Good morning, everyone, and thank you for joining us for today's presentation of KMD Brands' financial results for the first half of the 2024 financial year. My name is Michael Daly, and I am the CEO and Managing Director of the group. I'm joined on the call by Ben Washington, our Interim Group Chief Financial Officer. We'll be talking through the presentation lodged on the NZX and ASX this morning. Unless otherwise specified, all financial numbers are in New Zealand dollars. When it comes to questions, can phone participants please follow the instructions of the operator? Online participants may ask a question at any time during the presentation by clicking the Ask a Question button, and those questions will be addressed at the end of the presentation, after the questions by phone are cleared. Today's presentation will begin with a summary of the key first half results.
We will then discuss the group's financials, brand results, a strategy update, and a closer look at Kathmandu. We'll conclude with a trading update and on our outlook for the second half. I'll begin with a summary of the key first half results. Drawing your attention to slide four, sales were 14.5% below last year's record sales result, reflecting ongoing weakness in consumer sentiment. Sales declined for all three of our brands, cycling their strong sales growth achievements last year. Despite the challenges on sales, it was pleasing to see gross margin increasing and expenses and working capital reducing despite the inflationary environment. Gross margin remained resilient despite currency headwinds, improving 10 basis points year-on-year to 58.8%. Operating expenses were NZD 15.8 million lower than last year, despite continued inflation pressures.
Operating expenses benefited from restructuring implemented last year and lower variable costs associated with lower sales. With sales almost NZD 80 million lower than last year, and despite improvements in gross margin and operating expenses, underlying EBITDA decreased by NZD 30 million to NZD 15.1 million. Net working capital ended NZD 18 million lower than January last year, with reductions to both inventory and receivables balances, a significant achievement given the first half sales result. Moving to slide five now, and looking more closely at the group's sales history, you can see from these sales charts just how strong last year's sales result was, as all brands and channels rebounded post-pandemic. We are now operating in a more challenging consumer environment than we were twelve months ago, but first half sales this year remain above the COVID-impacted years.
Moving to slide six, we have had many highlights from our iconic brands in the first half, but I just wanna call out three that really stood out and are representative of the positive direction we are heading in. The Rip Curl Flashbomb Fusion wetsuit is the latest in a long history of leading-edge wetsuit innovations. Following successful launches in ANZ, North America, and Europe, this innovative product has given Rip Curl its 11th consecutive SBIA Wetsuit of the Year award. Earlier this year, Kathmandu launched its refreshed loyalty program, Out There Rewards. Similar to Rip Curl's new loyalty offer, the program rewards members for engaging in their passion, getting outdoors. Kathmandu's loyalty proposition had not fundamentally changed for many years and was becoming less effective, with a primary focus on discounts.
A revamped and innovative new program, in what has become a competitive market for rewards, is just what we need to continue to deliver in this space. It's early days, with plans in place to expand the reach of this program with exclusive partnerships and further targeted personalization. And finally, we have extended our offering of new category for Oboz. Following the commercial success of the Katabatic Style, our first foray into the popular fast hike category, Oboz has now launched the Katabatic Wind. With market-leading technology and innovation delivering even faster and lighter performance, we expect this range to open doors to new distribution and consumer connections. I'll now hand over to Ben Washington to take you through the financials in detail.
Thanks, Michael. Drawing your attention to slide eight, we'll now go through the group's profit and loss for the first half of FY 2024. Our statutory results include the adoption of IFRS 16. For comparability, the impact of IFRS 16 has been excluded from our underlying results, as well as the notional amortization of Rip Curl and Oboz customer relationships. As Michael described in his introduction, sales for all three brands have been impacted by a challenging consumer environment. Group sales for the first half of FY 2024 were 14.5% below last year's record sales result. Kathmandu saw cost of living pressures soften consumer sentiment from the fourth quarter of last financial year, compounded by the warmest winter on record in Australia. With the brand's current reliance on winter weight product, the sales result for the first half of this year has been disappointing.
Rip Curl and Oboz are both cycling record sales results for the first half of last financial year. While the direct-to-consumer channels for both brands have recorded single-digit declines, the wholesale channel has been more challenging. Wholesale customers for both brands have made short-term correction to reduce inventory holdings to de-risk their own business in the current consumer environment. The wholesale channel, wholesale customer destocking period has caused a short-term flow-on effect to our wholesale sales channel. Statutory EBITDA was NZD 64.4 million for the half. On underlying comparable basis, EBITDA has decreased by NZD 30.2 million to NZD 15.1 million due to the disappointing sales result. Gross margin remained resilient, increasing 10 basis points despite currency headwinds.
The US dollar hedge rate used to purchase inventory in the first half of this year was down approximately 7% from the rates achieved in the first half of last year. The currency headwinds were fully offset by lower freight rates, improved channel mix, exiting low-margin business, and new product introductions. Operating expense control has been a real focus for each of our brands, finishing NZD 15.8 million lower than last year, despite continued inflation pressure. Operating expenses benefited from restructuring implemented last year and lower variable costs associated with lower sales. Now, looking at a more detailed view on Slide 9, our sales. Our sales in our largest international regions have decreased from last year's highs. All key global regions have delivered sales above COVID-19 impacted years.
