KMD Brands Limited (KMD) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the KMD Brands Half Year 2022 Results Release Conference Call. Today's conference is being recorded. Kindly be reminded that there will be no web questions taken today, only OD questions shall be taken for today's call. For those who have questions, please dial in to the audio to be able to ask your questions. At this time, I'd like to turn the conference over to Michael Daly, Group CEO. Please go ahead.

Good morning, everyone, and thank you for joining us on today's presentation of the KMD Brands results for the first half of the 2022 financial year. 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 launched on the NZX and ASX this morning. Unless otherwise specified, all financial numbers are in New Zealand dollars. Today's presentation will begin with an introduction to our newly-rebranded KMD Brands, followed by the first half highlights, group financials, brand results, and we will conclude with our focus for the second half of FY '22. Earlier this month, we rebranded to KMD Brands Limited, with a refreshed corporate strategy and identity to drive the group into the next phase of growth. The new parent company name and refreshed strategy brings our brands together under an overarching corporate identity and harnesses the company's evolution over the past 35 years. Since the acquisition of Oboz and Rip Curl, we have been looking to distinguish the holding company from the Kathmandu brand. The change to Kathmandu brand is an outward sign of the transformation that has occurred within the group in recent years and its future strategy, while still acknowledging its history. With our rebranded name, we have also refreshed the purpose and vision of the company. Our purpose is to inspire people to explore and love the outdoors. I'd like to emphasize that all of our brands are focused on supporting, enhancing and encouraging activities for the outdoor consumer. Our vision is to be the leading family of global outdoor brands that are designed for purpose, driven by innovation and the best choice not only for people, but also the planet. Moving to Slide 6. We consider our 3 brands, Kathmandu, Oboz and Rip Curl, provide all the fundamentals for strong long-term growth through their technical and innovative products, their global reach and diversification, capabilities across multiple geographies and channels and their strong base of loyal and active customers. KMD Brands as a parent company will bring vision and strategic guidance to enable group synergies across brands through the sharing of technology, product research and development and leveraging operational excellence to enable the best delivery of customer service. We will now cover the highlights of the first half of FY '22. Moving to Slide 8. I'd like to first cover off our 4 strategic pillars. We are building a portfolio of global brands. We aim to continue to 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're also leveraging and delivering operational excellence to all brands across shared group support functions. Finally, we are demonstrating leadership across environmental, social and governance by transforming business culture and mindset. As we execute on our strategy, it is important for us to maintain balance sheet flexibility to support organic growth and potential M&A opportunities. On Slide 9, you can see that during the first half of FY '22, we successfully executed on all 4 pillars. At a group level, we appointed a President of KMD Brands Europe to drive our international growth across multiple brands in that region. We implemented a new common loyalty management system across Rip Curl and Kathmandu in Australia and New Zealand. We also made key group appointments in HR and commercial and determined the group's ESG focus areas. In relation to Rip Curl, we continue to build our brand, opening 10 new owned and licensed retail stores globally and sponsoring the first-ever WSL Finals held in the U.S.A., where the winner of the men's event was a Rip Curl surfer, Gabriel Medina. Reflecting our focus on elevating digital, Rip Curl online sales grew by 14.5%, with penetration increasing to 13.8% of direct-to-consumer sales. We demonstrated operational excellence by implementing the same point-of-sale system for Rip Curl and Kathmandu across Australasia. We also expanded a wetsuit recycling program to all Rip Curl stores in Australia and finalized the Rip Curl ESG strategy. We made substantial progress at Kathmandu, where we have completed the Europe Fall/Winter '22 sell-in, with forward orders in line with expectations, and we appointed a General Manager of International to drive growth. The execution of our digital strategy is evidenced by our 46.4% growth in online sales, with penetration increasing to 21.2% of sales. Importantly, we are utilizing Rip Curl's infrastructure to drive our international expansion into Europe and Canada. And on the ESG front, we've demonstrated success, with Kathmandu winning the Deloitte New Zealand Top 200 Sustainable Business Leadership Award. In relation to Oboz, the demand for the brand and products has never been stronger and forward orders into FY '23 support our medium-term growth targets. We have successfully launched online sales and implemented the group's business intelligence tool. To promote employee engagement, Oboz established an employee volunteer program. Moving to Slide 10, we will look at the impact of COVID lockdowns on Rip Curl and Kathmandu store sales across Australia and New Zealand. Kathmandu lost nearly 7,000 trading days in quarter 1 due to COVID lockdowns, compared to under 2,500 in quarter 1 last year, and for a 3-week period in August and September, over 70% of the Kathmandu store network was closed. Pleasingly, Q2 same-store sales rebounded 15.4%, demonstrating the lost sales opportunity in Q1. Rip Curl lost over 4,200 trading days in quarter 1 due to lockdowns compared to 3,700 in quarter 1 last year. Quarter 2 same-store sales grew 3% following the lockdowns in Q1. I'll now hand over to Chris to cover the financial slides.

