Parkson Retail Group's net profit crashed 22.1% to RMB253m

Sales proceeds also dropped.

Parkson Retail Group Ltd. reported that net profit declined by 22.1% y/y to RMB253mn (EPS: RMB0.091).

According to a research note from Barclays, by quarters, Q2 net profit was up by 6.2% y/y to RMB104mn, improved from Q1's decline of 34.3% y/y, but only on a preferential tax rate exemption.

However, this advantage of a low tax rate will likely erode with stores operating loss. Meanwhile, sales proceeds declined by 4.5% y/y to RMB8,575mn in 1H, with 2Q higher decrease of 8.1% y/y (on c.10% SSS decline) from 1Q's 1.2% y/y decrease (on 8% SSS decline).

Notably, excluding sales of gold and jewellery, SSS decline actually narrowed from 7.3% in 1Q to 5.5% in 2Q on high base effect.

There are no signs of a sales uptick as management mentioned July-to-date SSS were still in negative territory.

They also guided for four new stores to be opened in 2H, which would impede margin recovery, in Barclays’ view.

There are no major near-term catalysts, so Barclays maintains its UW rating. It has also fine-tuned its 2014E-2016E earnings estimates, which results in its new PT of HK$2.20.

Here’s more from Barclays:

Uncertain margin outlook: While the company closed down two underperforming stores in Jinan and Changzhou in 1H, which we viewed as the right strategy to avoid further loss, it is opening four more stores in 2H14 in Nanchang, Zhengzhou, Chongqing and Haerbin, in addition to the one store (in Zhongshan) opened in 1H.

Although management expects margin dilutions from these new stores to be minimal as these cities are where company is currently present, we think downside margins risks are likely.

Management guidance: Management guided for 2H performance to improve on easy comps (as 2H13 earnings were down by 91% y/y), new store losses should narrow in 2014 from RMB191mn in 2013 (which remains an unknown, in our view) and the company is actively looking to cooperate with brands after it launched Mango stores in 1H, which will hopefully increase traffic (which might require intensive investment – execution remains key).

However, there were still 17 loss-making stores as of 1H14 (1H13: 18), some stores' performance are still disrupted: Beijing Metro City store currently faces a lawsuit; and July-to-date SSS was still declining.

Valuation and risks: Our PT of HK$2.20 is based on an average of 13x 2014E P/E. in line with HK / China department stores trading multiple.

Upside risks include better-than-expected SSS and new store performance, stronger-than-expected flagship store performance after renovation, as well as more effective cost control.