[Varyon]

As Celjabba notes, the Retreat doesn't use up any of the character's movement, although I think some tables use a houserule that it does (which in the above situation would mean the thug would basically have to stay on the defensive if he wants to Retreat - or he could try a kick, but that's got a good chance of resulting in him falling down).

If not using a houserule, options for the karateka would generally be kicking (without specifically training it up, that's at 12, which is still respectable) and Deceptive Attack. Kicking from 1 yard away would be like the above, forcing the thug on the defensive if he wants to be able to retreat. Taking a -2 to hit with a punch for a -1 to the enemy's defense is actually a bit better than not doing so - you go from 90.74% chance to hit and 37.5% chance for the foe to fail to defend (total ~34%) to a 74.07% chance to hit and a 50% chance for the foe to fail to defend (total ~37%) - but not to a great degree.

In theory, there's also the possibility of the karateka forcing the thug into a corner, making it impossible for him to Retreat. That would require the karateka to give up his own ability to Retreat, however, and use his Step each round to keep up with the retreating thug. Additionally, with three hexes to Retreat into each time, you'd need a fairly cluttered area (or be using Situational Awareness rules for the thug to know what's behind him) for the thug to not be able to just dance around the battlemap for a while.