Sales decreased year-on-year by 16.6% in Australia, 14% in New Zealand, and 15.9% in North America, with Europe and rest of world holding up better than ANZ and North American markets, with a 2.2% and 7.4% decline year-on-year. Kathmandu challenges dominated the ANZ result, and we'll talk more about the challenging wholesale market in North America when we come to Rip Curl and Oboz brand slides. Sales declines were spread across all of our channels to market, albeit with direct-to-consumer sales performing better than wholesale sales, especially for Rip Curl and Oboz, with direct-to-consumer sales channels decreased 4.4% in aggregate. Moving on to Slide 10. Customers continue to return to shopping in stores. Our omni-channel offering provides customers the choice of in-store or online shopping.
While online sales have moderated, the channel remains significantly above pre-pandemic levels, with nearly 30% growth in online sales since the first half of FY 2020. Kathmandu delivered NZD 16.4 million of online sales in the half, comprising 10.9% of the direct-to-consumer sales. Rip Curl delivered NZD 18.5 million of online sales, also comprising 10% of direct-to-consumer sales. Oboz delivered a record NZD 3.8 million of online sales, a 34.2% increase on last year. Moving on to our balance sheet on Slide 11. We have a very strong balance sheet position with low net debt, significant funding headroom, and improving inventory levels. Inventory is well positioned, NZD 5 million lower than last January, despite over NZD 3 million-dollar increase in inventory balance year-on-year from the translation of regional inventory balances to NZ dollar reporting currency.
With significant trade still to come in the second half, we expect the July 2024 inventory balance to be lower than July last year. Also contributing to the net working capital decrease of over NZD 18 million year-on-year, trade receivables have been well managed. At the 31st of January 2024, the group had a net debt position of NZD 96.2 million, with significant funding headroom of approximately NZD 190 million. Moving to slide 12. We're expecting an unwind of inventory to underpin traditionally strong operating cash flow generation in the second half year. As previously communicated in the FY 2023 results release, the balance between interim and final dividend will be adjusted to better reflect the profitability of each half. As a result of this change, and due to the first half performance, the directors have not declared an interim dividend.
Our dividend policy remains aligned to first half and second half earnings weightings, with a target payout ratio of 50%-70% of net profit after tax. Moving on to our brands. Each of our brands has experienced a challenging start to the year in terms of weakened consumer sentiment, cautious wholesale customers, and sales underperformance. In this environment, our brands have worked hard to control gross margin, operating costs, and working capital. On Slide 14, we'll talk through Rip Curl. Rip Curl is cycling a record sales result for the brand last year. Sales in the first half of the year were impacted by wholesale customer caution, with sales down 9.2% year-on-year. Direct-to-consumer channels performed comparatively well, decreasing by 5%, again, cycling record results last year and reflecting weakened consumer sentiment in key global markets.
Stronger direct-to-consumer results were delivered in Europe, Asia, and South America. Online sales have stabilized at 4.3% above last year and remain significantly above pre-COVID levels. Wholesale sales were 14.1% lower than last year as wholesale customers actively reduced their inventory holdings in response to the challenging consumer environment. We are optimistic that the wholesale customer inventory reduction cycle will end, giving us a more positive FY 2025 outlook in the wholesale channel. Gross margin increased 90 basis points, reflecting improved pricing and freight rates, along with reducing low-margin liquidation business in North America and Europe. Operating expenses were well controlled despite the continued inflation pressure. Moving to slide 15. Kathmandu total sales decreased 21.5% year-on-year, reflecting ongoing weakness in consumer sentiment.
Kathmandu sales have softened over the last eight months with a combination of weaker consumer sentiment, the warmest winter on record in Australia, and an over-reliance on winter weight product, resulting in a disappointing first half. Sales were impacted in both Australia and New Zealand, with Australia down 22.9% and New Zealand down 15.9%. Online sales decreased 36.9% to NZD 16.4 million as consumers return to shopping in stores. Online sales represented 10.9% of direct-to-consumer sales and remain above COVID-19 levels. There is a clear opportunity to improve the recent online sales performance. Kathmandu's international sales opportunity remains a longer-term goal. In the first half, NZD 1.7 million was delivered to Canadian and European customer accounts as we continue to test and learn in these markets.
While gross margin decreased 240 basis points, this was driven by specific clearance of end-of-line product in August. Excluding the month of August, gross margin for the remaining five-month period was 50 basis points lower year-on-year, despite currency headwinds. The long-term fundamentals impacting gross margin remain strong. Operating expenses were tightly managed while facing continued inflation pressure. Operating expenses were almost NZD 10 million lower year-on-year, benefiting from restructuring implemented last year and lower variable costs. Later in this presentation, Mike will take you through a deeper analysis of Kathmandu's recent challenges and update you on the focus areas for the brand to improve execution and profitability. Finishing up on slide 16, Oboz. Oboz is cycling a record sales result for the brand last year. Sales in the first half of the year were impacted by wholesale customer caution, decreasing overall sales by 20% year-on-year.
Online sales grew 34.2% with strategic promotional activity. The online channel remains a key growth opportunity for the brand. Wholesale sales were 23.5% lower than last year, as wholesale customers actively reduced their inventory holding in response to the challenging consumer environment. We view the wholesale customer caution as a cyclical reaction to the North American market. Gross margin has improved strongly by 450 basis points, reflecting lower freight rates, improved channel mix, improved pricing, and new product introductions. We continue to do areas of brand, online, and product to support the long-term growth objectives, which also include international expansion. As for the North American footwear market, as the North American footwear market recovers from a cyclical inventory reduction and discounting phase, we expect to leverage this operating expense investment with sustainable growth in sales and significant improved profitability.
I'll now hand you back to Michael.
