AFTER two long years of intermittent lockdowns due to the Covid-19 pandemic, the retail sector appears to be bustling with life again. Weekend trips to the malls are no longer an easy endeavour, especially at the popular ones, with crowds thronging them.
Such anecdotal evidence suggests that times are now good for the retail sector compared with the slump in 2020 and 2021. Indeed, the retail sector is said to be one of the recovery plays as Malaysia transitions to the endemic phase of the coronavirus. However, one has to wonder whether the retail sector will achieve the expected recovery, given the concerning issues of rising prices, labour shortage and weaker ringgit. Coupled with fears over the impact of Russia-Ukraine geopolitics on the economy, it stands to reason that many are questioning whether the momentum in retail is sustainable going forward.
In some countries, the retail sector is already starting to feel the strain of price pressures.
In the US, the first quarter earnings of retail giants Walmart Inc and Target Inc missed expectations. Walmart’s earnings per share of US$1.30 fell short of the projected US$1.48, as did Target’s US$2.19 versus an anticipated US$3.07.
The retail giants attributed the drag in earnings mainly to rising cost pressures, the result of supply chain disruptions and an increase in crude oil prices. Walmart’s share price has shed 16% since the company announced its 1Q2022 earnings and Target 27%.
Their disappointing earnings have rattled sentiment in the US markets and added to concerns that rising prices are hurting the purchasing power of consumers. US April inflation growth of 8.3% further underscored those concerns as it was close to a 40-year high.
The earnings results of the other major US retailers will provide further signs of whether consumers are truly tightening their purse strings as inflation bites.
In Malaysia, April’s inflation rate of 2.3% is much smaller than that of the US, in large part owing to price controls on essential goods and fuel subsidies put in place to keep prices in check. Even so, prices have continued to rise significantly.
AEON Co (M) Bhd, which operates supermarkets and department stores in Malaysia, recently acknowledged that product prices at its outlets have increased between 3% and 5%.
Can consumers continue to spend as usual with the growing threat of price increases or will they spend more prudently, which could pause the recovery in the retail sector?
Analysts believe that in the near term, consumer spending will continue to hold up.
“We think consumer spending will remain high due to an increase in the minimum wage, coupled with the withdrawals from the Employees Provident Fund (EPF). Consumers have also been going out more since the lockdowns were lifted and this has helped to increase the footfall at malls. Lastly, we think spending will remain high in the near term on account of the festive seasons,” says Kenanga Research analyst Tan Jia Hui.
Profitability-wise, retail companies should see better revenue this year with the local economy reopening and the arrival of tourists, says TA Investment chief investment officer Choo Swee Kee.
In its March report, the Retail Group Malaysia (RGM) revised upwards its projection of the country’s retail sales growth to 6.3% from its November 2021 forecast of 6%. Compared with 2020 and 2021, when retail sales contracted 16.3% and 2.3% respectively, things are looking better for the industry.
While the sector is no longer in a trough, Choo stresses that the strength of the recovery depends on the health of the economy. “Customers are coming back to shop. Retailers have to be innovative to maintain their margins and still grow their sales. The cost and price of new orders are expected to be higher than [for] old stock.”
MIDF Amanah Investment Bank Bhd head of research Imran Yusof takes the view that the recovery could be more muted than initially expected with retail stocks facing difficulties because of inflation, which affects costs.
“This will put pressure on margins and hence, impact retailers’ earnings. However, we expect the recovery in demand to moderate the impact of these issues,” he says.
But how long will these issues last?
“With Malaysia’s inflation outlook expected to be manageable, the issue will be more from the external side, such as the timing of the easing of the supply chain disruptions. It is very difficult to forecast for now as it depends on a myriad of factors. However, we do expect these issues to ease towards the end of the year,” says Imran.
As costs continue to rise, it remains to be seen whether retailers will be able to successfully pass these on to consumers, and the degree to which they can do so without losing their price-sensitive customers.
However, it will take retailers several quarters to fully pass on the escalating costs that are the result of a weak ringgit and rising commodity prices, says a head of research.
