12 month Price Target: HK$9.26
Rumours stop at a wiseman
• Next Magazine accuses Sa Sa of deliberately selling expired products in its stores.
• Management’s swift actions to clarify the incident should help preserving its brand image and transparency to a great extent.
• Trading at 17.1x 12-mth rolling PE and 25% discount to our TP of HK$9.26, we see good opportunity to accumulate the counter. Reiterate BUY
False accusation by Next Magazine. Latest issue of Next Magazine (No. 1247) featured Sa Sa in its cover, with full content allegating that the company sells expired products and gives away expired merchandises as testers or gift items to customers. The magazine also describes how sales staff of Sa Sa wipe away product expiry dates and re-package expired products, and implies all such actions to be a result of aggressive sales targets that are required to be achieved by each Sa Sa store. By doing so, store managers and their staff also strive to maximize their own sales commission and bonuses.
Highlights of company clarification. Sa Sa management held a short conference call and published a formal announcement to clarify accusations of Next Magazine. Key highlights as follows.
1) Sa Sa has stated in its announcement that the false accusations by Next Magazine has been illogical and absurd.
2) Management says in the call that the company has already taken legal action against Next Magazine’s allegations. As such, it regrets not being able to share further details about internal investigation at this stage.
3) The company reiterates that Sa Sa follows strict internal policies to remove all beauty products with less than half-year usage period and health products with less than 1-month usage period from Sa Sa stores. These merchandises will be channeled to its outlet stores, namely Sa Sa Mart, in which significant mark downs of generally 50-80% will be offered to attract different segments of customers. The staff will clearly state the product usage period to customers if expiration dates are less than 6 months away.
4) Sa Sa confirms that no expired products will be allowed to dispatch to customers as testers or gift items. Overall, the company does not allow any behaviour of its staff that is detrimental to customers' rights.
5) The company also reiterates that it offers a 30-day product refund guarantee policy, thus there is no point for the company to deliberately sell expired products in its Sa Sa stores.
6) Currently, Sa Sa has 5 Sa Sa Mart outlets for the purpose of clearing inventory which have a usage period of less than six months. In the past, Sa Sa has always operated outlets with store area of about 600-800 sq.ft. each. These outlets have always played a part in assisting better inventory management, and have been included in its Hong Kong/Macau sales network of over 100 stores. The company does not use third parties for clearing inventory.
7) In terms of inventory policies, should the usage period of regular-priced products fall below 6 months, Sa Sa requires these products to be taken to its outlet stores with provisions made. The sales from these products are immaterial so far.
8) In fact, the 6-month usage period requirement set by Sa Sa is more stringent than most standards in the market. In general, cosmetics products are still effective for c.6 months even if consumers open the product packaging on the stated expiry date. This is a normal understanding given management’s experience in the cosmetics industry.
9) The magazine coverage regarding Sa Sa’s re-packaging of products is exaggerated and misleading. The use of clear plastic bags to wrap its products is mainly for display convenience and protecting them from damages during shipment. Normally, the production date and usage period is clearly stated on the product itself rather than on its original packaging. Therefore, the production date and usage period cannot be destroyed, nor can it be removed or changed by Sa Sa.
10) In terms of product breakdown, Sa Sa’s own labels account for 20% of sales, and reach 44% including exclusive items. Such percentages are quite similar for its outlet stores Sa Sa Mart.
Latest performance updates. Management confirms that Sa Sa’s sales trend for Jan 2014 has been decent and satisfactory. Besides, its sales momentum for the day right after issuance of the Next Magazine report has remained normal. So far, the company's hotline has not received any complaints with respect to allegations of the magazine.
Buying opportunity. All in, we view management's quick reaction to address accusations of Next Magazine should help safeguarding its brand image, transparency, corporate and management quality to a good extent. By assuming limited impacts on sales performance for Sa Sa, as seen in its sales performance subsequent to the magazine report release, we believe Sa Sa has been oversold. Following c.20% YTD share price correction to reach a 1-year low, while trading at 17.1x 12-month rolling PE, 3.5% yield, the counter offers good buying opportunities. We maintain our target price of HK$9.26 and reiterate BUY.
Publish date: 29/01/14