Thanks, Ben. Moving to slide 18 and reminding you of our strategic pillars, our strategy remains unchanged. We will achieve our vision of building global brands by our continued investment in market-leading innovative products, engineered for purpose and made specifically with the outdoors in mind. We are actively building our brands to have global appeal, presence, and reach through investing in world-class brand and customer experiences. Elevating our digital capabilities remains a key focus, building off the launch of Club Rip Curl and the relaunch of Out There Rewards. We will continue to tailor our personalization of offers to our customers, while continuing to improve and streamline our digital experience to the customer. We'll use the power of the group to leverage operational excellence across brands, with digital transformation being a key enabler. We're a leader in ESG.
Sustainability is now part of the DNA of each of our brands, woven into decision-making in all parts of our supply chains. Moving to slide 19, the sales challenges in the first half of this year have impacted our progress towards the group's KPI targets. We have provided an update on the latest KPI results on this slide, but the key message is that we remain committed to the short, medium, and long-term goals that we've previously communicated. We remain confident in the group's ability to drive towards these targets. Recent trading has delayed our progress, with our EBITDA margin target of 15% of sales changing to a medium-term timeframe. Also, with our immediate focus on improving execution and profitability in Kathmandu's local ANZ business, Kathmandu's international aspirations move to a longer-term goal. Next, we want to give you some more context on Kathmandu's current position.
Drawing your attention to slide 21, Kathmandu has been negatively impacted by a number of external factors in recent years, which slide 21 details. These include COVID lockdowns, reduced tourism, changes in the competitive landscape, and most recently, weather and softened consumer sentiment. I do wanna point out that the rolling twelve months to May 2023 represent the most recent twelve months of uninterrupted trade post-pandemic, and immediately prior to the warmest winter on record in Australia. Kathmandu delivered NZD 463 million in sales at almost 16% EBITDA margin during this recent rolling twelve-month period. It's also worth noting that despite the external challenges in recent years, Kathmandu remains the outdoor leader in the ANZ market. Onto slide 22 now. Not all of Kathmandu's challenges in recent years have been due to external factors.
We outline on Slide 22 the areas across brands and products where our execution has not been sufficient. In product, our reliance on winter weight product has increased, specifically in outerwear. Our breadth and depth of core categories has been insufficient, and our outerwear inventory investment has been overweighted compared to other categories. Unfortunately, though innovation continues to be a focus for Kathmandu, it has not delivered commercial outcomes in recent years. Product development timelines had less flexibility to allow us to capitalize on emerging market trends. Until recently, product was developed on an 18-month-plus timeline, which is an industry standard. Finally, in terms of product, there has been too much reliance on vertical brand products versus leveraging third parties, including Oboz. For brands, our execution of the rebrand since 2021 has been inconsistent.
We also had a lack of connection with target consumers, and prior to our recent Out There Rewards launch, the Kathmandu loyalty proposition has not fundamentally changed for many years, becoming less effective over that time. Slide 23 looks to summarize the immediate focus areas of the Kathmandu team, led by CEO Megan Welch. The customer is key. We'll focus on targeting outdoor enthusiasts in key product activity segments: hike, outdoor active, and adventure travel. We need to exceed the expectations of our target customers by focusing on product and brand. With product, our key focus is to reduce our reliance on outerwear. While we have managed to build and maintain a strong outerwear business, it has come at the cost of other categories, where execution hasn't been to the same level.
To do this, we must continue to innovate and invest in broader categories to address the year-round needs of our customers. Our spring/summer product must provide a stronger balance to our autumn/winter product. We must react to market trends faster and produce more regular product drops. In the first half, we leveraged Rip Curl suppliers and delivered 80 new SKUs on reduced timelines, and we have over 100 planned for the second half. We've expanded our third-party brand strategy and are actively leveraging premium brands and categories we are not experts in, like On running shoes, BLUNT umbrellas, and Hydro Flask drink bottles. For brand, we know we have strong equity in ANZ, but our execution needs to be refined and more authentic to the outdoors. Loyalty is an important part of this.
The launch of Out There Rewards in the first half has connected our customers more authentically with our brand than ever before, but we need to continue to expand this program with further targeted personalization. In-store and online, we must deliver a premium brand and product experience, bringing to life an authentic outdoors connection with technical and sustainable features clear to our outdoor enthusiast customer. We'll achieve this by continuing to build our talent pool, ensuring our people bring specialist expertise while truly understanding our customer. Our medium-term ambition is to deliver NZD 500 million in sales with a 16% EBITDA margin. We are committed to Kathmandu being a premium brand and the continued market leader in ANZ. With new leadership and an action plan in place, we are optimistic about the future for the Kathmandu brand. Okay, moving on to the outlook.
On slide 25, we highlight a sample of innovations for our brands. Rip Curl is arguably the number 1 surf brand globally in today's market. Through reigniting the search as the primary product, creative, and marketing vehicle, Rip Curl plans to inject this strong brand DNA into new innovative products and collaborations centered around athletes, with execution tailored to regional markets. Kathmandu is the market leader in the outdoor market in ANZ, with a long history of cutting-edge outdoor innovation. Here are some examples of some excycling innovations launching this half. The new Seeker range in stores now is a new insulated active jacket and vest made from recycled materials. In a first for Kathmandu, the Insulator Trailhead will extend the adaptability of an already successful rain jacket with the addition of insulation. Coming this winter is an excycling, sustainable addition to the hugely popular Epic Puffer franchise.
