Share Price HK$2.75
Target Price HK$1.70
3Q13: Still Struggling
Parkson’s 3Q13 results again fell short of expectations, with net profit falling 77% yoy to just Rmb35m. Same-store sales fell 4.2% yoy as footfall deteriorated further. Ongoing renovations have taken a toll on footfall, but more worrying is management’s strategy to open more stores when 20 of its 57 stores are in the red. We cut 2013-15 EPS estimates by 32-34%. Maintain SELL with a lower target price of HK$1.70.
• Parkson reported 3Q13 net profit of Rmb34m, falling 77% yoy (1H13: - 38%), a steeper-than-expected decline. Same-store sales (SSS) fell 4.2% yoy in 3Q13, the steepest decline since it was listed. Also, due to a difficult operating environment, the impact of the government’s anti-graft campaign has led to a decline in prepaid and footfall disruption from subway construction in Naning, Wuxi, Hefei and Nancheng. Consequently, 9M13 net profit came in at Rmb374m, representing only 55% and 54% of our and consensus full-year estimates respectively.
• Staff costs continued to increase from 12.6% of sales in 1H13 to 13.4% in 3Q13 while rental expenses jumped from 20.2% to 23% of sales as the company opened five stores and acquired four managed stores in 9M13, taking the total to 57 stores across 37 cities.
• Of the 57 stores in operation, 20 are unprofitable and they racked up a total of Rmb200m losses in 9M13. The company closed its store in Shijiazhuang in August and is planning to shut another two over the next 12 months. That said, it is also opening six more stores in 2014 despite the poor performance of its existing stores.
• No near-term uplift in earnings. Parkson is pushing ahead with its expansion programme albeit at a slower rate even as 35% of its stores are loss-making. Of the 10 stores that the company has opened in the last two years, only the one in Taiyuan has turned profitable. We are concerned about the continued operating de-leverage over the next two years. EBIT margin based on gross sales proceeds already fell from 23.2% in 1Q13 to 13.9% in 2Q13 and to just 6.2% in 3Q13. We do not expect this trend to reverse any time soon, given that we can reasonably expect another Rmb200m-250m new-store losses going into 2014, while the ramp-up of the newly-renovated Shanghai flagship store is likely to take another six months to recover to its pre-renovation level. Since its re-opening in October, sales have only recovered to 70% of prerenovation level as competition from nearby new shopping malls has likely diluted its store traffic as well as due to competition from ecommerce.
• More store closures in 2014 but plan unclear for non-performing stores. Management is planning to close another two stores over the next 12 months and is continually reviewing the non-performing stores to assess whether more store closures are required. The company is open to even closing the new stores. That said, because of the poor store performance, Parkson is facing pressure from some landlords who may be forcing them out of their premises. This will result in more store closures.
• Given the rapid deterioration in business and a lack of a near-term strategy to avert further losses, we cut our SSS growth assumptions but raise our cost assumptions to reflect the impact of continued store expansion and slow pace in shutting non-performing stores. As a result, our EPS estimates are reduced by 33.8%, 32% and 33.7% for 2013-15 respectively.
• Key risks to our forecasts are a faster recovery in SSS growth, a faster turnaround of new stores and a fall in rentals.
• Maintain SELL. Earnings visibility remains low as management is unclear as to how it can turn around non-performing stores. We are also concerned that the company’s strategy to open stores in the current environment would continue to be a drag on earnings. Parkson’s lack of market dominance and clear positioning also put it at a disadvantage to peers. We continue to peg our target price at 8x 2014F PE but because of our earnings cut, our target price is slashed from HK$2.47 to HK$1.70. We expect the market to downgrade earnings on the back of the disappointing results, pushing share price lower.
Publish date: 22/11/13