The management firm, Morningstar, says it has dropped the outdoor clothing retailer Kathmandu due to the brand being weakened by constant slashing of prices.
It says it will cease coverage of Kathmandu in early January next year, as organic revenue and earnings growth has been highly volatile.
“Sales are highly seasonal, lumpy and sensitive to weather, making inventory management difficult,” it said.
“In our view, Kathmandu's brand is "stuck-in-the-middle" between high-end brands, such as The North Face and Columbia, and unbranded products. However, the prevalence of discounting means that brand perception is moving in the wrong direction and confusing customers, who may lose trust in the brand.”
Morningstar says this is unlikely to change in the medium to long term, so it will focus on businesses with higher-quality, sustainable earnings that are more suited to its investors.
The move follows concerns raised by the New Zealand Shareholders Association (NZSA) this week about new CEO Xavier Simonet’s incentives package.
The NZSA said the Kathmandu board had set “soft targets” for Simonet to meet in order to get his pay package.
According to the board, Simonet has to have earnings per share grow by 10 percent a year for three years to receive 50 percent of his long-term incentives. He would receive all of his long-term incentives if he grew earnings per share by 15 percent.
“That equates to a profit in three years time of $27 million and $30.9 million respectively. Even the higher figure is only just ahead of the current forecast and he has three years to get there! In fact, if the forecasts are correct, he could actually have a profit decrease (from forecast) and still get 50 percent or more of his LTI payment. In our view, this is NOT above average performance coming off the low base that the company was so keen to describe as atypical not so long ago,” NZSA chairman John Hawkins and associate director Alan Best said in a statement.
Other business commentators, such as Milford Asset Management executive Brian Gaynor in the NZ Herald, have said it’s “totally inappropriate” for the Kathmandu board to set a target of only 15 percent a year when Kathmandu has suffered such a large decline in its annual profits.
Kathmandu’s annual profit for the past financial year was $20.4 million, a decrease of $31.1 million (51.6 percent) from the year previous.
Hawkins and Best said the NZSA expects the Kathmandu board to implement a “real stretch” long-term initiative scheme that benefits all parties, including shareholders.
To do this, they said the base level for Simonet’s earnings a share should be set, as a minimum, to the profit of $30 million that’s already forecast for the 2016 year.
“The new CEO will be applauded only if he achieves outcomes ahead of what was already expected and signalled, not by merely matching them or even falling short,” they said.
Hawkins has been at pains to point out that he has no issue with Simonet. Instead, he says the issue lies with Kathmandu’s board and the way it’s set up the incentive scheme.
Simonet’s proposed AU$546,000 performance pay will be put to a shareholder vote at Kathmandu’s annual meeting in Christchurch tomorrow.
Gaynor said it would be a “huge surprise” if Briscoe’s Rod Duke, who owns 19.9 percent of Kathmandu, voted in favour of the proposal.