The Epic Special Edition is made from fabric drawn from end-of-life tires. Oboz is one of the newest and fastest growing hiking footwear brands in the market. Recently, Oboz has launched the new Cottonwood range, its most sustainable hiker to date. This is an important direction for the brand, consistent with the group's strategic pillars, and timely in the North American and European markets as enhanced regulations are introduced. Finally, as we hit slide 26, I wanna take you through a brief trading update and our outlook for the second half. Group sales for February were -3.5% below last year. While noting that February is not a significant trading month, we have seen improvement on year-to-date sales trends from each of our brands. February sales trends have continued into the start of March.
As we begin the second half trading, it's important to remind ourselves that the group will be cycling less challenging sales performance last year, particularly Kathmandu, in the fourth quarter. As I've already stated, improving Kathmandu's sales performance and execution is our immediate priority as we approach the key winter trading period. I've taken you through Kathmandu's focus areas, that we believe we will start to materially improve Kathmandu's performance progressively over the next 12-18 months. The Kathmandu team are already implementing these changes at pace. With regards to the wholesale market, we are optimistic that the wholesale customer inventory reduction cycle will end, giving us a more positive FY 25 outlook in the wholesale channel for both Rip Curl and Oboz.
Despite the challenging consumer environment and with significant trade still to come in the second half, we do expect the July 2024 inventory balance to be lower than July last year. We expect this ongoing reduction of working capital to drive strong cash flow generation in the second half. We believe that our portfolio of the iconic global outdoor brands and leadership and sustainability. We remain a unique investment proposition and well-placed for the future. Okay, time for questions. This now concludes the formal part of today's presentation. I want to thank you all for your taking the time to join us on this call. I would now like to open the call for questions.
Thank you. If you would like to ask a question over the phone, please press star followed by the number one on your telephone keypad. If you would like to withdraw that question, again, press star one. Thank you. Your first from the line of Guy Hooper from Jarden. Please go ahead.
Yeah, thank you. Morning, everyone. Let me just quickly on the balance sheet. I know you've sort of called out you've got plenty of headroom. Can you just talk a bit about the covenants, particularly around the fixed charge covenant?
Yeah, thanks, Guy. We've obtained some relief for the 31st of January period and the 31st of July reporting period, so we've got sufficient headroom on the banking covenants for the next reporting period.
Okay, thank you for that. Maybe just... Oh, can you tell us what the covenant is?
It's 1.25x at January, and 1.35x at July.
Okay, thank you. And maybe just, I guess, on the product side for Kathmandu, I mean, you sort of have that statement in there around some of the product innovation not delivering. I mean, can you talk a little bit about the product misses in that Kathmandu brand, and I guess what we should expect to see on the product side, I guess, over the next 6-12 months? And then the second part of that—a third party strategy, I mean, how deep do you kind of plan to go, or how wide do you plan to go in terms of the categories that you'll look to supplement with third party?
Yeah, Michael, here, Guy. Yeah, look, in terms of the Kathmandu product pipeline, look, it's a challenging, obviously, market for the consumer with the cost of living crisis and so forth, but what certainly resonates in this market is good product. You know, unfortunately for us, you know, particularly our spring/summer offer that we've had for the last six months just did not resonate as strongly as we would've liked. We didn't have particularly a lot of newness to encourage the consumer to come back to us. We did have a stretch rain jacket and Trailhead, which worked quite well, but outside of that, to be honest, we really struggled.
We did some fast injections of some newer product T-shirts, fleece, and so forth, which again, worked really well, but not enough to cover for the loss of sales across a broader category. Now, looking forward, we're more excited about what the pipeline brings us in the future. I mentioned earlier just some of the new outerwear jackets we've got coming in, and certainly beyond that, I'd expect to see the innovation extend not only through outerwear, but into other core categories, whether they be fleece, pants, backpacks, travel packs, and so forth. So certainly that's the focus of the team we've assembled under Megan, and that will be the ongoing focus for us into the future. In terms of the third party strategy, look, I don't think it necessarily goes too wide.
You know, the Kathmandu brand can't be everything to everybody. You know, there is a limit to where the brand can extend, but there are some products that the outdoor enthusiast does need and would expect to find in our stores. So certainly we'll be making sure that we have the very best brands in specialist products, where we don't feel that the Kathmandu brand has a natural place. So for example, in footwear, we think that, you know, with Oboz, with brands like On and HOKA, we are in a much better place than we are if we're just focusing on the Kathmandu brand. So really just looking at those sort of specialist categories where we feel it's a bit too far of a stretch for Kathmandu. But that said, it'd be very targeted to products for the outdoors.
Great. Thanks for that. I guess just one last one from me. Look, I know you guys stay away from providing guidance at this point, but I guess as we look forward, you're cycling what was a, I guess, a particularly tough period for Kathmandu. I mean, like, what are your, I guess, expectations, particularly as these comps turn, I guess, a bit easier, you know, how do you feel about your ability to, I guess, perhaps defend that result last year?
Yeah, look, it was a tough winter for us, particularly in Australia, and given our reliance on winter weight product, particularly outerwear. Look, we think, you know, depending on, I don't like to predict on weather, but look, we're well-placed. I think the most important thing is we've got new innovation, new products coming into the cycle. You know, I was in the showroom yesterday looking at all the products landing over the next couple of months, and certainly I walked away from that with excitement, that we're, we're giving our sales teams the best opportunity to not only defend last winter, but hopefully do a little bit better than that.
