KMD Brands Limited (KMD) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Kathmandu Holdings Limited Full Year 2021 Results Release. [Operator Instructions] Today's conference is being recorded. At this time, I would like to turn the conference over to Michael Daly. Please go ahead.

Great. Thank you. Good morning, everyone, and thank you for joining us in today's presentation of the Kathmandu Holdings results for the full financial year of 2021. My name is Michael Daly, and I'm the CEO of the group. I'm joined on the call by Chris Kinraid, our Chief Financial Officer. We will be talking to the presentation lodged on the NZX and ASX this morning. Unless otherwise specified, all financial numbers are in New Zealand dollars. We'll begin on Slide 2, which briefly outlines the strength of our 3 iconic outdoor active brands. In short, Rip Curl is among the top 3 global surf brands. Kathmandu is the leading outdoor brand in Australasia, and Oboz is a fast-growing North American footwear brand for hiking. We are highly engaged with our loyal and active consumer base, achieving a Net Promoter Score that exceeds 70. We will -- we have 2.1 million active Summit Club members and 44,000 Rip Curl search GPS watch users. One of our key strengths is the development of purpose-built technical products. Research and development drives our innovation, and we are focused on using sustainable materials. A leader in sustainability and ESG, Kathmandu was an early B-Corp adopter, and we are working towards extending B-Corp accreditation across all of our brands. This year, we also committed to the largest indicator sustainability-linked loan in New Zealand. Lastly, we have built a diversified business with global reach. We are employing a multichannel approach to appeal to a wide range of customer buying preferences and having both the winter and summer focus we appeal to customers across seasons. On to Slide 3. Our brands have extensive global reach with over 3,000 wholesale doors in North America, over 2,000 in Europe, nearly 1,000 in each of Asia and South America, 23 in Africa and the Middle East and over 1,000 in Australia and New Zealand. There are substantial opportunities to leverage the wholesale networks of each brand to expand our sales reach. Turning to Slide 4. I'd like to discuss in more detail the group's 2021 financial year highlights. Total group sales were $922.8 million and were up 15.1% on the prior year. And pleasingly, our underlying EBITDA was up 35.9% to $113.3 million, underpinned by a gross margin improvement of 40 basis points. Underlying net profit after tax for the financial year was $66.3 million, and we delivered strong underlying operating cash flow of $93.3 million. We ended the period with a strong net cash balance of $37 million. Moving to Slide 5. I want to touch on some of the key operational highlights during the year. Rip Curl delivered strong direct-to-consumer sales, same-store sales growth of 19.2%, with online sales growing by 31.3%. Online growth was underpinned by changing consumer preferences brought about by the COVID-19 lockdown periods. We successfully relaunched Kathmandu's new brand platform in May, reminding people that being outside changes us and as human beings we are hardwired to be outside. The relaunch was very well received and pleasingly, Kathmandu achieved an exceptionally high Net Promoter Score of 76. Oboz successfully launched their online store in April, and the wholesale business is well positioned with double-digit growth in forward orders. Moving on to Slide 6. Sustainability is at the core of each of our brands, and I would like to highlight some notable achievements. In conjunction with our key stakeholders, we completed an ESG materiality assessment, and we committed to the largest sustainability-linked loan in New Zealand. Rip Curl launched a wetsuit take-back program with TerraCycle, and the business source is a sustainable cotton in line with the Better Cotton Initiative. These are important sustainability initiatives for the brand. The Kathmandu brand meets the highest standards of environmental and social performance, as certified by its B-Corp status. We've also upped our efforts to limit climate change while offsetting our missions to claim carbon neutrality. For Oboz, over 4 million trees have been planted since the company's inception, with the company planning a tree for every pair of footwear sold, and Oboz have 95% environmentally preferred leather materials in the product range. Moving to our refreshed group strategy on Slide 8. We have been building a portfolio of global brands and aim to further expand our global footprint as we invest in world-class brands and customer experiences. We will elevate our digital capabilities by investing in group digital platforms to deliver a world-class unified commerce experience. We will also leverage and deliver operational excellence to all of our brands across shared group support functions. Finally, we will continue to demonstrate leadership across environmental, social and governance to drive long-term value for our shareholders. Given the uncertainties associated with COVID-19, it is important for us to maintain balance sheet flexibility, allowing for capital return options and the capacity for future M&A. On to Slide 9, our strategy focuses on building global brands. Our goal is for Rip Curl to be the #1 surf brand in Australasia and a top 3 brand in North America and Europe. We will be building Rip Curl's North American presence and see the potential to double the North American business across our own stores, online and wholesale channels. Kathmandu is the leading outdoor brand in Australasia with 2.1 million loyal and engaged Summit Club members, which we aim to further leverage. There is significant market opportunity to expand into Europe and North America. And we aim to launch in both Canada and Europe during FY '22. We have an attractive new product pipeline, which includes an enhanced summer product offering. Oboz is undergoing the expansion of its product range into adjacent footwear categories, and we aim to grow Oboz into a USD 100 million business in the medium term with growth opportunities in the recently launched online store and further expansion of the business in Canada and also Europe in time. In Slide 10, with the current COVID situation accelerating a move to online sales, significant investments have been made to elevate our digital capabilities. Our goal is to increase group online sales to 25% of direct-to-consumer sales in the medium term by enhancing our digital capability. With this goal in mind, a new group online platform is being rolled out across our brands. We also are making further enhancements to our omnichannel foundations, including making point-of-sale upgrades to support unified commerce and click-and-collect functions for contactless purchases. We're investing in our loyalty programs, including the launch of our Club Rip Curl program in the coming year to leverage our strong consumer following. Furthermore, pricing and promotions are being enhanced based on data algorithms, and we have developed personalized consumer content to encourage digital purchases. Moving on to Slide 11. We aim to leverage the collective operational excellence of our brands, having a target of improving our underlying EBITDA margin to 15% of sales. We also plan to accelerate cross-brand revenue growth opportunities. The group has invested over $20 million to date on core platforms to support the growth of our brands and over $10 million will be invested in FY '22. Investments will be made to optimize our supply chain, efficiently manage our fixed cost base, collaborate on product innovation between brands and to enhance core systems to unlock growth potential across loyalty programs and online. Moving to Slide 12. Being a leader in ESG will drive long-term value for shareholders. We are working to extend Kathmandu's B-Corp creditation across all of our brands. Transparency and responsibility will continue to underpin everything that we do as we manage our environmental and social impact responsibly and ethically. We are highly engaged with our people and our communities, and our ESG strategy starts with the well-being of workers in our supply chain. We are setting science-based targets to align with the Paris Climate Agreement, and our circular business models target a 0 waste supply chain. I'll now hand over to Chris to cover the financial slides.