Thanks, Michael. Statutory results include the adoption of IFRS 16 on Slide 12. For comparability, the impact of IFRS 16 has been excluded from our underlying results. Underlying sales decreased 0.8% to $407.3 million, as a result of Q1 COVID lockdowns and the impact of Vietnam factory closures on Oboz. However, sales rebounded in Q2 as Kathmandu and Rip Curl stores opened in Australasia. Gross margin was 130 basis points below last year due to elevated international freight costs and increased clearance mix for the Kathmandu brand. We continue to carefully manage our operating expenses during store closures, while investing in the long-term value of our brands. Moving to Slide 13. You can see another demonstration of the COVID impact on Q1 followed by a rebound in sales in Q2. As seen on the pie chart, we're building a global business, which is diversified by brand, sales, channel and by region. We expect to see further diversification going forward as we deliver on our international growth strategy. Online sales continued to steadily increase, rising to 17.4% of direct-to-consumer sales across the group. Rip Curl online sales increased by 14.5%, while Kathmandu online sales were up 46.4% to now comprise over 21% of DTC sales. Moving to Slide 14. Lockdowns in Australasia were more severe than last year and less government support and rent assistance were received, impacting year-on-year EBITDA by approximately $35 million. Oboz was impacted by the Vietnam factory closures, with approximately half of first half orders unable to be fulfilled. Our Q2 EBITDA was above last year, reflecting the rebound in sales. Despite the trend attributed to COVID disruption, the group continued to invest in the long-term value of all 3 brands, with an additional $14 million expenditure in the half to support brand marketing. Moving to our balance sheet on Slide 15. We have a strong balance sheet, which is supportive of our organic growth initiatives and any future M&A opportunities. We have significant funding headroom and all debt facility covenants are comfortably complied with. Our long-term leverage target is approximately 0.5x net debt to EBITDA. Our inventory is $20 million above where it was in January '21 and has been managed to mitigate increased production lead times and international shipping delays. Our inventory balances in January traditionally include stock builds for the key Rip Curl Northern Hemisphere summer and Kathmandu winter seasons. Moving to Slide 16. The operating cash flow outflow was a result of the COVID lockdowns in Q1 and the inventory build to mitigate international supply chain challenges. Q2 operating cash flow was strong, reflecting the sales rebound. Noncash items include depreciation and amortization of $15.7 million. The directors declared an interim dividend of $0.03 per share, a 50% increase from the NZD 0.02 per share from last year, fully franked for Australian shareholders and not imputed for New Zealand shareholders. The record date is 15 June 2022 and the payment date is 30 June 2022. I will now talk through the segment results and performance of each of our brands. Looking at Rip Curl in more detail on Slide 18, sales were 2.7% above last year, with strong sales growth delivered in the online and wholesale channels. Europe and Hawaii, in particular, achieved sales growth, while the rest of North America was impacted by wetsuit shortages and port congestion. Australia was impacted by store closures in Q1, however, rebounded in Q2. Direct-to-consumer same-store sales decreased 1.5% overall but increased 2.1% when adjusted for lockdowns. Q2 same-store sales grew 3% and was 20.1% above pre-COVID level, pleasingly. Sales through our online channel, as I mentioned previously, grew 14.5%, while wholesale sales grew at 16.1%, with less COVID interruptions in the sell-in period compared to last year. Gross margins were impacted by the higher wholesale mix and elevated freight costs internationally. Moving to Slide 19. We will focus on the key Kathmandu -- key Rip Curl brand initiatives. We sponsored the first ever World Surf League Finals, which was the most watched day in the history of professional surfing, with a record 6.8 million live views. And Rip Curl team rider, Gabriel Medina, won his third world title, driving both viewership and Rip Curl's claim on professional surfing in the U.S.A. Rip Curl launched an interactive bikini fit guide, which promotes size inclusivity and offers a new shopping experience for bikinis both in-store and online. Saltwater culture is a move into the environmentally-friendly production of quality surf products. We have a preferred fiber list, driving sustainable solutions and collections featuring cotton through the Better Cotton Initiative, recycled synthetics, FSC-accredited viscose and Bloom bio-based EVA foam. Moving on to Slide 22 for Kathmandu, showing the P&L for the first half. COVID lockdowns and travel restrictions impacted Kathmandu financials, with total sales 0.8% below last year. In Australia, sales were 4.3% above last year at constant exchange rates, with over 5,000 lost trading days in the first half compared to 2,300 lost days last year in that first half. In New Zealand, total sales were 4% below last year, with nearly 2,000 lost trading days in the first half compared to only 266 lost days last half year. First half same-store sales increased 15.9% when adjusted for lockdown and 3% overall. It was a strong Q2 rebound, with same-store sales growth of over 15% following lockdowns. However, the same-store sales remained 21% below pre-COVID levels due to continued restrictions on international travel, tourism and subdued CBD locations. Online sales grew 46.4%, as mentioned earlier, to 21% of DTC sales. Gross margin was impacted with an elevated mix of clearance, negative hedging impacts as well as international freight costs. However, second half gross margins are expected to be above last year on the -- based on promotional plans with higher international freight costs, offset by the impact of beneficial hedging we are currently experiencing. Our operating expenses were carefully controlled through lockdowns. While, again, we continue to invest in the long-term brand growth, our brand momentum is building due to our renewed focus on marketing and products. Turning to Slide 22. We have strong brand awareness, with Kathmandu leading its category in Australia and New Zealand. We are the leading -- we are leading the market for top of mind awareness, consideration, brand desire and digital visitation. Our customer base is active and highly engaged with a Net Promoter Score of 76 with 2 million active Summit Club members. We continue to invest in long-term brand equity through our summer campaign, which has built an all-season perception with increased consideration for summer contributing to brand -- building brand desire. We're driving key brand differentiators, especially among millennial consumers, with significant digital impressions across Australia and New Zealand and strongly positive social sentiment across paid and organic channels. We are focusing on having a year-round relevance with successful new summer specific product franchises launched and building on continued momentum in the camp category. This autumn and winter, we have launched a new ANY-Time Sweats franchise, and we will continue to extend our Heli Anoraks and COZY fleece franchises. We're continuing to lead the industry in groundbreaking sustainability innovations with Bio-down launching in winter '22, winning the prestigious Outdoor Retailer Innovation Awards in January, a fantastic achievement. Moving to Slide 24 on Oboz's first half performance. Wholesale and online sales were heavily impacted by the 3-month closure of factories in Vietnam, compounded by international freight delays. Approximately half of first half FY '22 orders were unable to be fulfilled, and gross margin was slightly eroded due to international freight costs, which averaged more than 300% higher over historical average. Operating expenses have been carefully managed in this period, while we continue to make investments, again, to support brand momentum. And that remains strong as demand outstrips supply due to the increased consumer focus on outdoor experiences. Pleasingly, forward orders into FY '23 support our medium-term revenue growth targets and initial online performances indicate there are strong growth opportunity available. I'll now hand back to Michael to cover our focus for the second half.

