Given the
weakening of Ringgit, Padini is taking a passive approach in its stores
expansion plan for FY17 and FY18 as compared to FY16 when the group
opened five new Padini Concept stores and nine new Brands Outlet stores
in Malaysia.
Management guided that for FY17, the group
will open 3 new stores in Malaysia, i.e.: Vincci and Padini Concept
stores in MyTown Mall as well as a Padini Concept Store in Melawati Mall
in Kuala Lumpur, and these new stores would make full-year
contributions from FY18 onwards.
For FY18, Padini is expected to open one
Brands Outlet store in Genting Premium Outlet and currently in
negotiation to open one store in Aeon Kempas, which is expected to open
by end-2017.
Other than that, given Padini’s
price sensitive target market, management guided that the group will
continue adopting its competitive pricing strategy for FY17 to stimulate
sales. Therefore, observers can expect no increase in selling price and
the topline revenue growth would all be driven by volume and
contribution from new stores.
Furthermore, in order to keep up with the
fashion trend, new clothing lines would be released almost every week.
Note that, end of 2016 Padini launched an active wear collection to
cater to the active and health cautious market. Streets are positive as
this would enable the company to fend off competition from rivals like
Cotton On and H&M.
Management guided that the gross profit
margin is expected to be below 43% level (vs. 41.7% for FY16) for FY17.
This is a tad lower than the average gross margin of 45.2% over the past
five years.
The increase in cost can be attributed to
unfavourable ringgit movement in recent years which has inflated the
cost of sales. Currently (April 2017), it is estimated that 90% of the
group’s cost of sales are transacted in Chinese Yuan.
As such, management explained that the
group is always on the look-out for suppliers from other countries to
diversify the risk. Padini has tested production from Bangladesh, which
is believed to be cheaper than China. However, due to lack in support
industry i.e. infrastructure and logistics, the turnaround time from
Bangladesh is slower. Therefore, Padini is currently still heavily
reliant on production from China.
To mitigate the cost pressure, the company
would continue closing down underperformed consignment stores and open
more Padini Concept and Brands Outlet stores. In 2016, the company had
closed down 79 consignment stores in Malaysia.
In terms of e-commerce channel, Padini
launched the group’s first e-commerce platform in 2015. Currently (April
2017), the turnover from the platform accounts for less than 1% of the
group’s total revenue as sales are only limited to within Malaysia.
However, sales volume did show exponential growth i.e. more than 1000%
YoY for FY16.
Observers view the online ecommerce
platform as a requirement to prepare Padini to compete effectively
within the retail market in the future. Although the Malaysia ecommerce
market is a relatively young market as compared to the rest of the
world, the future growth potential is enormous.
Padini is also exploring possible ventures
in other South East Asian countries through franchising of Vincci brand
stores. Other than that, after closing 12 stores in Saudi Arabia in
FY16, Padini is still interested in continuing the business in the
country subject to finding a suitable franchisee. This is to ensure the
best service quality to customers and to enhance brand awareness.
Potential downside risks to our call are
i) weakening of Ringgit to Chinese Yuan, ii) unexpected opening of new
stores and iii) recovery in consumer sentiment.
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