Obviously that's not a forecast, but certainly, you know, we plan to success and with the pipeline of products we're coming through, not only in store now, but coming in the next couple of months, we feel that we're well-placed to, at very minimum, defend last winter.
Great. Appreciate the color. I'll pause there. Thanks.
Thanks, Guy.
Your next question comes from the line of Kieran Carling from Craigs Investment Partners. Please go ahead.
Morning, Michael and Ben. First question from me is just on, I guess, Kathmandu's relative underperformance versus Macpac. Just wondering if you can, you know, give us a bit of insight there on, on, you know, where you think you're underperforming that competitor, and perhaps what you're seeing in the promotional environment.
Yeah, Macpac's been owned by Super Retail Group now for a good 5+ years. You know, Super Retail are one of the best retailers in this region for a reason, and I think they've done a great job with the Macpac brand, and they're executing really well, growing aggressively in terms of store count, pushing across their broader channel. And, you know, their stores look and trade well. So, all credit to them on that front. For us, we're focusing on what we're doing. We certainly feel that we've built an amazing brand and certainly have a really strong outerwear jacket business, but, you know, we need to be known for more than that.
And that's probably what's hurting us the most at the moment, relative to not only Macpac, but any other broader competitors. We need to have the consumer wanting to come to us to buy more than just outerwear. And, you know, we've got ourselves in a position now where, you know, our outerwear business is up towards, you know, 40%+ of our total business, and that's probably just a bit too much. So for us, as I mentioned before, our focus is on executing stronger across a broader core category and effectively taking what we've done across our outerwear business over many years and really looking to, you know, once and for all, push into some other core categories and execute better.
We feel if we do that, that our numbers and comparative performance relative to outdoor and other sectors will improve for sure.
... Great. Thank you. And just on your store rollout target, targets for Kathmandu, can you touch on what your expectations are for the second half there? And, you know, whether this is the right economic environment and given the brand's current performance, to be rolling out new stores?
Yeah, we had a push-through of new stores last year, prior to the winter. This is the sort of time we'd normally be opening. We do have, I think, two opening up in the next month or two, but that'll be it, for this, at least the next six months. We'll reconsider once we see the winter trade. But look, as we sort of indicated, in our presentation, now we feel that focusing on the fundamentals of the Kathmandu brand, the fundamentals of the Kathmandu product pipeline, is where our focus needs to be at the moment, and certainly that's where I've got the team, Megan and her team, focusing on. And with that, we'll probably slow, for this year in terms of store count.
We still remain committed that we think 200 stores across the region is fine, but we wanna get those foundations and fundamentals right. I think focusing on that for the balance of 2024 is our priority, and I think we're well positioned to go back into some store openings in 2025 and beyond. But that said, we will finish the year a couple more stores up from where we are today.
Cool, thank you. And then the last question from me is just on your balance sheet. Can you provide some color as to where you see your inventory and net debt positioned at year-end? Do you still see cash neutral as being achievable?
Thanks, Kieran. Yeah, look, a lot of that will depend on, I guess, the winter trade for Kathmandu. We have signaled we believe the inventory balance will be lower year-on-year. And we're still targeting that 0.5x EBITDA as a net debt target. So, yeah, that's probably all I can comment on at this stage.
Okay, thanks, guys.
Your next question comes from the line of Bianca Frys from UBS. Please go ahead.
Hi, good morning, Michael and Ben. First question is just on Oboz. So you mentioned that's one of the fastest growing hiking brands, but at the same time, sales were well below last year. And I appreciate that's off higher comps, but, yeah, could you just talk a bit about how. Yeah, just talk about how that works, I guess, and who you are taking market share from?
Yeah, good day, Bianca. Yeah, look, Oboz is obviously, since the acquisition, has been a very successful acquisition for us, minus that sort of three-six-month period where we had some supply chain issues on the back of COVID closures in Vietnam. We're seeing good growth from that brand. It has become one of the most well-respected brands in the wholesale market in North America or in the US, which is great. We're very proud of that. It's certainly though it has got some channel and geographical concentrations that, you know, in the long term, we're looking to address. You know, if you look at that business, at the moment, the way it's structured, you know, we're sort of 95% wholesale and, you know, realistically 90+% U.S.
So with that concentration, and given the state of the broader outdoor market, in the U.S., particularly in the wholesale environment, which is fairly well documented, from many of the US outdoor brands, we're certainly starting to see struggling with some momentum on that wholesale accounts, just because we see the whole market looking to, de-risk and reduce their inventory levels. And given our concentration of that wholesale, we are in the middle of that cycle, which we anticipate will, you know, run for a 9-12-month period. So if you look at our online performance of our store there in the U.S., I think we're up 34%, year-on-year. So, you know, the consumer demand for the products is strong. Everything that we hear from our wholesale account base, the demand for Oboz is as strong as ever. That's supported by our D2C.
But we do just have to cycle through this, you know, de-inventoring that's happening in the market, in particularly in the USA. Certainly as we go beyond into future years with the relaunch of the brand across Australia and New Zealand, and a launch in Europe, in the next couple of months, we'd like to see that geographical and channel concentration reduce, which will certainly overcome these sort of short-term blips, which we very much see it as a short-term blip.
Okay. That's helpful, thank you. And then moving on to the Rip Curl brand. So there has been some social media backlash, a couple of weeks ago. Has that had an impact on your sales for that brand, or is it still having an impact?