Thanks, Chris. Moving to Slide 26. We have a clear set of strategic priorities to focus on in the second half. We will remain focused on building global brands. We plan to open new Rip Curl stores in the key growth markets of North America and Europe. We will launch a new global autumn and winter range for Kathmandu and plan for our USA launch. Oboz Vietnam factories are ramping up production and supply is expected to gradually recover in the second half, and our key Sawtooth X product launch will be in market from April. We will elevate digital through the continued global rollout of our new group-wide loyalty management, customer data and online trading platforms across all brands. Our Club Rip Curl loyalty scheme will launch in Australia in the second half, with preregistrations already underway. Kathmandu will be launching online sites in Europe and Canada, and the relaunch of Kathmandu Summit Club will offer an exciting new value proposition. We will build on the positive momentum of Oboz's recent online launch, which presents a strong growth opportunity. We will leverage operational excellence at the group level through merging our Canada and U.K. fulfillment centers across all brands. For Rip Curl, we will continue the rollout of Group POS and ERP systems, enabling Rip Curl to leverage unified commerce opportunities. Kathmandu will leverage enhanced functionality of new merchandising, allocations and replenishment software. Lastly, we will continue to lead in ESG in the second half as we finalize our group ESG strategy for communication in October, with science-based targets set. We are progressing towards B-Corp accreditation for both Rip Curl and Oboz and our new Kathmandu Bio-down product, which won the Outdoor Retailer Innovations Award, will launch in the second half of FY '22. Turning to Slide 27 and updating on our brands. The Rip Curl wholesale order book remains strongly above pre-COVID levels, and Kathmandu enters the traditionally strong upcoming winter season well prepared. Those factories in Vietnam are now ramping up production following the end of COVID-related shutdowns. In terms of the outlook, second half gross margins are currently expected to be in line with last year based on our promotional plans and expectations in international freight costs and currency impacts. COVID continues to cause ongoing disruption to our consumers and employees, especially in the current New Zealand Omicron outbreak. Some of our supply challenges are beginning to ease, while forward demand for our products remained at record levels. The second half is traditionally the strongest cash-generating period and we remain well capitalized as we invest in the long-term international expansion of our global house of brands. This now concludes the formal part of today's presentation. I want to thank you all for taking the time to join us on this call. And I'd now like to open it up for questions.

[Operator Instructions] We'll take our first question from Andrew Steele with Jarden.

The first one for me is on brand investment. You've highlighted in the outlook statement that you'll continue to invest in building brands in the second half. Is that incremental brand investment beyond what you highlighted in the trading update of the $14 million? And, I guess, how should we think about an aggregate that sort of annualized incremental brand investment on an annualized basis?

Thanks, Andrew...

I'll take that one. [indiscernible] Yes, I'll just touch on the -- in terms of dollar investment, that was more weighted towards the first half. So the second half incremental will be significantly lower from -- in terms of that investment. So I wouldn't annualize that number if you're thinking of doing that. Michael, do you want to go?