Retailers of non-discretionary goods will be more insulated against the uncertainties compared with those selling discretionary goods, say analysts, even though costs will remain an issue for retailers. Interestingly, Choo points out that luxury goods retailers could be even more resilient than those who sell discretionary goods, as their clientele is usually not affected by cost increases.
With the uncertainties surrounding earnings going forward, analysts believe that investors may already be pricing in a weaker recovery for some retailers.
“It could be the case where investors are pricing in these factors. However, we opine that there is a possibility of overpricing these factors. It will really depend on how long these factors persist,” says Imran.
Kenanga’s Tan, on the other hand, believes that investors have yet to price in these uncertainties and it will likely be reflected in the following quarterly earnings announcements.
Many analysts believe that the effects of “revenge spending” and the spending momentum from EPF withdrawals are starting to wane following the festive season, implying that consumer spending is expected to moderate going forward. All eyes will be on the retail sector’s earnings in the quarters ahead, especially in the second half of this year.
AEON Co (M) Bhd
AEON’s earnings for its first quarter ended March 31 (1QFY2022) improved 27% to RM28.07 million from RM22.03 million a year ago. However, revenue was slightly lower at RM1 billion, against RM1.01 billion.
The company said its retail business revenue for the quarter came in at RM857.4 million, 2.5% lower than the previous corresponding quarter’s RM879 million as consumers spent less time at home cooking their own meals and more time outside. However, the impact was cushioned by the improvement in softline.
Hong Leong Investment Bank (HLIB) Research highlights that AEON registered a weaker Ebitda (earnings before interest, tax, depreciation and amortisation) margin, by five percentage points quarter on quarter, because of inflationary pressure from Harga Jamin — a price guarantee given against inflation for more than 500 essential products — and higher electricity costs from the hike in electricity tariff surcharge for non-domestic users that ended in December 2021.
With AEON’s management promising that the group will roll out another anti-inflation campaign on essential items, HLIB Research anticipates that the move will strain margins going forward and has downgraded its recommendation on the company’s stock to “hold” from “buy” previously, with a lower target price of RM1.40.
MIDF is more positive on the counter as it expects AEON’s prospects to improve from FY2022 onwards, in line with the reopening of businesses and social activities, coupled with the group’s initiative to accelerate its digital transformation. “We think the group has an advantage as a retailer and asset owner while being backed by AEON Co Ltd,” it says, maintaining its “buy” call on the stock and increasing its target price to RM1.79 from RM1.74 previously.
Mr DIY Group (M) Bhd
Mr DIY, the fast expanding home improvement retailer, failed to meet analysts’ expectations as its 1Q2022 earnings came in 19.5% lower at RM100.5 million from RM124.93 million in the previous corresponding quarter, as cost factors outpaced revenue growth. Revenue for 1Q2022 grew 4% year on year to RM905.2 million from RM870.18 million on account of its growing store network.
Maybank Investment Bank Research says the results disappointed because the group kept product prices unchanged during the first quarter despite rising input costs. The stores also experienced lower footfall due to a rise in Covid-19 cases in 1Q2022.
Nevertheless, the home improvement retailer raised product prices in April and May. Maybank IB Research says it will continue to do so if the need arises in order to provide a buffer against further cost increases related to raw material costs, freight charges and staff wages.
As such, the research house expects Mr DIY’s margins to improve in the upcoming quarters. It maintained its “buy” call on the stock but reduced its target price to RM3.90 from RM4.20 previously.
RHB Research, which has also kept its “buy” call on the stock but reduced its target price slightly to RM4.50 from RM4.59, believes that the weakness seen in the company’s 1Q2022 earnings will not persist. “Footfall is expected to normalise and the Aidilfitri festivities should spur consumer spending, whereas price adjustments are estimated to lift gross profit margin by two to three percentage points, according to management’s guidance,” it says.
While Mr DIY is expected to incur higher wage costs from May onwards, as half of its 12,000 employees draw salaries below the new minimum wage of RM1,500, the higher disposable income of consumers following the implementation of the new minimum wage could lead to more consumer spending, benefiting retailers such as Mr DIY, says RHB Research. “As such, the net impact on Mr DIY could be positive, taking into account its dominant market share in the home improvement retail industry.”