Thanks, Michael. Our statutory results include the adoption of International Financial Reporting Standards 16. For comparability, the impact of IFRS 16 has been excluded from our underlying results. The full year of FY '21 includes a full 12 months of Rip Curl, while FY '20 only included 9 post acquisition. As you can see, we have delivered growth across all key financial metrics, underpinned by exceptional sales performance in both Rip Curl and Oboz. Total sales increased 15.1% to $922.8 million, while underlying EBITDA increased 35.9% to $113.3 million. We continue to carefully manage our operating expenses given the current operating environment. Our results include the benefit of $7.3 million from rent abatements agreed with landlords and the $15 million annualized restructuring and synergy savings implemented during the onset of COVID pandemic last year. Lease renewals completed for 14% of the store portfolio, which delivered $1.4 million in annualized savings. The result also included a COVID-related write-down of Indonesian receivables of $2.7 million and net wage subsidies across Australia and New Zealand of $16.6 million. Depreciation included $5 million in notional amortization of Rip Curl customer relationships. Included an interest costs were the $2.1 million write-down of underwriting costs and related to the Rip Curl acquisition have been excluded from our underlying results. A future tax benefit of $7 million was also recognized from the recognition of historical U.S. tax losses. Moving to Slide 15. We delivered strong sales of $922.8 million, underpinned by 12 months of Rip Curl ownership, while online sales moderated following 63% growth in FY '20. They have grown at a strong CAGR of 21.9% since FY '17 and now comprise 14.4% of total direct-to-consumer sales. Our sales mix is diversifying across brand, channel and region. Rip Curl recorded strong online sales growth of 31.3%, while Kathmandu online sales normalized from a COVID surge in FY '20, now make up 15.8% of direct-to-consumer sales of the brand. Given strategic investments made, we expect to achieve robust growth in online sales from both Rip Curl and Kathmandu over the medium term. Moving to our balance sheet on Slide 16. We're in a very strong position. We have significant balance sheet headroom with $37 million net cash at year-end and our current debt facility of circa $300 million. Our long-term leverage ratio target at 0.5x net debt to EBITDA. We've managed our inventory carefully during lockdown periods and will continue to do so in FY '22. Our strong balance sheet position allows the group to ride through any short-term COVID-related challenges, while supporting growth investments and providing room to pursue further M&A opportunities and flexibility for future capital management options. Moving to Slide 17. We delivered strong operating cash flows of $93.3 million despite challenging conditions. Moving forward, capital expenditure for FY '22 is expected to be around $35 million which will support our continued investment in systems, capabilities and ongoing brand development. As a result of the strong performance across the group, we have resumed paying dividends following a suspension during FY '20. Our directors are declaring dividends totaling $0.05 per share for the full year, including a final dividend of $0.03 per share. This will be fully franked for Australian shareholders, however, not intruded for New Zealand shareholders. I will now talk through the segment results and performance of each of our brands. On to Slide 19 for Rip Curl, we can see the P&L contribution for the 12 months in FY '21 compared to 9 months in FY '20. Total sales were 10.5% above last year, with continuing -- with sales continuing above pre-COVID levels in the key regions of North America and Europe during the Northern Hemisphere summer season. Direct-to-consumer same-store sales grew strongly at 19.2% for the 12 months ended 31 July. Sales for our online channel grew strongly to $33.5 million and now comprise 12.5% of direct-to-consumer sales. Over the past 4 years, online sales have grown at a CAGR of 44.4%. Wholesale sales were 9.6% above the previous year. Despite a COVID disrupted sell-in in the first half, order books are now significantly above pre-COVID-19 levels, reflecting strong category performance. Sales are back to pre-COVID levels, even though stores in airports, Australia, Hawaii, Asia and parts of Europe, continue to be affected in FY '21. Gross margins have increased due to consumer sales are increasing as a proportion of total sales. The next 2 slides focus on Rip Curl product and brand marketing initiatives. As shown on Slide 20, a key tenant of Rip Curl and all our brands is our technical excellence and innovation which allowed us to provide the best possible products for our customers. The Icons of Surf Collection is a selection of the most iconic logos in the industry. These products blend timeless design and bold graphics to create one of the strongest volume driving collections in surf. The Mirage Ultimate is the most unique and innovative swimwear in surf, tested by the world's best. The line includes premium Italian Lycra that offers support and flexibility with water-repellent glide neoprene