kathmandu currently has 45 Stores in New Zealand, 100 in Australia and 4 in the UK. Company Operations

4. David Kirk (Chairman): Virtually no experience in this industry, great rugby player, but what does he have to offer? Xavier Simonet (CEO): Has the right CV for a company that wants to be a high end luxury brand having previously worked as CEO of British handbag company Radley. Directors appear to be more about keeping the company ticking over than making fundamental changes which are needed to the company, i.e. there are no visionary leaders, within the board. Management

5. Kathmandu has a vertically integrated business model designing product ranges in New Zealand which are manufactured cheaply overseas then sold in their retail outlets. This integration provides good margins due to a more efficient supply chain. Kathmandu’s main value is in its brand with a loyal customer base. With over 95% of its sales being Kathmandu branded products and the majority of customers being ‘Summit Club’ members. Kathmandu has expanded its stores aggressively to increase market share with stores growing from 97 in 2010 to 150 in 2014. 3 key competencies

6. These core competencies are Kathmandu's competitive advantage leading to increased sales and net profit over the last decade. Competitive advantage

7. The brand’s percieved value has been damaged by discount sales and a decline in the quality of product since shifting manufacturing offshore. As a result margins have started deteriorating in 2015. While sales have continued to increase due to more stores. Same store sales have remained flat. While the capital expenditure of opening more stores has led to the company taking on a massive amount of debt. Company strategy

8. The retail industry has strong competition with online stores trending due to ease of use and cheaper prices. Kathmandu faces strong competition due to the low start up costs from these online stores that don’t have the same fixed costs (i.e. building leases) and variable costs (i.e. Sales Staff) as retail stores. Allowing them to undercut prices. By focusing on opening more stores rather than investing online, Kathmandu is losing market share and margin with a bleak outlook going into the future against industry trends. Moves by the NZ and Australian governments to add GST to smaller overseas online purchases in the future may negate some of this effect. Industry trends, Risks, Competition

9. The main competitors within the industry are outdoor shops like Fishing, Camping and Outdoors, MacPac and Hunting and Fishing NZ, and online retailers such as Torpedo 7, all vying for similar segments of the market. A major risk is being unable to generate the turnover of stock required to meet debt obligations which has occurred with New Zealand clothing chains in recent years. Such as Pumpkin Patch and Postie Plus. Rising interest rates and debt leading to higher debt servicing costs and could led to the company breaking banking covenants. Stores in Australia are presently making a loss as the economy is struggling, the competition is tough and the appreciation of the NZD reduces their reported earnings as earnings are reported in NZD. Lower export earnings in New Zealand presents a risk as it will reduce consumer discretionary spending. Industry trends, Risks, Competition

10. Kathmandu has listed four key projects for its future development: 1. Continuing the store rollout in Australia and New Zealand 2. Optimising its existing store footprint, 3. Introducing new products 4. Continuing to develop its online capabilities through its website. These changes by themselves are not going to be enough, our analysis shows that they need to make large changes to their company to turn their decline around and increase long-term shareholder value. Such as cutting down debt, focusing on brand image, seriously investing online and focusing on the stores it already has by improving margins instead of chasing sales growth. Continuing a rollout in an unfavourable environment where sales in Australia are tumbling and many retailers are going out of business seems like a poor decision. Company Outlook

11. Financials While sales will increase, net profit will drop drastically due to contracting margins. The company assets are almost all intangible, as the value is in the brand. The company is currently borrowing to pay the dividend which is an unsustainable practice so the dividend should be cut. Debt levels are becoming dangerously high and the company should reduce this not pay a dividend.

12. Peer review Due to high debt levels and uncertain outlook Kathmandu should be valued based off it’s net tangible assets. Pumpkin Patch limited is a similar company with a large amount of debt, with an uncertain future. Which is why it has a low NTA multiple. Speciality fashion group on the ASX is another similar company with large debt and lumpy earnings but is less risky that PPL giving it a higher NTA multiple. Hallenstein Glasson’s is nearly debt free and profitable with growing sales warranting a high NTA multiple.

13. While Kathmandu is not in as bad a state as PPL or SFH due to a number of factors the current share price is too high. These factors are: -Lack of future earnings clarity -Decreasing margins -Large debt levels -Highly Competitive industry Due to this a NTA multiple of 2 is more appropriate, giving a fair value of $1.15 Valuation

14. SELL Executive decision