I was going to say much the same. I think what you'll see is the first half, really, I guess, returned our marketing spend to, I guess, more traditional levels, noting that the first half of last year was quite muted in terms of spend just because of the uncertainties. But coming into this first half that we just closed, we felt it really important to return our marketing investment to more traditional levels and indeed, probably a little bit higher than we normally would, knowing that we had sort of lockdowns, but we felt that we wanted to be well positioned for reopening. So in terms of moving forward, I would say our overall marketing spend as a percentage of sales come down from what we're seeing in the first half of this financial year.

And just to clarify, I mean you highlighted coming down, what -- how do you think internally about what a normalized level of marketing as a percentage of sales might look like?

Look, it's a detailed conversation because, obviously, you need to look at each market. And if you're launching into new markets, you're obviously spending marketing before you actually even got new sales. So it does vary depending on where the brand is at and what jurisdiction. But more generally, I would say, I think most brands, including our brands, we'll be looking to spend anywhere between 5% to 7% of sales on marketing. And depending on where we sit on that scale, it depends on ultimately where each brand is at and where we're at in terms of geographical expansion. And in markets where we're new, we're going to be spending a lot higher than that and in more established markets, we'll spend lower. But I'd say, on average, in the range of 5% to 7%.

That's clear. In terms of gross margins, you've highlighted a flat gross margin or flat year-on-year margin outlook for the remainder of the year. I guess given the lag effect that you see from input costs and rising manufacturing costs, how should we think about the direction of gross margins into FY '23 when you take into account your forward hedging book as well?

Yes, I'll take that. Look, obviously, all companies are facing margin pressure at the moment, and we're certainly not immune from some of those pressures, whether they be freight or input costs. I guess going against that and in our favor is more favorable hedge positions that we have for this upcoming 6 months compared to previous periods, as well as a change in the mix of our business. Obviously, the more that our business distorts towards direct-to-consumer, it is higher margin. So look, on balance, we feel relatively comfortable in terms of the second half as far as margins, as we've communicated. As we move into FY '23, like everyone, we're concerned about where inflation is at and where cost inputs may go. But at the same time, we believe with our technical innovation base, we have got the potential to raise prices where we need to. And certainly, we've already done that from a Rip Curl and Oboz perspective with our wholesale prices in last season or 2. And so we'll maintain that flexibility to increase prices if we need to, and we'll just assess that. So look, to summarize, we're reasonably comfortable in the second half of this year in terms of margins. Moving into FY '23, we certainly have concerns, depending on where input costs and freight goes. But that said, we are reasonably confident that with the technical nature of our brands, we've got the ability to move prices should we need to. And we certainly have done that in the past. And we reserve the right, I guess, to do that in the future if we need to protect those margins.

Great. In terms of working capital, clearly been a reasonably large outflow in this half versus pcp -- and you've explained that well in terms of the underlying drivers of that. How should we think about those underlying working capital dynamics through the remainder of the year? Should we expect some unwind? And do you think you can get close to a net cash balance by the end of the year? Or is that more looking like it will be 1H '23?

Yes, I'll start and I'll let Chris finish. But in terms of our working capital cycle, I'd just be -- I'd just flag nervousness if anyone is trying to compare us to other sort of Australia, New Zealand retailers. I say that because of our weighting of our Northern Hemisphere business as well as our weighting towards the winter in the Southern Hemisphere, we tend to run a little bit higher on our inventory levels as we enter this sort of January, February period. Our peak in working capital for inventory in particular, is quite high in March, just because we've got all those deliveries coming into the Northern Hemisphere, for the Northern Hemisphere summer, which is a big part of the Rip Curl business and certainly a huge part of the Oboz business. But also on top of that, we've got the products coming in for the Kathmandu winter peak period for the Southern Hemisphere in Australia and New Zealand. So we do run a little bit higher than other, I guess, retailers in Australia, New Zealand-based businesses. So I just flagged that from the outset. But that said, yes, certainly, we would normally see a rundown from what is somewhat of a high period for us around sort of January, February. And that will run down through to the end of financial year, certainly. Chris, do you want to comment on -- in terms of the cash position?

Yes. Yes, and that's correct, Michael. July is always traditionally a low point for the working capital cycle. So we expect some unwind in that number. And in terms of the cash position, we expect it to significantly improve from the current position. And we expect it to be a low -- probably a low net debt number.

Great. And just one last question from me. Can you comment at all on your trading in the second half period to date?

Andrew, taking the line through our same first half of last year, we haven't given any specific update, and we do that because February for us is not a particularly meaningful month or indicative of where we're at. Indeed, I think it's our lowest month of sales of the year. So we didn't want to give any misreads in terms of our trends. But certainly, what I would say is that the overall trends that we've seen in February is pretty consistent with what we saw in part of that first half: Rip Curl sales continue to be on the positive; Kathmandu, really on the back of sort of New Zealand Omicron, just a little bit soft at this point in time. But as I said, they're very small numbers through February and early March. So it's nothing that we're worried about.

[Operator Instructions] We'll take our next question from Marni Lysaght with Macquarie.