panels providing comfort, compression and windchill reduction. The Surf Series include technical surf-inspired products. These products are engineered with wet dry surf functionality and hydrophobic materials. Slide 21 covers Rip Curl's key marketing initiatives. The Rip Curl World Surf League title which aside last week, for the first time in an exciting 1-day format, which included the top 5 men and women in surfing and featured both Olympic Gold Medalists from the Tokyo Olympic Games. The medal -- the men's title was taken out by Rip Curl athlete Gabriel Medina, and the event was a great opportunity for us to host our key customer accounts and showcase the Rip Curl brand in a key growth market. In terms of bringing innovation to the market, the new E7 Heatseeker combines our latest stretch and warmth technologies will be launched by Mick Fanning and Molly Picklum. The launch is taking place this month and will cover digital, outdoor, retail and broadcast channels in Northern Hemisphere. Now on to Kathmandu. Slide 23 shows the underlying P&L of FY '21 on a pre-IFRS 16 basis. COVID-19 lockdowns and travel restrictions impacted Kathmandu's financials with total sales declining 17%. In Australia, sales were 18% below last year with 4,700 trading days lost in FY '21. In New Zealand, total sales were 14% below last year with 400 trading days loss compared to 2,450 in FY '20. Online sales of $56.8 million represented 15.8% of DTC sales and have grown at 14.3% CAGR over the last 4 years. Same-store sales were 18.2% below last year. Strong winter launch momentum in conjunction with the Kathmandu -- brand relaunch prior to the Australian lockdown resulted in a second half insulation growth compared to the pre-COVID period in the second half of FY '19 despite significant store closures. Gross margin improved in the second half by 240 basis points. The improvement in operating expenses included the benefits from restructuring, rental abatements and net wage systems. Kathmandu's inventory is well controlled and ended the year in line with the expectations. Turning to Slide 24. We are building a strong, meaningful and differentiated brand with strong brand awareness in Australasia, where we dominate the category. Kathmandu launched its new brand positioning during the winter this year to improve the well-being of the world through the outdoors, celebrating being out there in nature and a fun-spontaneous and inclusive way. Our customer base is active and highly engaged with a Net Promoter score of 76, 4 points above the level last year. We have 2.1 million active Summit Club members, and these members are responsible for over 70% of total Kathmandu sales, and they spend approximately 30% more per transaction than nonmembers. We are setting the foundations for Kathmandu brand growth. An integrated brand campaign was launched in May 2021, which generated 30 million views. We have relaunched our website, improved the user experience, and we are planning to relaunch the Summit Club during the first half of FY '22. We continue to lead in product innovation. Slide 25 shows how we're aiming to establish year-round relevance and excitement, focusing on the 8 months of transitional weather. Our aim is to ultimately become in summer what we are in winter. Furthermore, we are broadening our customer appeal to reach a younger, more cosmopolitan consumer. An example is the new mold of summer range, designed with playful characters and colors in collaboration with Sydney-based artist Mulga. The new Sun-Stopper range, launching in stores now, is an example of renewed product focus combining technical innovation while capitalizing on the summer opportunity. The range combines serious chemical-free UPF 50+ sun protection with fun colors and easy wearing silhouettes. Moving on to Oboz, Slide 27, and it shows the strong financial performance in FY '21. Sales grew 44.9% on a constant currency basis to reach $78.4 million. The result was driven by a successful product innovation strategy and a strong recovery following the COVID lockdown period. Gross margin was impacted by one-off airfreight costs of $1.5 million to support key customer deliveries of winter seasonal styles in the first half, plus increased ocean freight costs due to supply chain congestion in the second half. We expect gross margins to normalize to historical levels when global supply chain congestions and related shipping rates return to normal. Pleasingly, our forward order book is at its highest ever level, which allows us to invest further to support future growth initiatives. Moving to Slide 28. Oboz has been broadening the appeal of its product range since the acquisition with a series of strong product launches and robust brand activations underpinning continued strong growth. The recent launch of the new Oboz online store also provides a significant growth -- sales growth potential. The brand experienced 20% growth in social media audience during the second half, is currently involved in a number of exciting social initiatives. These include the Oboz Trails Experience and the Oboz first-ever collaboration with the Black Folks Camp Too initiative, which launches this month. I'll now hand back to Michael to cover the outlook for the group.