Look, no noticeable impact. Obviously, it was one that, you know, within the Rip Curl bubble, was quite distressing there for a couple of days when we found ourselves in a divisive debate that we didn't particularly plan to be in. But no, look, there's no noticeable impact on sales from that event, and it, it's not something that comes up on a day-to-day basis at all, at the moment.
Okay, thanks. And then last question, just on your SG&A, including leases, so as a percentage of sales for the half, that's around 56%, which is quite high and looks even higher than sort of peak COVID times. What's sort of driving that?
... Look, Bianca, it's quite clearly just a sales problem. You know, if you look at the actual underlying costs, they are down, and down significantly in the six months. The team, through restructurings at the start of the year and ongoing focus on cost reductions and productivity gains, have done a good job in reducing expenses, but that said, it just hasn't been enough to cover for the sales loss. So certainly from our point of view, it's more a sales problem. We remain. We, we agree that 56%, or whatever it is, is too high. It's not maintainable. We think that, you know, through addressing the sales challenge we have at the moment, through continued product innovation and bringing faster and more desirable products into our ranges on a more consistent basis, we'll address the sales problem.
We have ongoing momentum in expense reductions and margin enhancement, which you have had for the last period of time. We expect that to continue as we continue to realize the benefits of bringing the brands together and integrating the brands, which we've still probably got a good 12-24 months of runway of those efficiencies coming through, which should help underwrite continued cost improvements. But fundamentally, our expense-to-sales ratio at the moment is high on the back of our sales challenge.
Okay, thanks. That's all for me. Thank you.
Thanks, Bianca.
Your next question comes from the line of Paul Koraua from Forsyth Barr. Please go ahead.
Hey, morning, guys. Maybe just a quick couple questions from me. If I pick up from where Bianca left off on, on Rip Curl, could you just talk to us a little bit about the sales rates there? You obviously, through four months, you guys were -6%, then, you know, that fell off a bit towards the end of the year, -9%, and then in February, you guys seem to be trending a little bit better. You know, if it's... Is that all coming through the wholesale channel, or is that more, you know, direct to consumer?
Yeah. Good day, Paul. Look, a little bit of both. You know, to be honest, we were sort of hoping for that blazing hot El Niño summer that never really eventuated, to be honest. So we were, you know, a little bit more hopeful, particularly in the Southern Hemisphere, for the summer. You know, some places in Australia in particular did really well, like Sydney, where it's been consistently hot, but in other parts, you know, we did see some softening. But yeah, look, overall, we feel relatively, you know, it's hard to say we feel relatively happy where Rip Curl is at, given we've got a sales decline, but we are coming off record sales. We have grown that business significantly over through the COVID period.
And, you know, when we look at our sales performance for the first half, you know, D2C, we're sort of looking at negative 4%-5%, circa. So we're thinking that coming off those record highs, given the broader consumer, you know, a low single digit decline in D2C, is about where the market's at. Obviously something we would continue to focus on improving. Wholesale is a little bit higher than that, closer to sort of, you know, in some parts of the world, it's above 10%, and that's just part of the ongoing inventory reductions we're seeing across the whole outdoor and surf industry as our wholesale accounts look to de-risk. So we see that...
We expect that to soften up, sorry, improve a little bit, I should say, in the next six months, and see those trends come back to at least the D2C. And indeed, you know, as we see some improvement or some settling consumer sentiment, there's no real reason why we can't return to growth, very shortly.
Cool, thanks. Maybe just a second question on Kathmandu. Obviously, you guys have quite a big focus on the product pipeline going ahead, but is there any concern about some of the old stock that has sort of missed the mark, and if there's gonna be any residual stock left over, and if you're gonna need to, you know, discount to move some of that stuff?
No. Look, we've been super aggressive. You'll recall that through last financial year, we dropped NZD 40 million of inventory, or I think it was about NZD 37 million of inventory, through aggressive trading of, and clearing of any potential problems. I was the acting Kathmandu CEO at that time, and to be honest, I wanted to make sure we had a clear deck for the incoming CEO. So, even our margin took a little bit of a hit in the first half, as we did a final sort of clearance in August. So, no, we're really clean, to be honest. Any of our problems have been dealt with, and we're looking at a good, clean pipeline for Megan and her team to execute upon.
Yeah, maybe just a quick follow-on from that. You know, you spoke to sort of 18 months as what the product development pipeline needs to look like or the development time, sorry. What does that sort of look like now? You spoke to it sort of improving.
Yeah. Yeah, look, the key part is, for us is that, you know, we've-- the, the Kathmandu brand has been guilty of, you know, seasonal planning, drop 9% of the products at the start of the season. That sits in stores for five, six months, and then wait for the next season. You know, certainly what we're looking to do is get a bit of balance between, you know, mainstream ranges that's come in at the start of the season, but then regular and consistent freshness that comes into store each month. And also giving us the ability to have some quick strike or fast strike product, as well. So we've certainly started to do that, leveraging Rip Curl's capabilities in that space.
We have done that in the last six months and dropped a variety of, as I mentioned, I think it's 80 SKUs that we've dropped in the first six months. That brings it back to circa 30 weeks or something like that, which is still, you know, relative to fast fashion, it's still relatively slow, but we're not a fast fashion operator. We're an outdoor operator, and certainly from our experience, that sort of timeline allows us to get products into market to follow trends or address things that we have missed. And that's a capability that we didn't have previously, that we do have now, and we certainly think that sets us up better for the future as we move forward.
Cool. Thank you. Maybe just a final point, on the balance sheet, you know, come second half, do you think it would be more important that, you know, debt gets paid down or that a dividend gets paid?