I just wanted to touch base or get a sense of, I guess, inventory. So the inventory has built up about $20 million from last January. I can also see the net change in net working capital is about $50 million in the half. So how do we think about, I guess, how you're planning stock levels in the next 6 to 12 months? Do you feel like there's a need to invest a little bit more heavily, just given that there's ongoing challenges and you have been impacted, particularly in Oboz?

Yes. There's a few elements there. Just quickly on the broader working capital. I think you'll recall, 12 months ago, Marni, we flagged that with the return of more normal wholesale shipments in that back half of the calendar year, we would see our trade debt has come up a little bit, and that certainly has happened. So that's helping to fuel some of that growth in working capital and we'd expect that with increased wholesale business that we've seen, particularly on the Rip Curl side. That's all to that. In terms of inventory, yes, there's a bit of a mix there with the inventory. There's no doubt that on the back of those unexpected lockdowns that we had in Australia and New Zealand, we, along with many other companies, are holding more inventory than we would normally like at this time of the year in terms of clearance inventory -- not anything too substantial. But certainly, there's more inventory in that respect than we would normally like. So that's certainly helping to fuel that inventory growth a little bit. But at the same time, and probably a bigger impact, like everyone, we're just making sure that we have the inventory we need to hit our numbers. And so we have strategically brought forward some of our deliveries, particularly for the Southern Hemisphere, just to make sure that we're ready for that peak winter season. So I would say our growth in inventory is a little bit of a mix of -- a little bit more inventory than we would like, just on the back of those lockdowns because we obviously bought 4 stores that were ultimately closed for a long period of time. So we're holding a little bit more. At the same time, we have brought strategically forward some of our buys to make sure we have the inventory, just to make sure we don't have huge gaps. And so that's certainly something that we've done. And also, there's also an element of there on the back of wholesale growth orders, particularly for Rip Curl, that obviously, the higher wholesale orders you got, the more inventory you have to bring in so -- just to help fuel that growth. So there's a few different parts in there, but certainly, it is all adding to that inventory balance at the end of the first half.

Okay, technically...

I wouldn't expect it to -- sorry, Marni, and it's not expected to grow beyond the current point is all. So we're saying it's kind of at that peak and as supply chain challenges ease over time, we expect, as I said earlier, to normalize that.

Okay. Because I consider the [ $33 million ] building in the half from [ July ]. So if I wanted to partition that, like -- or if the market wants to partition that, could you say like immaterial part would be this clearance inventory, then [ Oboz ] would be -- Rip Curl, with wetsuit, et cetera. And then the balance would be Kathmandu winter starts?

[indiscernible] I'll [indiscernible] [ I'll turn it to Michael to you guys. ]

I was going to actually hand it to you, Chris.

Okay. That's right. I mean, it's relatively evenly split between brands and, as Michael said, clearance is a significant portion of that. So that's what we would probably say on that.

So clearance...

So I think in -- yes. And if you fast track another 12 months, Marni, certainly, I would expect that our inventory levels at this point in time next year will come down a little bit because, hopefully, with supply chain challenges easing, we won't be bringing forward as many of our buys. That said, offsetting that, we'll have a lot more Oboz inventory this time next year, I imagine. So -- but to Chris's point, I think we're pretty much at a peak here. I wouldn't see any growth from here. And indeed, if anything, there might be a net decline.

Okay. That's clear. And just to make it clear, the line was a bit muted: The clearance is not a significant part of the balance or the buildup?

No, not [ in title. ] No.

Yes. Awesome. Awesome. Moving on to just another question. I know I can see that you've got obviously Oboz resuming production. But I recall, maybe it was at the time of the AGM, you may have flagged some plans to increase capacity in Indonesia for Rip Curl. Is that still going ahead?

For Oboz, we have added a third factory, yes. So historically, we've had 2 key suppliers. We've added a third. And so that is certainly helping to open more capacity for the Oboz brand, not only to overcome our short-term inventory challenges, but certainly to help fuel longer-term capacity, and that new supplier has capabilities to produce in a number of countries. So that gives us some flexibility because up until now for Oboz, we've been restricted to Vietnam as a country of origin. So that certainly gives us some flexibility, yes. So that's with respect to Oboz. I'm not -- what was the question with respect to Rip Curl?

Rip Curl, I just remember, obviously, wetsuits is like -- just you've experienced unprecedented demand for wetsuits. And I recall you advising you have plans to increase capacity at the wetsuit factory in Indonesia. Is that still going ahead? Or is it being delayed because of COVID...

Yes. Yes, the wetsuit factory is in Thailand. So yes, Thailand is where the Rip Curl facility is. Yes, we are in advanced, I guess, internal discussions and external [ concessions ] to adding extra capacity. Whether we do that with external partners or with our own facility, we're still working through those different options. But that said, even if we added the capacity at the moment, Marni, unfortunately, the challenge is more around the raw materials. So the more short-term issue is getting access to the raw materials as opposed to the actual physical capacity of the manufacturing line. So we've got a little bit of time on the manufacturing line. So we're making sure we go through the various options and we consider all our options before we commit. And really, at this point in time, the main focus is scrambling with our broader suppliers to secure as much raw materials as we can to make as many wetsuits as we can. But the raw material imports is the big issue for wetsuit supply at the moment.