Thanks, Chris. Moving to Slide 30. COVID continues to impact the global business. Loss trading days in FY '21 due to lockdown restrictions were around 13,000 compared to 15,000 in FY '20. Continued lockdowns in New South Wales, Victoria, ACT and New Zealand will continue to impact our results during the first half of FY '22. Trade in airport locations and emerging countries such as Brazil, Indonesia and Thailand remain significantly impacted by COVID, while Northern Hemisphere retail stores are managing with staff constraints and sporadic closures as positive team COVID results arise. COVID is also impacting our supply chain with reduced factory capacity stretching lead times, freight congestion leading to delivery delays and increased freight costs. As we continue to proactively manage the impacts of COVID daily, our main priority is to ensure the health and safety of our staff, our customers and our suppliers. On to Slide 31, our key priorities for FY '22 are to build global brands, elevate digital capabilities, leverage operational excellence and be a leader in ESG. To build our global brands, we will increase our investment in marketing sustainability initiatives. Importantly, we will be launching Kathmandu in Europe and Canada, and we'll continue to launch innovative products to capitalize on growing participation rates in outdoors, beach and surfing activities. In relation to our digital capabilities, we'll be launching a loyalty program for Rip Curl initially in Australia and New Zealand and relaunching Kathmandu Summit Club. We will also implement unified commerce capabilities throughout ANZ and replatform our European online capabilities. We aim to increase the use of data insights, analysis and personalization to drive growth and to also expand our marketplace presence. In terms of driving operational excellence, we will put a group executive structure in place to build out our group capabilities. We will align technical platforms across our brands, initially in Australia and New Zealand. This will involve an investment of circa $10 million in core systems capital expenditure in FY '22. We are setting clear margin and expense targets to drive a permanent shift to 15% EBITDA margins as we emerge from the impacts of the COVID pandemic. Our key ESG priorities are to extend B-Corp accreditation to all of our brands, set science-based ESG targets and implement the Rip Curl ESG strategy. Turning to our trading update on Slide 32. Rip Curl same-store sales for the first 6 weeks on FY '22 have declined 12.8% on an absolute basis, however, have increased 3.6% when adjusted for COVID lockdowns. Kathmandu same-store sales have declined 19.9%, but are up 18.3% when adjusted for lockdown. Online sales growth has been strong, up 25.9% across the group. Pleasingly, Kathmandu has seen strong sales in regions less affected by COVID restrictions. COVID restrictions are impacting supplies in Asia, and the group is actively managing supply chains to minimize impacts. The impact of freight costs and gross margin is expected to be offset by improved foreign exchange rates. Due to these ongoing COVID impacts, the first half FY '22 profit is expected to be below the first half of FY '21. We are encouraged that both Rip Curl and Oboz wholesale order books are significantly above pre-COVID levels. In terms of the outlook, all of our brands are well positioned to capitalize on growing participation in outdoor, beach and surfing activities. We are set to capitalize on opportunities resulting from the global COVID vaccination rollout as restrictions ease in key growth markets and international travel restrictions are expected to ease as FY '22 progresses. This now concludes the formal part of today's presentation. I want to thank all of our shareholders for their support through this challenging year and for taking the time to join us on this call. I would now like to open the call for questions.

