EBITDA up 20% but operating cash flow collapsed 44% on working capital shift

What changed

Group revenue rose 7.3% to NZ$505.4m, a meaningful acceleration from the 0.5% growth reported in HY25. Reported EBITDA improved 20.0% to NZ$63.3m, and PBT loss narrowed 43.5% to NZ$14.8m — the cleaner operating read given that tax benefits reduced the headline NPAT loss in both periods (NZ$1.7m benefit in HY26 versus NZ$5.5m in HY25).

Three segment dynamics drove the improvement:

• Rip Curl (58% of revenue) remained the only clearly profitable division at NZ$11.9m EBIT, though down from NZ$15.3m in HY25 on a margin compression
• Kathmandu swung materially, with its EBIT loss narrowing from NZ$18.7m to NZ$4.2m on 12.3% revenue growth
• Oboz remained loss-making but improved from NZ$3.0m EBIT loss to NZ$1.3m

Against those gains, gross margin fell 170bps to 56.8%, and corporate overhead worsened from NZ$6.3m to NZ$8.1m.

The significant negative was operating cash flow, which collapsed 44% to NZ$25.6m from NZ$45.8m, even as capex fell to NZ$8.6m from NZ$14.1m. Pre-lease free cash flow halved to NZ$17.0m. Net debt rose to approximately NZ$94.0m, lifting gross borrowings to NZ$121.4m. KMD subsequently announced a NZ$65.3m fully underwritten equity raising and refinancing of its debt facilities.

What matters

Cash conversion deterioration is the most important signal in this result. EBITDA-to-operating-cash-flow conversion fell from 87% in HY25 to 40% in HY26. The company reported net working capital of NZ$179.2m — improved NZ$13.4m year on year — and inventory days fell to roughly 229 days from 283 days. But that working capital improvement, which in HY25 generated significant operating cash inflow, has now largely played out. With inventory levels normalising, there is less working capital release available to flatter future cash generation.

The equity raising and refinancing signals balance-sheet stress that the earnings recovery alone was not resolving. Total equity has declined to NZ$689.3m from NZ$778.7m, and the FY25 full-year result of NZ$93.6m net loss has eroded the buffer. The raising addresses near-term headroom, but the capital structure still requires a sustained earnings turn to stabilise.

The Kathmandu turnaround is the most strategically meaningful operational development, with its EBIT loss narrowing by NZ$14.5m on revenue growth of NZ$19.2m. This is the largest single driver of the group's HY26 improvement and the metric most worth tracking against the Next Level transformation narrative.

Expectations

No explicit FY26 financial guidance or earnings target was provided in the release materials. The framing — "Next Level transformation delivers strong H1" — is qualitative.

The FY25 second-half shape provides an important caution: implied H2 FY25 EBITDA was negative NZ$2.2m, against a positive NZ$52.7m in H1 FY25. That means the full EBITDA cycle is heavily first-half-weighted in this business. If that seasonal skew repeats, the NZ$63.3m statutory EBITDA delivered in HY26 may not translate into a meaningful full-year improvement unless H2 avoids a similar deterioration. The implied H2 FY25 NPAT loss of NZ$72.0m also demonstrates how severely the second half can overwhelm a reasonable first half.

H2 FY26 will cover the southern-hemisphere autumn and winter period for Kathmandu and the shoulder season for Rip Curl's surf business, both structurally lower-revenue periods. The HY26 revenue run-rate of approximately NZ$1.0bn annualised is only 2.2% above FY25 total revenue, suggesting there is limited top-line buffer if conditions soften.

Quality of result

The earnings improvement is partially durable and partially timing-driven:

• The Kathmandu EBIT recovery looks operationally grounded — cost reduction and higher sales density rather than clearance volumes — but gross margin compression (−170bps) across the group suggests promotional pressure has not fully abated
• Statutory EBITDA of NZ$63.3m sits well above the company's own disclosed underlying EBITDA of NZ$11.5m (+197% on the prior period). That NZ$51.8m gap implies significant non-cash or non-recurring adjustments embedded in the statutory figure, but no reconciliation bridge was provided in the supplied materials, which materially limits comparability
• Working capital improvement contributed to prior-year cash flow in a way that is unlikely to repeat at the same scale; the inventory normalisation trend described in HY25 commentary appears largely complete at NZ$274.1m versus NZ$303.7m
• Capex reduction (from NZ$14.1m to NZ$8.6m) flattered free cash flow but represents lower investment, not operational leverage
• Rip Curl's EBIT decline despite revenue growth is a modest concern — the dominant profitable segment is showing margin pressure even as group results improved

Unresolved

• The NZ$51.8m gap between statutory EBITDA (NZ$63.3m) and underlying EBITDA (NZ$11.5m) is not reconciled in the supplied materials; without a bridge, it is not possible to assess what is being stripped out or whether those adjustments are genuinely non-recurring
• The equity raising structure, pricing, and its effect on dilution and per-share metrics is not quantified in the available excerpts
• Rip Curl's segment EBIT declined despite revenue growth — the underlying margin dynamics (FX, geographic mix, wholesale versus direct-to-consumer split) are not transparent from this filing
• Whether H2 FY26 will avoid the extreme seasonal deterioration seen in H2 FY25 is the central value question, and the release provides no forward earnings guidance to anchor that assessment
• The FX exposure is described as material, but no hedge book sensitivity or currency split is disclosed

This briefing cannot assess whether the NZ$65.3m equity raising will be sufficient to fund the transformation plan through to cash-flow breakeven without further dilution.

Key metrics

Segment breakdown

Analytical metrics

---

This analysis was generated using Annolyse, an AI-powered tool that extracts and analyses NZX/ASX company announcements. The underlying data is extracted from official company filings and verified against source documents. This is general information only and does not constitute financial advice. The analysis may contain errors. Always read the original company filings and consult a licensed financial adviser before making investment decisions.