Misses after misses
Parkson’s 4Q13-to-date same-store sales growth (SSSG) was still negative. 3Q13 net profit missed again after a series of misses since 2011. We believe that Parkson will continue to underperform its peers and the HSI until it can deliver a positive SSSG trend.
3Q13 net profit missed our forecast by 75%, based on the historical range, after the previous 34% 2Q13 earnings miss. As a result, we cut our FY13-15 EPS by 7-16%, causing our target price to fall to HK$2.00 – still based on 8x CY14 P/E, in line with its peers Maoye and NWDS. Under our new rating structure, our call changes to Reduce from Underperform The lack of a CFO replacement plan is a de-rating catalyst.
While the miss itself was not a surprise, the extent of it was. Parkson currently operates 57 stores and 20 of them are loss-making. Margins dropped 50-70bp across the board in 3Q13, due to loss-making new stores, promotions and the temporary closure of its Shanghai flagship store. We believe that a positive SSSG trend will only emerge in 2015. A sales turnaround could be more difficult for Parkson, compared to GE or Intime, because of its ageing store portfolio and the lack of large stores in the pipeline.
3Q13 results recap
3Q13 GSP was flat at Rmb3.8bn vs. our mid-single-digit growth estimate, unfavourable when compared to Intime’s 4%. Revenue remained flat yoy at Rmb1.02bn but operating income plunged 66.2% on higher staff and rental costs. 3Q13 net profit fell 78% yoy to Rmb35m (Rmb154m in 2Q13) and only accounted for 6% of our original FY13 forecast vs. 16-17% historically. 3Q13 SSSG deteriorated further to -4.2%.
Parkson closed one store and opened five new stores in 3Q13. The company is planning to close two more stores in 2014. The opening of the Nanchang and Zhongshan stores will be delayed to 1Q14, which means no new openings in 4Q13 and six in the pipeline for 2014.
Still in the tunnel; Sell
Parkson trades at ~25% discount to Intime’s 2014 P/E. We do not advocate buying Parkson on valuation grounds as we think that its turnaround may not happen before 2015. Switch to Intime (Add, TP: HK$9.00).