[Operator Instructions] We'll now take our first question. [Operator Instructions]

Andrew Steele from Jarden here. The first one from me is just on the guidance. Obviously, current lockdown restrictions in Australia and New Zealand are a key component of that. Could you just give us a sense as to what your weekly loss run rate is in New Zealand and Victoria and New South Wales at this time of year?

I'll pass to Chris for that one.

Yes. I mean it will change in each month, Andrew. But -- and August is still a reasonable winter month for Kathmandu. But the circa run rate is between -- from the August period is between $8 million and $10 million impact on EBITDA for that first month. It reduces a little bit for September, October. But that's the current run rate. So we're looking forward to all the stores opening up in due course.

Great. And just a little bit more detail on your launch in Europe and Canada. Could you sort of talk to the type of stores that you're going into the numbers of stores and sort of any expectation around revenue contribution at this stage?

Yes, I'll take that one. Look, obviously, early days, Andrew, in terms of launching into Europe and Canada. The sell-in period for the particular season, we're aiming, is in sort of November. So obviously, being in mid-September at the moment, we're sort of still in the initial planning phase, I guess, arranging samples and so forth. But certainly, we've had various conversations with accounts, and that includes everything from outdoor specialists to sports chains to online pure-play retailers. And certainly, from -- so far, the conversations have been quite proactive and positive, a bit hard to articulate in terms of how many accounts may very well look to buy into the range because, as I said, we haven't actually sold it in and won't sell it until November. But certainly, as we've said before, if you look at the broader wholesale account base for Rip Curl, there's some 14% to 15% of our top 20 customers that stock both Surf and outdoor. So in Europe, in particular, a lot of the distribution is -- can -- sort of the volume distribution, they typically stock both all outdoor brands, and that includes everything from surf right through to outdoor. So there's a lot of potential there as far as overall wholesale accounts, but it's a bit hard to articulate exactly how many accounts will buy into the range until we've actually had those detailed meetings.

Great. And just my last one. It seems like a good result in terms of rent savings of $1.4 million, I think it was. If you were to go through that process across your entire lease space, what would the annualized rent roll look like? What sort of stating we would be talking about? And is that a realistic or achievable outcome?

Yes. I mean in terms of overall savings, we don't expect that to -- I mean that was some of the negotiations last year and there were some good outcomes. We expect that probably normally to some degree over the future negotiations. But -- so I don't expect -- I wouldn't roll that forward across the whole lease base and extrapolate that savings, Andrew.

We'll now take our next question from Bianca Fledderus of UBS.

First question for me, you mentioned that the impact of freight costs on gross margin is expected to be offset by improved foreign exchange rates. And just wondering sort of what about raw material costs, do you still see pressure there? And how much of this can you push through to consumers?

Yes. Look, we're definitely seeing freight cost, obviously, one component of the input costs, but we're certainly seeing raw material prices increase as well. As you could appreciate, not necessarily across the broad, it's typically in certain areas. And to be quite honest, it's evolving on a daily and weekly basis. So look, at this point in time, there's definitely -- I would say there's definitely some inflation in some areas of raw materials, fabrics and so forth. I think at this point in time, we're managing it quite well. We've got long-term relationships with our suppliers, which puts us in [indiscernible] for all of our brands. And as we've mentioned with the upside that we expect from foreign exchange, we're not too overly concerned on the overall impact of margins, but it would be fair to say it's one that we are watching and managing on a daily basis. And that's my view today, but that could change quickly depending on what happens because obviously with pandemic as we see on a regular basis, things change very quickly.

Okay. Yes. Okay. And then I guess, second question on your inventory position at the moment. So yes, obviously, we see those global shipping issues. How are you sort of managing your inventory and purchasing for the future? And then I guess on the rebrand as well. How do you sort of expect the new Kathmandu products may impact your inventory is it's obviously a more colorful product? And therefore, I guess, possibly increased risk to managing the inventory, especially at the moment with lockdowns, for example?

Yes. So there's 2 components to that. As far as our overall inventory, we're certainly seeing delays in the timeliness of delivery. And depending on the reports in which products are coming out of and into, and there's particular ports around the world that are quite congested, we're dealing with that by bringing forward buys and building into our buying time lines, additional time to allow for those freight delays. We can't get it perfectly, of course, but we feel we've made the adjustments to ensure that we have a free flow of inventory. And it's important to remember that 12 months ago, we were in a very similar situation, albeit different. Last -- 12 months ago, we were actively pulling back inventory and forward orders because of concerns of that pandemic. So we traded through the first half of last year with some challenging inventory positions. And obviously, we're going to be trading through the first half of this year with some interesting and challenging inventory positions. But we feel we've made the adjustments. There are some delays, but overall, we're managing quite well. The one area that is well known globally where there's -- problems is footwear, footwear particularly out of Vietnam and other Southeast Asian countries. That's probably the category of most watch at this point in time and most under pressure. And obviously, Nike has been very open about those issues, and I think most of our wear brands have. In terms of the inventory risk with the reposition of the Kathmandu brand and products, look, it's not something that we're overly concerned about. The feedback that we've had from stores that are open at the moment with respect to the new colorful summer range, it's been extremely positive. Certainly on the Rip Curl side, from which I'm from, color has been a foundation of our business a long time and I'm avid watcher of what's happening in North America. And if you go into their stores at the moment, they are very colorful. So I'm certainly confident that, that color trend will continue here in Australia, and I think we're going to be well placed with respect to our inventory in the Kathmandu. So obviously, the lockdowns don't help. We will be accumulating some inventory in lockdowns, but we're just managing our forward inventory purchase to make sure we've managed that to deliver consistent inventory flows and reasonable levels of inventory.