Okay. Okay. Just I guess, the availability of those raw materials.

Yes, that's the challenge. Ultimately, our factory -- our own factory at the moment in Thailand is not operating at full capacity, purely just because we can't get enough materials to maintain efficiencies, unfortunately.

We'll take our next question from Mark Wade with CLSA.

Just a question on the wholesale orders and how that whole channel is going. Look at the -- there's a really helpful chart in the pack we set out the number of doors that you're in. And overall, there's a big increase, which has come out of Rip Curl from roughly 5,950 up to about 6,650 doors. That's great. The other 2 brands have gone backwards slightly in Kathmandu and Oboz. So can you talk us through how those -- what's really driving that big increase in Rip Curl and yet Oboz and Kathmandu have been a little bit sluggish on the wholesale channel to date?

Yes. Look, in terms of -- I'm sure you can appreciate keeping a track of exactly how many doors and supply -- customers we are in around the world is not the easiest thing to do. It sounds easy, but it's actually quite challenging because, obviously, you've got to keep a track of what all your customers are doing, what stores they've got open. And obviously, in these times, it's quite challenging to keep a track of. Look, what I would say overall is, in terms of the Kathmandu numbers, the wholesale component is so small. So it's not worth talking about. Obviously, the -- at the moment, the Kathmandu business is predominantly a direct-to-consumer business. So from that point of view, I put that to the side. In terms of Oboz, I would think that any decline is purely just the short term. The fundamentals of that brand and the fundamentals of demand for that brand are as strong as ever. So there might be just some timing issues or maybe there's some temporary store closures on the back of COVID or something that I'm not aware of, but I would say, overall, in terms of Oboz and Rip Curl, if we look at our customer base, if we look at our wholesale orders, all our trends are quite positive in that respect. In terms of Kathmandu, it's just too early because the wholesale business is such a small component that has become increasingly relevant as we start to ship those 4 winter orders in sort of August of this year. But until then, I wouldn't use wholesale doors for Kathmandu as an indicator.

And in the Rip Curl, it looks like you had a good [indiscernible] penetration...

Yes. Rip Curl -- yes, I think across the board and across most of our regions, we've certainly seen a new business driver. I know internally, the team has been working on a new business drive for the last 12 to 18 months, and that has been quite successful in terms of adding new distribution for wholesale in most of our markets. Indeed, I think all of our markets are showing net growth in doorways. We're quite picky still on distribution. We don't typically open up to anyone. Of course, if we decided to do that, we could probably blow those numbers out significantly, but we choose quality distribution, and that's where the focus is. But certainly, very pleased to report that we have added new distribution and that's coming out of the demand for the products. So -- which is great news.

Yes. No, that's really pleasing. I mean you've obviously -- you've got a new chief in charge there. So it seems like it's going in the right direction, which is good. Lastly, on the Kathmandu brand, the Summit Club rebranding that's ahead. What do you hope to achieve there? I mean, outwardly, it looks like numbers of the -- the numbers have kind of been stagnant for a number of years and then fallen off slightly with the store closures at -- which has been hard to get new members, I take it. But in this time in the year -- in a year's time from now, I mean, what might that -- the potential be with that Summit Club? Because traditionally, there's been a really strong correlation with those numbers and future sales. So what do you hope to achieve?

Yes. I think what we hope to achieve is an excitement to be honest. What we're keen to -- I think that scheme has been in place, the loyalty scheme has been in place for a long time. It has been largely driven around discounts. And we feel that the broader experience for consumers with loyalty has gone over and above just discounts now, whether it's exclusive access to products, whether it's exclusive events, whether it's points and loyalty rewards or other mechanisms that we're seeing across the board, not only in apparel, but certainly across broader consumer engagement from insurance companies to airlines and so forth. So I think, certainly, the way we look at it is that, that scheme needs to evolve and create some new excitement to take it to the next layer, I guess, of -- or next layer of consumers to have them interested in not only signing up to it, but engaging with Kathmandu brand on an ongoing basis. And really, that net aim being to drive the frequency of those shoppers up. I'm probably more interested in the frequency of our shoppers and our engagement of our shoppers than our overall numbers because obviously, you can have great overall numbers, but if they're only coming back to you once a year, once every 2 years, it's not particularly great. So yes, to answer your question, Mark, I'd definitely say what we're aiming for is excitement. We need to relaunch that plan to do a better job to engage with our consumers and get them back more frequently and rely not only on discounts, but rely on a broader suite of measures to engage with that consumer.

Yes. I think I hope -- it sounds good. And I think coupled with the We're Out There kind of campaign you've already got underway and the new range and colors of -- it's got the makings here of a really good turnaround.

