Optimistic view on the long-term sustainability of Padini’s business


PETALING JAYA: Padini Holdings Bhd’s operating environment is expected to remain challenging due to cautious consumer spending trend, expanded scope of the sales and service tax (SST) and higher operating costs, analysts say.

Kenanga Research said it walked away from Padini’s post-results briefing feeling mixed about its near-term prospects.

The research house said the homegrown fashion retailer expects to maintain its gross profit margin at 38% by not raising product prices amidst rising product costs.

“It hopes to achieve this by enhancing inventory management ahead of the upcoming Hari Raya festival via the optimisation of its inventory levels to three months (from four months), focusing on high-volume value-for-money products tailored to the local needs, optimising store and product offerings, as well as exploring alternative sourcing in China,” the research house said in a report yesterday.

However, Kenanga Research said it is projecting a gross profit margin of 37%.

The research house said this was having considered Padini’s targeted M40 customers would likely be impacted by the higher SST and impending subsidy rationalisation, coupled with the uptrend in its selling and distribution costs (increased by 22% year-on-year to RM185mil in the first half of financial year 2024) due to the persistent rise in staff expenses.

“The group currently has no plans to expand its portfolio of partnership names, having already secured several well-known brands such as Snoopy, Peanuts and Garfield, which have been performing reasonably well since their introduction to stores.

“Instead, Padini is considering expanding value-for-money offerings within its existing segments, particularly in activewear and innerwear, which have been well received,” the research house said.

Kenanga Research said given the prevailing subdued consumer sentiment, Padini did not set a specific target for new store openings in Malaysia for financial year 2024 (FY24).

The group’s total store count increased to 154 in the second quarter of FY24 (2Q24) from 147 in 1Q24.

“Instead, it now focuses on optimising underperforming stores that make up less than 10% of its 140 existing stores. Our forecasts assume a net addition of two stores each in FY24 to FY25,” the research house said.

Kenanga Research maintained an “underperform” call on Padini with a target price of RM3.20.

The research house said it remained cautious on Padini, given the sustained high inflation and the impending subsidy rationalisation, the group’s target customers in the M40 group that will be the hardest hit by the subsidy rationalisation, as well as the downward pressure on the company’s margins from rising input and operating costs and potentially heavy discounting to defend its market share.

On the other hand, MIDF Research said Padini might consider a price hike in the event of higher expenses. However, price adjustments will be a last resort as the group aims to balance sales volume and price.

The research house also noted that gross profit margins depend on the sales mix of products, ranging from loss-making to double-digit margins.

“In 2Q24, the group reported a same-store sales contraction of 5% in existing stores. This reflected cautious consumer spending amidst various inflationary pressures that eroded discretionary income.

“However, the opening of eight new stores, including two BrandsOutlet stores, three Padini Concept stores, and three freestanding stores, partially offset this decline,” the research house said.

MIDF Research maintained a “neutral” call on Padini with a target price of RM3.50 and it anticipates the demand for Padini’s products will remain resilient due to their relatively cheaper prices.

Meanwhile, TA Research which maintained a “buy” call on Padini with a target price of RM4.40 said it remains optimistic on the long-term sustainability of Padini’s business, adding that the stock is likely to remain a defensive one that could pay higher dividends due to its net cash position.

“Padini is planning to close five non-performing stores in FY24. Currently, less than 10% of the store is loss-making. We are slightly concerned about its top line expansion due to current weaker market sentiment.

“However, we think the upcoming sales clearance will reduce its inventory eventually.

“Padini is expected to introduce a fair bit of new and trendy products during Hari Raya to boost its sales performance. We believe gross profit margin will sustain at this level due to its favourable sales mix,” the research house said.

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