We'll now take our next question from Mark Wade of BLSA (sic) [ CLSA ].

I'll continue on the relaunch of the we're out there theme in the Kathmandu brand. I mean how have you found it score? And I mean in terms of a bit under measure it, what kind of customer -- apart from the 30 million views, what kind of responses have you seen to the brand? And how have you been able to manage that?

Yes. Well, it's obviously early days. The relaunch was only May. And obviously, some of the products associated with that relaunch are just landing in store as we speak for the spring/summer. As I mentioned earlier, feedback overall has been quite positive from our teams, and that's probably the best indicator that we have initially of the success of that launch. And so certainly, the feedback from our teams, both on the relaunch and the product that is hitting stores now and is in stores now has been extremely positive. And certainly, our Net Promoter Scores that we measure in-store with customer interactions have all been positive post that involvement. So -- and then on top of that, we manage and watch what's happening on social media. And again, all of the feedback we've received and the tracking of social measures and analysis are all positive. I think the number is around about 95% positive sentiment on the rebrand positioning. So we're very confident on that reposition. And I'm really excited by about pipeline of new products that we've got coming through. As part of that, we've really rebuilt our -- both our marketing and product capabilities for the Kathmandu brand over the last 12 months. And the new team is delivering some exciting things, and we're looking forward to seeing how they work in store in the immediate future and through FY '22.

And Mark, there's other points. I mean, we also saw that during the launch, Kathmandu trading quite strongly, especially in Australian markets, and that went to launch and winter periods before sort of the lockdowns at Melbourne and Sydney, so strong double-digit growth. So we have some good sentiment, and we saw that from the customer base. So it gives us plenty of confidence going forward.

Yes, exactly.

Okay. I hope it goes well. And maybe one for Michael. I mean, what part of the strategy do you envisage will need to be tweaked? And what do you think will really stay largely the same under your helm?

Yes. So I mean the key focus areas I talked to are certainly the areas that I feel needs to be a major area of focus for us. I mentioned about building those global brands. Rip Curl, I guess, is the closest to that. And certainly at the back of Rip Curl's experience and Rip Curl's broader geographical spread, really excited by the opportunities that open for Kathmandu and Oboz. I guess that's probably where the biggest area of excitement for me is and probably the biggest area of change from where we were previously. We have talked about it, but really internally, this is the first time that we've really pushed hard on it. So certainly, from my point of view, that's the most exciting part. We have a lot of work to do on our digital capabilities in terms of building our platforms and our unified commerce experience. It's not a key strength that I would call out just yet, but certainly, it's an area of major focus and major investment at the moment. And we certainly look to work through the FY '22 year to look to -- our aim is to sort of be best-in-class in that space over the period. So a major area of investment as we've outlined. And then in terms of the other areas. In terms of ESG, leadership and driving that operational excellence, I think there are 2 things that we've done well across our brands previously. And there, I guess, a continuation of what we've done in the past with some minor tweaks. So yes, in terms of -- to answer your question, the 2 major changes have been really elevating that focus on our digital execution and then really a push towards making sure that all of our brands have global aspirations and really looking to do that in a smart, efficient and as much as possible, low-risk way that with these things, you need to make investments for the future, and that's what we're doing. And as we've stated in the announcement, investing in the brands most importantly, is a major focus.

And lastly, the Kathmandu brand, you had online sales for 30%, a lot worse than the total brand down 17%. Does that -- so what were your -- I can't remember what you said you put that down to something around -- was it just the fact when stores reopened because...

Yes, it's just the mix of, obviously, a big COVID surge last year. So as a percentage of sales, that's normalized, but on sort of a 2-, 3-year basis has gone from FY '19, it was even -- it's a stable basis of approaching 16%. And we've got a pretty firm goal of obviously driving it north from here. But normalization once we shared stores trading as well. So that's in relation to that.

