Kathmandu Holdings' profit dropped 85 per cent in the 2020 financial year.
The outdoor clothing and equipment retailer posted a $8.9 million net profit after tax in the 12 months to July 31, compared to $57.6m a year earlier. The company said the stark drop in earnings reflected a $18m one-off transaction cost for the acquisition of surf brand Rip Curl, a $4.6m restructuring cost and a $2.6m leasing cost.
The company said it lost sales worth $135m from its retail and wholesale business as a result of Covid-19 and lockdowns in New Zealand and Australia.
Despite this, group sales increased by 48.7 per cent to $801.5m in the period, compared to $538.8m a year earlier. This included nine months of earnings from Rip Curl.
It posted earnings before interest, tax, depreciation and amortisation (ebitda) of $149.8m, up from $99.5m reported in the same period a year earlier.
Kathmandu will not pay a final dividend.
Total online group sales grew by 63 per cent to $106.4m in the year, now accounting for 15.7 per cent of all sales. Kathmandu's online sales grew 67 per cent to $80.9m in the period, while Rip Curl online sales grew 52 per cent to $25.5m.
Kathmandu group chief executive Xavier Simonet said FY20 had been a "transformational year" for the company following the Rip Curl acquisition. But the group had borne the brunt of the Covid-19 pandemic, which had affected its results.
Despite this, Simonet said the company was in a strong financial position and was benefiting from consumer trend towards outdoor and recreational activities.
"Unfortunately the group faced significant unexpected challenges with Covid-19 restrictions and lockdowns. We took decisive action early to reduce costs, adjust the operating structure of the business, and raised $207 million of equity. These initiatives have resulted in a strong balance sheet and healthy inventory level, which position us well for the future," Simonet told the NZX.
After lockdown restrictions eased in New Zealand, Australia, Europe and California, the group's retail sales returned strongly.
"Rip Curl and Kathmandu also enjoyed an exceptional post-lockdown winter sales performance in Australia and New Zealand," Simonet said.
The company said Covid-19 had resulted in lost sales of about $70m in the Rip Curl business and about $15m in the Oboz business.
It had caused lost sales of about $50m from Kathmandu stores.
Rip Curl sales declined by 17 per cent, but it still generated $34m and contributed $11.7m to group underlying ebitda during the initial nine months of ownership.
"Beyond the short-term impacts from lockdowns, our long-term strategy remains unchanged," Simonet said. "Product innovation, brand differentiation, a key focus on sustainability, and a step change in digital transformation, will enable us to continue answering the needs of our customers."
Analyst's take perspective
Harbour Asset Management senior portfolio manager Shane Solly said Kathmandu had worked hard through the pandemic, and had benefitted from the trend towards consumers re-engaging with the outdoors.
He said "strong inventory and cost management" was supporting profitability, adding that the result was encouraging considering the difficult trading period.
"It's a good result considering what is probably one of the most challenging times to be a retailer," Solly told the Herald.
"The business is down to near-zero debt at the moment, which puts it in a really strong position to keep investing in things like engaging with customers and making sure they have good products and investing in technology - that's one thing not all retailers are going to be able to do."
Solly said Kathmandu's decision to acquire Rip Curl was a good business decision and a complimentary operation that would pay off within time.
"We can see early on that the Rip Curl business has gone phenomenally well - they've had a relatively low online presence in the past, and they've done a really good migrating that onto online. That business is definitely performed better than many people thought.
"It's a good complimentary business and it brings different seasonality, and they'll be more upside [to the pairing] over time."
Kathmandu reduced its net debt to $9.4m in the year through its $207m capital raise in April.