Thanks, Paul. Yeah, that's something we'll certainly look at once the second half trade is in the bank. We've been pretty clear on our dividend policy, so we'll reserve judgment to see what the second half trade looks like at this point. Yeah, and just-
Cool.
Just to add that with the,
Sorry.
Yeah, just to add to that, with the rundown of inventories we expect, you know, we've got some reasonable good momentum. We've referred previously to us holding a little bit more in terms of Rip Curl wetsuits and Oboz footwear than we would like, coming out of the supply chain issues of the last couple of years. We're progressively running down that inventory. There's nothing wrong with that inventory. It's all inventory that is planned to be in the line for two to three years. When we see that run down, that should give us another good boost on cash flow for the second half, that there's no reason why we can't be looking to both pay down debt and pay dividends in the second half, assuming obviously trade goes well.
Perfect. Thanks, guys.
Your next question comes on the line of Julian Mulcahy from E&P. Please go ahead.
Mike, just a couple more questions on inventory. So you're saying that the inventory levels in Kathmandu is clean, and it's really just Rip Curl where it overstocked?
Yeah, it's essentially, Rip Curl and Oboz are both still holding remnants of that, build up in supply of those goods that we were having trouble to get, you know, sort of two years ago. So we're still running those down, progressively over the next... realistically, the next six to nine months. So I would say by, by December of this calendar year, the inventory will be reset to back to the levels we would expect it to be, and you'll, you'll see that noticeably at the end of financial year.
Right. So with the, when the wholesalers go through their restocking phase, is that gonna be in, like, the first half of FY 25 or the second half? When would it sort of impact on your sales?
Yeah, look, it's, that's the million-dollar question. The harsh reality is, is we don't know. Obviously, we don't have great transparency on what inventory levels they're holding, and obviously, also, goes to what trade they're going to do in the coming period. Now, we had said previously that we felt spring, summer, Northern Hemisphere sell in, which is, you know, go to market May, shipments December, January, later in the year. We're hopeful to see some, I guess, return to normality and see some, how wholesale customers looking to, I guess, normalize inventory then. But, time will tell, to be honest. So that's what we're hopeful for. That's what we're planning for. So we'd like to see at least, the trends soften up to a neutral trend. That's what we'd probably be targeting, but we've just got to see.
The market will tell us what that is. We've got some excycling products both on the Rip Curl and Oboz side, so we think that stands us in good stead. Ultimately, the market will tell us, and we'll know more a couple of months after that season launch in May.
If the wholesale customers, you know, took a view that, you know, retail's back and it's gonna be a good summer for middle of next year, so their Northern Hemisphere summer, when would they push orders through to you to restock for that?
Yeah, so they, they've got to commit to inventory, for the Northern Hemisphere spring, summer. They have to commit to inventory effectively the middle of this year, so, for deliveries early next calendar year. So, you know, if we do see, I guess, a normalization and the end of the inventory destocking phase, the first signs would come through with this, this sell-in, but that will only have a impact on effectively the second half of next financial year. If there is still ongoing challenges, that would then push out another six months. So, yeah, that's the sort of timelines. We haven't seen anything particularly in the market as yet, to give us a strong read.
It's just depends on, I said, how their trade goes and how their own inventory is and just the context of everyone. I mean, this is just coming about from everyone having a lot of inventory coming out of COVID, because everyone was spooked about supply chain.
Right. And just finally, so with the expected reduction in Kathmandu inventory in this half, is that based on, like, a normal winter, or if we have another repeat winter or what? Like last year's warm winter.
Yeah, look, the way we buy that winter weight product is such that, you know, even we, we saw with this, that past winter, the worst winter on record in Australia, we didn't see a noticeable jump up in inventory on Kathmandu just based on how we buy that. You know, their, their rolling styles. We top up the buys as needed. So, you know, we can, you know, we can trade through one of those tough winters and manage that well, particularly with our outerwear business, given the volume and the way we buy it. Probably the greatest risk to us, Julian, is more if we, you know, as we push and try to build out more of our spring/summer offer, you know, taking risk in those spaces can create inventory issues.
We don't have any at this point in time, but certainly that's one that we'll need to monitor and watch as we go forward. But certainly from the Kathmandu inventory point of view, even despite the significant sales challenge we've had, our inventory is really clean. Where we are holding a little bit more than we'd like, it's black puffer jackets, to be honest, which will clear out in this winter. So we don't really have any concerns in terms of inventory exposure or risk as we speak, but, of course, the teams are constantly watching that for the future to make sure that they don't get caught, and that's just about risk management that we deal with on a day-to-day basis.
Okay. Thanks, Michael.
We have no further phone questions at this time.
Okay, thanks. We're gonna switch to online questions now.
We have a question from Oisin Rymer. Question is: When you say March has continued the February pace, do you adjust for the extra leap day trading in February, a 3.6% boost to trading hours, with March being -6% adjusted for the leap day, or -3.5% not adjusted for the leap day?
Yes, thanks for the question. Yeah, adjusting for the leap day makes sense, and would be more in line with the adjustment for March.
Next question is from T. Chong. Can you please clarify what exactly medium term means for performance targets on your page 19 of the slides? Is it 5 years, 10 years, or longer? Do you think a very general aspirational timeline and soft targets would be sufficient to turn around the company?
