Seeking growth: The Body Shop’s outlet is seen in the Klang Valley in this file picture. InNature might reopen these outlets in airports in the country after having closed six during the Covid-19 pandemic.
PETALING JAYA: Innature Bhd
’s sales momentum could face headwinds in the second half of the year, in light of sluggish consumer spending and intensified competition.
CGS-CIMB Research, in a report, noted that the company’s sales momentum likely improved quarter-on-quarter in the second quarter of 2022, mainly driven by the lifting of movement restrictions and “revenge spending” activity.
“However, we believe the sales volume could be weaker than expected due to a slower recovery in footfall at its stores in non-prime locations in Malaysia.
“While we have seen increased tourist arrivals post border reopening, we also gather that high-spending foreign tourists, especially from China and the Middle East, remain scarce at this juncture.”
In lieu of weaker sales expected in the second half of 2022 due to sluggish consumer spending ability, intensified competition and demand normalisation, CGS-CIMB Research is lowering its revenue forecast for InNature for 2022 to 2024 by between 1.4% and 4.1%.
InNature retails and distributes The Body Shop brand of cosmetics and personal care products.
CGS-CIMB Research noted that InNature raised average selling prices of its products as of end-June 2022 by around 7% to offset rising input costs via new product launches and packaging.
“Nonetheless, we are concerned that price hikes could lead to lower demand, given the weaker consumer purchasing power in the second half of 2022.
“InNature has been raising selling prices since the fourth quarter of 2021. Hence, we think this could also lead to margin compression as it may be unable to fully pass on the costs to protect sales volume.”
As of June 2022, InNature had 118 stores: 76 in Malaysia; 40 in Vietnam and two in Cambodia, said CGS-CIMB Research.
Going forward, the research house said InNature aimed to continue rolling out more “workshop” concept stores, which typically have a faster breakeven period of within a year.
“These will have better customer in-store experience. The company also plans to upgrade existing outlets (in prime locations with higher footfall) to compete with peers in terms of store attractiveness.
“It also intends to break-even its Vietnam outlet within 12 to 15 months. InNature may also reopen its The Body Shop outlets in airports in Malaysia after closing six during the Covid-19 pandemic.”
Last month, InNature announced that it was disposing of its entire shareholding in wholly-owned subsidiary Ola Beleza Sdn Bhd to Natura Cosmetics Asia Pacific Pte Ltd (Natura AP) for RM2.04mil.
In a filing with Bursa Malaysia, InNature said it had entered into a share purchase agreement with Natura AP for the disposal.
Natura AP is a member of Natura & Co, a multinational cosmetics and personal care corporation carrying the brands of Natura, The Body Shop, Aesop and Avon.
Commenting on the disposal, InNature group managing director Datin Mina Cheah-Foong said the disposal was a mutual decision, having considered the evolving operating environment post-pandemic.
“Following the completion of the disposal, Natura & Co will take over the Natura business in Malaysia, whereas InNature will focus on growing our core business in all our markets,” she said in a statement. Ola Beleza is in the business of distribution and commercialisation of certain Natura products in Malaysia.
CGS-CIMB Research said the Natura brand had been underperforming over the past couple of years.
“This was due to difficulties in recruiting and scaling its beauty consultants (as its direct-selling members) during the pandemic, as a result of lockdown measures and minimal face-to-face marketing after just starting operations in 2019.”
CGS-CIMB Research said it was positive on the disposal. “This could improve future profitability going forward, as the Natura segment has been a drag on the group’s profitability, given its loss-making position.
“We estimate that this segment may continue to be unprofitable from 2022 to 2024, given the longer-than-expected gestation period and assuming there is no financial assistance of circa RM250,000 per month from Natura AP until the completion of the disposal.”
The research house also noted that there would be minimal inventory written off related to the Natura segment in 2022, as the majority of its expired products (amounting to around RM500,000) had been written off in 2021.
“This disposal could allow InNature to focus its efforts on growing its core business segment (The Body Shop) going forward, in our view. Assuming the deal is completed in the fourth quarter of 2022, our financial years 2023 and 2024 earnings forecasts could be lifted by 6.1% and 6.4%,” said CGS-CIMB Research.