I mean the other thing I'd add is Kathmandu built up an amazing business appealing to that traveling outdoor consumer and particularly has got a loyal base that consistently come back for those products for when they're traveling to, whether it's Japan or Europe and obviously, with that not happening, those educated consumers looking for that product aren't coming back online. So I'm certainly -- I suspect that's a part of it. And the other part is last year, we tightened up our inventory buys coming into summer because of the concerns of the pandemic and the impact on trade. And as a result of that, we just didn't have as much stock on clearance. So -- and obviously, the online consumer is a particularly price-sensitive consumer. So if you've got less product to clear online, you're going to drive less sales. So certainly, that was also an impact of reducing that online volume last year.

We'll now take our next question from Julian Mulcahy from EAP.

Just a couple of questions. Firstly, how do you explain like the Australian sales being so much weaker given the comparable trading days weren't that different from last year? And also why New Zealand fell quite a bit given the loss days of way less than last year?

You're talking overall there, Julian or specific to...

Just the Kathmandu business.

Yes. Well, in terms of the Kathmandu brand, obviously, as I mentioned earlier, obviously, the impact of travel and the pullback on the inventory definitely had a major impact on the Kathmandu brand. There's no doubt about that. They've built a big business appealing to that outdoor traveler. The positioning of the brand was very much around adventure travel. And on the back of those border closures, a big chunk of that business disappeared. So that's products appealing to that consumer. So backpacks, insulation, those type of products. Now with the benefit of hindsight, our stores would have been loaded up with tents and camping gear and so forth. And if it was, our results probably would have been a lot better. But the unfortunate situation was -- we've built a large business around adventure travel. And when that adventure travel stops, it does have a a very significant impact on our results, which clearly it has. And as I mentioned earlier, as far as New Zealand trade there, the New Zealand consumer is particularly a price-sensitive consumer. If you've got less inventory on clearance, there's less for them to buy. So that again has a drag on your overall performance. So there are a bit of 2 key call outs that I would make in terms of my observations. Chris, you got anything to add to that?

Yes. I mean Kathmandu, second half was traveling reasonably well, I said earlier. We lost -- as we guided in our June update, the impacts are quite significant on the last -- the back end of June, July, which is the key trading period for Kathmandu. So overall, the circa $22 million impact on EBITDA for those lost sort of 6 weeks since lockdown. So the business is traveling. Overall the group traveling well north of where we landed, and the lockdown extended deeper into July than originally expected. So that's a massive impact when you've got at some stage, over 50% of your store network closed. So that was a big impact overall in the second half.

Right. So there's like something more of a case that the result last year like the comp was boosted by sort of clearance of imagery and it was a bit cleaner this time around. I just keep by stores being closed...

Definitely a whole lot clearance, which is a good place to be, helps long-term margins a little bit more clearance this year, but significantly still lower than FY '19, so that will help. And we saw in August when you had more stock than the trading has gone quite strongly until additional lockdowns, especially in New Zealand and Queensland, WA were trading quite strongly and continue to do okay. So it's really hard to get a really pure read, thanks to ongoing closures that's reality in July is the trading period for Kathmandu a bad timing for the brand.

Yes. Okay. And with the first 6 weeks trading with the adjusted numbers, how many stores does that actually include?

I mean, I can say right now, we've got, I think, about 130 stores closed right now. It was about 150 until the New Zealand Level 3 to Level 2 adjustment, excluding Auckland. So right now, it's about 42% of the network is closed.

Right. And is that similar to last year?

Well, it's actually worse than last year because Auckland only had a 2-week period last year. But we've got Victoria and the South Wales where last time, it was just basically Victoria. So the lockdown period for the first quarter is worse than in prior years, which is pretty obvious. So obviously looking forward to really moving on beyond Q1 and getting retail stores opened up and get everybody trading, that's what we're looking forward to.

And just finally the launch into Canada and Europe, is it mainly backpacks weather gear or a broader range of Kathmandu products?

Yes, really a major focus on apparel to start with. There will be some pieces of equipment, but we won't be going with the full camping outdoor line. We'll start with a curated range, which were really look to appeal to, I guess, more of the apparel consumer than anything. There will be some pieces of backpacks in there for sure, but obviously, a little challenging to sell backpacks in the current environment with various border closures and so forth. So main -- more of the focus on apparel for the initial launch.

We'll now take our next question from Marni of Macquarie Capital.

I just wanted to understand just the Rip Curl result. So it looks as though the second half of '21 EBITDA margin came in the realm of 7.4%. And obviously, the first half of '21 was particularly strong. What's the -- how do we think about -- I mean, assuming -- in the absence of lockdown, with the synergies that have come through and the cost measures you've put in place, what's an ideal EBITDA margin for that surf segment?