Padini Holdings Bhd
Fashion retailer Padini had yet to announce its earnings for the third quarter ended March 31 (3Q2022) at the time of writing. However, the consensus is that the fashion retailer will see an improvement in earnings as the festive season fell during the first and second quarter of the calendar year.
For 2Q2022 ended Dec 31, Padini’s net profit improved markedly as it jumped nearly sixfold to RM60.89 million from RM10.65 million a year earlier. Revenue doubled to RM427.17 million from RM245.96 million.
Maybank IB Research notes that its Brands Outlet stores, which have a lower average product price point than its Padini Concept Stores, saw a faster pace of recovery post-lockdown.
The research house adds that cost pressures are likely to have a larger impact on earnings in FY2022, given that prices have risen 5% to 10% y-o-y. The retailer says certain new products could see an upward revision in pricing to offset the higher cost of production.
Maybank IB Research has a “buy” call on the counter, with a target price of RM4.10.
Kenanga Research shares a similar sentiment, saying that while business activity will return to normalcy as the nation transitions to the endemic phase, volatile supply chain issues remain a concern. It reiterates its “outperform” call on Padini and raises its target price to RM3.80 from RM3.20 on account of the reopening of the economy. As the retail group enjoys a net cash position of RM1.10 per share, it could potentially mean another bumper dividend payout.
Bonia Corp Bhd
Investors with a keen eye would have noticed that leather goods retailer Bonia’s share price has surged 163.7% since the start of the year. Last Wednesday, the stock closed at RM2.53, valuing the company at RM507 million.
It is worth noting that compared with retailers like Padini, Mr DIY, AEON and InNature Bhd, Bonia is the least expensive, trading at a price-earnings ratio (PER) of 19.8 times and a forward PER of 13.46 times.
The leather goods retailer showed a significant improvement in earnings in 3QFY2022 ended March 31. Its net profit was up more than four times at RM12.5 million from RM2.84 million a year earlier. Revenue increased 37% to RM86.82 million from RM63.45 million.
The improvement in the group’s financial performance was attributed to the Chinese New Year festival season, a significant growth from a year ago when movement restrictions curbed celebrations.
“The board is cautiously optimistic about the remainder of the financial year as a result of the reopening of all economic and social activities in Malaysia and overseas markets. In addition, the reopening of Malaysia’s international borders for travellers from all countries effective April 1, 2022, and the Hari Raya Aidilfitri celebrations will benefit the retail industry,” says the company.
CGS-CIMB Research, which is one of three research houses that cover the stock, opines that Bonia is a strong proxy for recovery in consumer discretionary spending. It has an “add” call on the counter, with a target price of RM3.
InNature Bhd
Cosmetics and personal care retailer InNature, which carries brands like The Body Shop and Natura, did not seem to have benefited from the Chinese New Year festive period as its net profit for 1QFY2022 ended March 31 slipped to RM4.53 million from RM5.1 million a year ago. Revenue was 11% lower at RM33.74 million from RM38 million a year earlier.
The group says the operating environment in the first quarter was impacted by the rising Omicron cases and compulsory quarantine of close contacts.
“Overall, group revenue declined 11.2%, with Malaysia, Vietnam and Cambodia recording lower revenue of 9.3%, 18% and 8.4% respectively. Nevertheless, we remain profitable across all our operating countries in 1Q2022, with group profit after tax margin preserved at the 1Q2021 level,” says InNature group managing director Datin Mina Cheah-Foong in a statement.
She adds that Malaysia’s quarterly profit after tax had in fact improved 8.6% y-o-y without the Covid-19-related support from the government, landlords and brand principal, despite the decline in revenue.
Cheah-Foong says the higher profit after tax was mainly the result of prudent cost management measures taken during the pandemic years, including the closure of underperforming stores. “Overall, we believe that as long as the economy remains open, our performance will improve year on year in 2Q2022 and for the financial year ending Dec 31, 2022.”
Source: https://www.theedgemarkets.com/article/retail-sector-roars-restrictions-are-lifted-rising-inflation-could-dampen-sales