Yeah, well, addressing the second part of that question to start with, you know, in terms of the day-to-day execution of what we need to do to, you know, improve the Kathmandu brand in particular, I mean, that is something that we're working on every day, you know, every hour, every week. Of course, we have some aspirational plans out there, but that's not necessarily what drives... It drives our direction, but in terms of the pace and speed and veracity that we go after initiatives, that's driven by, you know, management's desire to improve this as quickly as possible. And we'd like to think that with this autumn/winter that is in store now, and moving into future seasons, that as each season goes, we will get better and better on the Kathmandu side.
So, yeah, in terms of the timeline for those, obviously the timeline varies depending on what the goal is. If we're typically talking medium term, we're talking three-five years. If we're talking long term, we're talking five years plus. The main thing for us with those goals that we put out there is to be clear with the market in terms of, you know, where we're headed, and we have no problems as a management team being held out to that. We think that's a better dynamic to have than not putting any goals out. So, yeah, that's our position.
Next question is from, Brad McFarlane. While I understand the loss of sales due to market sentiment, can you please explain the loss of market share to Macpac and what is being done to address this?
Yeah, look, as I mentioned earlier, I think Macpac's done a great job, and, you know, to be honest, I do find in my experience that having good competition helps the broader industry, so we welcome that competition, and certainly from my point of view, as I mentioned, we've got some work to do ourselves in terms of our execution. Execution, not only in terms of our product pipeline to make sure we've got innovative products coming, not only in outerwear, which we've done a great job of, but in other categories that are needed for the outdoors. But also we've got some work to do just to being more consistent in terms of our brand execution, to make sure we're remaining authentic to the outdoor consumer.
So that's certainly where our focus is, and you would've seen one of the slides where we show what our focus is for the Kathmandu brand. As I mentioned earlier, we're just looking to execute better and better season by season. Spring/summer that just passed was not a good season for us. We know that. It was a very disappointing result, and we're focused on making sure we execute better, not only for autumn/winter, but each season that goes beyond, and we're confident that we will, we will do that. And if we do that, and do that well, then we should certainly start to see us, you know, trade better than what we have over the last couple of years, relative to our competitors.
Next question is from Cameron Blair. Have Kathmandu considered developing the underwear section? If developed to a strong quality, would or could these products elevate sales of other Kathmandu products?
Yeah. I'm not sure which brand you're referring to. I'm presuming Kathmandu. Look, we have both Kathmandu and Rip Curl have dabbled in this area more for underwear that can be worn in the outdoors, and then in the water with the Splash line with Kathmandu, and Rip Curl certainly has an offering for swimwear, but. Look, it's not something that we are planning to go into, underwear basics. There's plenty of other companies like Bonds and others that do that well. To be honest, we'll probably leave that space for them. But that said, we have dabbled in that space in the past, and it's probably not one that we think is a natural place for a surf or an outdoor brand.
But I appreciate the insight, and we'll give it some thought.
The next question is from T. Chong: Can you please give an update on your plan for expanding Kathmandu into the U.S. market?
Yeah, look, in terms of the U.S., the U.S. is one of the most competitive outdoor markets in the world. So certainly from that point of view, when we just do decide to go into the U.S., we need to make sure that we execute well. Certainly, the U.S. has been the place where a lot of brands from our part of the world, whether it be Australia or New Zealand, have tried and failed. So we're very conscious of that. Look, we have no immediate plans to push hard into the USA with the Kathmandu brands. We're very happy being in a test-and-learn phase with Kathmandu in Western Europe and in Canada. To be honest, given our broader fundamental challenges with the Kathmandu brands in Australia and New Zealand, that's our focus at the moment.
We need to execute better there before we worry about pushing too hard, internationally. So at this stage, we're just remaining in a test and learn in Western Europe and Canada. We're happy with that. We'll consider the USA down the track, but at this point in time, it's not something that's on our radar, to be honest. It has been reported previously that we had a plan and we paused it, but to be honest, it was never a very expanded plan. So, it's just not on, not on our radar at this point in time. We'll consider it on an annual basis, and when the time's right, we'll certainly look to launch, and when we do, we'll certainly let the market know.
The next question is from Oisin Rymer: Will the third party strategy extend beyond footwear, bottles, and umbrellas? Is there a silver bullet in third-party brands that could drive group sales? For example, noticing HOKA is now in stores.
Yeah, thanks, Oisin. Look, you know, I'm a big believer that, as I said earlier, that, you know, it's very hard for brands to be everything to everybody. And so I do feel that both for Rip Curl and Kathmandu, there is a place for third-party brands, you know, whether they be hard goods, whether they be specialist goods that we can't do ourselves, you know. Very hard for our brands to go head-to-head with specialist footwear brands, so that's something we're aware of. HOKA and ON have done a great job for us. They're performing really well, as is Salomon.
And certainly, we expect that we'll continue to ramp up Oboz, our own brand, in our stores, and that's probably the one that we really need to ramp up a lot more, and you'll see that come to life, significantly over the next couple of months as we roll out some shop-in-shops, for Oboz within Kathmandu. So look, we think third party has got a great part to play. Is there a silver bullet? Well, you know, there, there are certainly brands that come and go in surf and outdoor that, are providing specialist product that we think that, can play a real key role in our stores. And to be honest, our teams, particularly on the Kathmandu side, need to be better at looking out for those brands, and that's what they'll be looking to do.
We've put a new buying team in place, a commercial buying team, to really be scouting those brands. This is the first drops that they're putting in, and I'm excited about what they can deliver in the future.
That's all the questions for today. Thank you very much for participating. We'll call it a day there. Thank you very much. Cheers.