Look, as we've previously discussed and outlined, certainly, our longer-term aim 15% EBITDA. We feel that, that's a maintainable ratio on an annual basis. That said, this half always used to the Northern Hemisphere, which is a lower margin. And obviously, in the second half that we just saw we had 2 impacts. One was obviously the lockdowns that came late in terms of Australia, which had a negative impact on our results. And also late in the year, we picked up some doubtful debts with respect to one of our Indonesian partners. And the effect of both of those is probably looking at a circa 10% at least drop away in the EBITDA in the last month of the year. So from that point of view, I would say that the 7% EBITDA, you quoted for the second half, is on the lower side. We normally expect that to be double digits in the second half in a normal year. And therefore, that EBITDA ratio for Rip Curl would be closer to the 15%. But we're also investing in the brand and investing in long-term growth. We have strong aspirations to build our North American business. So we certainly want to invest in our marketing, in particular, over the next 12 to 18 months to drive that future long-term growth. So yes, continuing to invest in our brands. So we see that the EBITDA margin will only go up from here and certainly tracking towards 15%.

Okay. And obviously, there might be some -- from what you just said, it implies that the first half might be just a bit north of 15%, given that there are lockdowns in Australia, there could be a slight downside risk to that? Or is it because -- I mean, there's just so much exposure offshore, a lot of the weakness in your first half of '22 profitability is probably more skewed to Kathmandu?

Yes. Look, in terms of the first half with respect to -- well, honestly, with the first half with all brands to give any sort of guidance or detail at the moment, would just be remissive it. Because, I mean, as of a week ago, I was out of lockdown and a week later on back in lockdown. So yes, I really can't comment on that. What we do know from what everything we know today as of 21st of September, we know that our first half for FY '22 will be lower than the first half of last year. As far as how March? We really just don't know until we can see when particularly New South Wales and Victoria open up. And obviously, we're hoping and assuming that there's no lockdowns or closures of other states or indeed, other countries knowing that our breadth of results across Oboz and Rip Curl SKUs to Northern Hemisphere and Europe as well.

Yes. And I think we're going to look -- the way we look at it, Marni, is, I mean, clearly, for Q1, there's a lot of impacts with lockdowns. I mean that's pretty clear for everybody. But -- and some supply chain challenges related to that. Long term, I mean, we've got some -- as we mentioned a few times, the order books incredibly strong, especially Oboz and into Rip Curl into curation. And so I think we look at a lot of confidence, but the first half will be impacted the doubt because of the lockdowns.

Okay. Okay. That's clear. And because there's talk in the press this week, such as about markets like Bali, opening up. In the lead in to the opening of borders of some markets that we spoken about call out Hawaii performing really well. Do you give any kind of like lead indications from your partners there about the reopening and ordering? Or does the ordering kind of come through once they've reopened?

Yes. Look, it's changed on a daily basis, Marni. All I would say is that where we have seen -- historically, where we have seen borders open and travel coming strong, we've seen outstanding results 6 months ago. We were talking about Hawaii and our business there being decimated since they've opened up their travel back to Hawaii. Those stores have come back online strongly and are back at pre-COVID levels indeed above that. I have no doubt that when Bali ultimately opens up and when Thailand opens up. And quite frankly, even in the Australian results, particularly for the Rip Curl business, with borders closed, with tourists from Victoria and New South Wales, Nordic don't getting over to WA and not getting up to Queensland. That has a negative result as well. So certainly, I'd expect that once we see Australian borders open up, once we see Bali open up, Thailand open up. As we have seen historically, we're certainly expecting a really strong bounce, which gives us a lot of encouragement for the future. But obviously, we just got to wait patiently for these borders to open up.

Okay. And just a final question for me. You've called out M&A. And I think I recall you calling out something similar at the interim results. Just in terms of like when you talk about your balance sheet providing you with the capacity to do that. Is that something that you're going to prioritize as we remain in a lockdown? Are there very good opportunities, and the opportunities skewed to offshore or within Australia?

Yes. I think at the moment, it's a very active space, obviously. As you would know a lot of things out there available for purchase. But at the same time, I would say, across the board, there's probably some inflated expectations. So from our point of view, we want to have that flexibility, and it's something that we'll look at. But is it a priority at this point in time? No. I think that with the complications of looking, particularly anything offshore and doing due diligence on the business when we can't travel, that -- there is some obvious limitations in what we can do. So it's an option for us. We've got the balance sheet to do it. If something that comes up is perfect and a really ideal fit for us but it's not certainly -- it's not front of mind for myself at this point in time. We've got plenty to work on with our existing brands and plenty of potential. As the world opens up, and that's my main focus.

It appears there are no further questions. Michael, I'd like to turn the conference back to you for any additional or closing remarks.

Thanks. Now look, thanks, everyone, for your time. Look, we're really comfortable with the results and excited by the future. We're just going to get these things back open up, and the Board is open, and we're looking forward to that. So thanks for your time and patience.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. Stay safe. You may now disconnect.