Yes. And both the brands -- both Rip Curl and Kathmandu have been working together on that. And we're sort of at the pilot stage for Rip Curl. So we've got the benefit of seeing how it works for Rip Curl, learn -- Rip Curl has been able to learn from what's worked well for Kathmandu in the past. And the benefit we'll have now is Rip Curl will go live with its new plan. And then Kathmandu will be able to see how that goes and then adapt their own plan for their relaunch later this year as well. So a good example of the brands working together to learn from each other.

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

So first question from me is on the Kathmandu brand and the ANZ border reopening. So I guess you mentioned same-store sales for that brand still 21% below pre-COVID levels. And so with borders reopening, do you expect any sort of positive impact from that in the second half? Or is it more of an FY '23 story? And I guess when are you expecting for same-store sales for the Kathmandu brand to recover to pre-COVID levels again?

Yes. Thanks, Bianca. Look, I'll start and then Chris can add anything that he thinks I've missed. Look, I think we're very confident and looking forward to having an uninterrupted winter in the Southern Hemisphere, across Australia and New Zealand. Obviously, the ongoing outbreak of Omicron in New Zealand and WA are having a short-term impact on footfall. But we certainly would expect that with the flip to cold weather in the coming weeks and us having the ability to trade unrestricted for really the first time through winter since 2019, gives the Kathmandu brands great potential to be able to return to those COVID levels. And I guess we're excited by that because not only should we get unrestricted trade, we hope through this winter, which is great because it's the first time in a couple of years. But secondly, we have really repositioned the brand with some of the marketing to really appeal to that younger consumer. And if you've been into some of our stores more recently, and you'll notice that even more so as you get into the depths of winter, really bringing some new products, some new colorways into the range. And certainly, with the Bio-down jacket, we're really comfortable that we're well positioned to get that growth. So we're quite upbeat that we'll see a good winter period for the Kathmandu brand on the back of those things. In terms of the opening of borders and the opening -- freedom of movement between Australia and New Zealand will certainly help that, because as you know, we haven't seen that for some time. So hopefully, we'll see Australians and Kiwis going between the 2 countries. I think as far as the overall uplift from international borders, I think that's probably more FY '23 as we move into the European and North American winters. And then we -- hopefully, we start to see New Zealanders and Australians starting to head overseas, later this year, sort of Christmas period. And with that, our return and our volume of business appealing to that traveling Southern Hemisphere consumer who's traveling to the Northern Hemisphere for the winter. So I'd say we'll see a good second half. We're confident where we're placed. That said, I think the full impact of opening borders we'll see right through until the -- later in the year, when we see the international borders and the more freedom of movement on the international side as well. Anything to add to that, Chris?

No, I think you likely covered it, Michael. The second half of Kathmandu has always traditionally been more of a need-based approach with winter and the natural affinity of the products for those categories. So -- and we definitely saw that last year in Australasia. As I recall, I think we saw more insulation in Australia than pre-COVID last year. So -- but definitely, as Michael said, that travel component is more of the first half FY '23 story.

Okay. Great. And then on the Rip Curl brand, so with the supply shortages, what regions has that mainly had an impact on? Or is that sort of overall, for the Rip Curl brands? And I guess on Rip Curl as well, with North America being the key growth opportunity, could you just give a bit of an update on how that's going?

Yes. So yes, the Rip Curl supply issues are principally really around wetsuit products, and that has affected all markets. It's probably -- we see it more clearly in the North American market, just because it's such a big market, and that's probably the market that if you were to go into our stores, looking at our wetsuit collection, it's probably even more empty shelves on our North American stores than maybe Australia and Europe, but it is affecting all markets. But we're seeing it probably most in North America just because of the size of that market. The growth that we're seeing in that market because it's a market where we haven't traditionally been a top 3 brand, but we're slowly approaching getting to that sort of top 3 or top 5 status -- so we're seeing probably a little bit more growth in that market than we are in other markets. So that does extend the issue, I guess. And then on top of that, certainly, the challenges of getting products through North American ports on a timely basis are still a major issue. So again, those delays through ports are even making the wetsuit supply shortage even worse again, because even if we can get wetsuits on the water, it's quite challenging to get it through the L.A. port at the moment. I think couple of months ago, there was 120 ships waiting to be unloaded. And I think they're down to 70 or something, but they've still got a massive backlog, which is just delaying our ability to get those products into the market, even if we did have those products. But to answer your question, all markets generally, but we're seeing probably most clearly in the North American market. And as far as our progress in terms of Rip Curl in North America, yes, we're really happy with how that's progressing. Wholesale orders, as we've mentioned, are going really well, sort of record levels. We'd love to have more wetsuits, of course, and that would certainly help, and we're certainly looking to open select stores. We're largely focusing on our online business and our wholesale in the more immediate terms. But we will open up the odd store here or there, where it makes sense in the North American market, just to help contribute towards that growth in that market. But yes, we're really well positioned there and our plans to burst into the top 3 surf brand in North America are well on track.

And then last question on the Oboz brand. So in the second half, with supply normalizing, what can we sort of expect for that brand? Like are you expecting that to be in line with second half '21? Or still lower because of the supply chain issues?

