Sa Sa's 1H15 earnings feared to tumble by over 24%

No thanks to intensified competition.

Sa Sa has reported weak operational data for 1Q FY16 (April-June).

According to a research note from Barclays, while weak sales were only slightly behind its expectations, the bigger negative surprise came from gross margins being down 1.3ppt y/y.

It contracted 1.3ppt due to intensified competition, according to the company.

Here's more from Barclays:

Weak 1Q FY16 sales data: Sa Sa's core Hong Kong/Macau turnover was -8.8% y/y and SSS growth was -6.8% y/y. The data showed the widening of declines compared with the data (1 April -21 June, HK/Macau sales -7.6% y/y, SSSG -5.8% y/y) disclosed at its FY15 annual results briefing on 26 June 2015.

The average sales per transaction for 1Q were down by 9.6% y/y and the number of transactions only saw marginal growth of +0.9% y/y. For Mainland Chinese customers, average sales per transactions dropped 15.3% y/y and the number of transactions rose 3.7%.

2Q deteriorating, lowering estimates: Sa Sa said that the market environment is continuing to deteriorate in 2Q. We lower our FY16/17/18E earnings estimates by 9% and our price target by 9% (remains based on 14x CY16 P/E).

For FY16, we believe 1H could see earnings fall by over 24% y/y before 4% growth in 2H due to last year's low base given the protests. Longer term, on a low base and easing rentals, we believe Sa Sa could potentially see a 5% CAGR for FY16-18E. Sa Sa's e-commerce efforts in China are in the making, but we are yet to see how management executes on this strategy.

Prefer global retailers: We continue to prefer global retailers L'Occitane and Samsonite for their more diversified exposure and management execution. For Hong Kong retailers, we continue to expect a challenging growth environment as Mainland Chinese visitors diverge away from Hong Kong due to 1) demand for other travel experiences and 2) weaker currencies elsewhere making shopping outside Hong Kong more attractive.