Parkson's net profit worse-than-expected

Check what to blame on almost a quarter decline.

Parkson reported much weaker-than-expected FY12 results amid a tough operating environment, said MayBank KimEng.

IIts net profit fell by 24.2% YoY to CNY851m against consensus of CNY924m.

Key disappointments are: i) continuing operating deleveraging as its SSSG of 0.4% came below its earlier revised guidance of 2- 3%; ii) losses arising from new store openings; iii) new stores’ dilution impact on its concessionaire rate and hence on its merchandised margin; and iv) delayed openings of three stores. Earlier lease renewal for several of its stores also added pressure to its OPEX. Nonetheless, its merchandise margin squeeze eased in 2H12 as the company adopted less aggressive promotional discounts. One-off events including store closures and remodelling work at its Beijing and Shanghai flagship stores also affected earnings.

Looking into FY13F, management guided: i) its FY13F SSSG will be in mid-single digits, while gross sales proceeds will see mid-teens growth YoY; ii) merchandise margins will be flat or decline marginally YoY; iii) OPEX ratios will increase slightly; iv) it will raise the percentage of its self-owned properties to 30%(current: 15%) in the near
future; v) to open 8 new stores or add its GFA by 15% YoY.

In view of its neartermand medium-term operation outlook, management believe competition will continue to intensify as emergence of other retail formats will continue to cause disruption to the traditional department store sector, while cost of investment and operating cost will continue to increase, thus the sector’s ROI and ROE should be
on a downward trend.

Therefore, management target to i) open lesser but bigger new stores and allocate additional space for amenities services to drive traffic and increase rental income; iii) to be more aggressive in acquiring existing and new locations; iii) to invest into exclusive brands for differentiation.

Here are implications according to MayBank KimEng:

Overall, we believe Parkson's de-rating(currently trading at lowteens FY13PER vs historical average forward multiple of mid-teens) may sustain ahead, in view of its uninspiring earnings prospects, relatively unfavourable store profile and rising competition from shopping malls and e-commerce.

We believe asset-heavy players such as Golden Eagle, Intime and Springland to outperform its peers within the sector.