Yes. Look, if -- it will really come down to how easily we can get footwear through those ports to be honest, Bianca. So to give you an exact number, it's going to be hard. Based on our forward order book, we will have a very good second half. But the forward order book is only as good as the deliveries you can get into the market. And what we're seeing at the moment is, yes, look, transit dates that normally might be 35 days is still upwards of 75 days plus. So it just may mean that some shipments that would normally be in this half and should be in this half, may flip into the next half. So I wouldn't want to give specific guidance on that second half for Oboz, just because we may see a little bit of a drift depending on how quickly we can get those products into market. But certainly, we've got a lot of work to do to restock shelves in that market because we had a historically low inventory levels for Oboz on the back of those lockdowns. And we've got containers and containers of shoes that are making their way into that market. And it's a good problem to have from a point of view. We're not sure how much demand there is because we just don't have the shoes. But certainly, we think that the Oboz brand is well placed in the medium term. As far as the immediate next 4 to 6 months, just a little bit hard to know just because of the uncertainty on getting products freely through those ports.

We'll take our next question from Matt Noland with Forsyth Barr.

Chris and Michael, just confirming you can hear me?

Yes, Matt. Loud and clear.

Yes. All good.

Great. Maybe just following on with Oboz, historically you used -- or previously, you used air freight to get some of the products out there. Is that an option you'd consider as well to meet demand or the cost of margins?

Look, in my feedback that -- I've asked those questions before as well, but the air market is just as complicated as the sea market. And certainly, when you start talking air market at the moment, in the very inflated rates, I don't know the exact dollars, but certainly the amount of products would have to shift and it's quite heavy products to get -- to make any difference would be quite margin destructive, to be honest. And while it's always good to have some sales than no sales, our customers are being patient with us. They understand the situation. And they also understand the situation that bringing airfreight will bring in some small lines and small runs, but it's not necessarily going to deal with their overall issues. So look, we are using air freight as we need to, and that's the same for wetsuits where we need to. But unfortunately, the air markets for freight are just as complicated -- indeed, more complicated than the sea freight markets at the moment. And quite punitive in terms of the cost, for sure.

Yes, you wouldn't do it when you're shipping hundreds of thousands of shoes over a period, but as Mike said, that's more for hitting those demand gets or get through certain key customers that you do that.

Sure. Maybe shifting on to Kathmandu and the new color. Are you happy with how those are being perceived by customers? And just in terms of the elevated clearance volumes there, were the new colors overrepresented in that? Or not?

No, not really. I think in terms of -- I would say, in terms of clearance, what is overrepresented in clearance is heavier weight products, just on the back of those closures in our network, particularly in that sort of July and August period. So -- and to be fair, most of our new products really have only started landing with spring/summer and then into this autumn. So as far as any overhang on clearance, that's largely related to heavier weight products from, I guess, previous ranges. So no buildup of any of the new product in that clearance in any way. And sorry, what was the other part of that question?

No, that's -- that's ticked it off actually. So maybe just one more from me -- sorry, yes?

Yes. No, that's fine. Yes, go for it.

Just noticing a lot more advertising, particularly on Instagram, surrounding your -- just on sustainability. Can you give us an update on how you're progressing with Rip Curl and Oboz in terms of B-corp and then also the level of the marketing expense that might be coming through with the sustainability efforts and how to think about that going forward as well as a percentage of marketing spend?

Yes. So the numbers I mentioned earlier in terms of marketing spend are inclusive of anything that we're putting out there with respect to ESG. Obviously, referring to the Instagram post for Kathmandu, certainly, I think in terms of a Kathmandu perspective, we feel that we maybe haven't given Kathmandu as much profile in the market as what we could have, with respect to its environmental credentials, particularly around its B-Corp accreditation. And any work that we've done sort of suggests that it's not necessarily well known by the consumer. So we have probably elevated that messaging a little bit on the Kathmandu side more recently, just to help educate the consumer where the Kathmandu brand is placed, and we very much see the Kathmandu brand, very high relative to its peers as far as where it's at on its environmental journey and certainly, the B-Corp accreditation supports that. So that's, I guess, a short-term push on the Kathmandu brand. In terms of Oboz and Rip Curl accreditation, yes, a lot of work happening. The Oboz business is a lot smaller and a lot simpler, operating in really one market across a couple of styles of footwear. So in terms of its ability to -- on the accreditation, it's a lot easier than the Rip Curl business, which is multichannel or multi-geography. So -- but they're both progressing well. We're working with B-Corp on that sort of reaccreditation process for Kathmandu as well as the application process for Oboz and Rip Curl. A lot of work has been done, progressing quite well. We're not exactly sure of the timing, but we're certainly aiming to get those accreditation as soon as possible and hopefully that occurs in this calendar year.

Ladies and gentlemen, this does conclude today's question-and-answer session. At this time, I'd like to turn it back to your presenters for any additional or closing remarks.

No specific comment. Just thanks, everyone, for participating. And yes, that's all.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.