KMD Brands Sales Rise as Heavy Discounting Squeezes Margins Ahead of Cost-Cut Target

At its annual meeting, KMD Brands, the company that owns Kathmandu and Rip Curl, told shareholders it is on track to meet its cost-cutting goal for this year. The message came with a qualification: sales are up, but the money earned on each sale is down.

The company reported that overall sales rose in the first three months of its financial year. Across the business, though, gross margins were squeezed. The reason, as the company described it, was that it sold more product at a discount in order to clear older stock. Higher sales driven partly by markdowns bring in revenue, but they leave less of each dollar after the cost of the goods themselves.

KMD Brands is a loss-making business, and its management is in the middle of a turnaround. The company is closing stores and slimming down its operations as part of a plan to take $25 million out of its costs this year. At the meeting, management said it remains on track to reach that figure.

There is also pressure from outside the boardroom. Some large investors have been calling for the company to sell off its underperforming assets. Management is trying to fix the business as it stands, and in doing so to stave off those calls. How convincingly the turnaround proceeds will bear on whether that pressure eases or grows.

The update leaves two things running in opposite directions. Sales growth in the first quarter is a better sign than a decline would have been, but the discounting behind part of it is eating into margins. Cost cuts are meant to improve the bottom line from the other side, by shrinking what it costs to run the business.

The reporting available so far does not break down the sales increase by brand or by region, and it does not say how much of the rise came from discounting versus underlying demand. Nor does it give the size of the margin decline. Those details would show how much of the improvement is durable.

What to watch next is whether the $25 million in savings, delivered through store closures and a leaner business, is enough to offset thinner margins and move KMD Brands toward profit. If it is not, the argument from large investors for selling assets is likely to gain strength.