This article first appeared in The Edge Malaysia Weekly on March 12, 2018 - March 18, 2018

IS Padini Holdings Bhd less in vogue now owing to the intense retail competition? The local retailer recently announced a net profit of RM49.97 million for the second quarter ended Dec 31 — nearly 9% lower compared with a year ago as gross profit margins declined owing to the tough market environment.

Its revenue, however, rose 8% to RM460.43 million compared with the previous year.

Although its earnings were within analysts’ expectations, the response from investors was muted. Padini’s share price slid 7.2% to RM4.96 from RM5.35 between Feb 26 and 28, but rebounded slightly to RM5.10 by last Wednesday.

While its share price performance has impressed since 2016, investor interest appears to be waning, prompting many to question whether its outstanding growth over the last two financial years can be repeated.

Undaunted, the company has already launched 10 of the 12 new stores planned for FY2018.

According to its 2017 annual report, as at end-June last year, it boasted 182 free-standing stores and consignment counters in the domestic market. Its many brands include Vincci, Seed, Padini Authentics, PDI, Padini, Miki Kids and Brands Outlet.

While cognisant of the strong competition, chief financial officer Sharon Sung says the company will continue to open new stores in some key areas as well as in bigger upcoming malls.

In an email reply to The Edge, she reveals that average same-store sales growth for its more popular brands, Vincci and Brands Outlets, as well as concept store Padini Concept, stood at -4% thus far this year.

Because of the crowded landscape, its new outlets could take longer to break even, and their contribution to the group’s bottom line would hence be slower.

“In a saturated market, growth would be harder to generate. I imagine the marginally lower quality of sales and margins are due to a higher degree of cannibalisation. It is a bit like the economics of shopping malls in Malaysia,” says an analyst with a local research house.

Padini is aware of this and has been looking to expand in the Asean market. It currently operates in the Asean region and several Mid-East countries through licensees and dealers carrying the Vincci brand.

The fashion retail operator took things up a notch in December when it ventured into Cambodia by opening an outlet. It plans to add another two this year.

“Cambodians have accepted Padini well so far,” Sung observes.

Some opine the next phase of growth will have to come from expansion overseas, but can it replicate its domestic success abroad?

“I think it is well within Padini’s capability to adapt to Cambodia’s demand preferences and its targeted segments to find the same success abroad. It’s really down to execution and adaptability, which Padini has exhibited over the past few years, advancing to all-time highs in terms of revenue and profit despite severe GST-constricted consumer spending,” says the analyst.

MIDF Research analyst Nabil Zainoodin opines that is too early to tell if Padini’s Cambodia operations will succeed. However, he believes the Cambodian market has huge potential because of the rising affluence of its young middle class.

Sung says Malaysia remains an important market. “Malaysia is still Padini’s home base. We are looking into expansion in Asean markets while still taking good care of the domestic market.”

To grow its earnings, Padini has started selling its products online via its own platforms. The online business currently contributes less than 1% of total group revenue but Sung believes the segment holds promise, expanding more than 50% over a one-year period.

“We plan to tap neighbouring countries [with our e-commerce business] rather than just confining ourselves to the local market,” she says.

Between Jan 1, 2016, and Dec 29, 2017, Padini’s shares gained a whopping 178%, from RM1.78 apiece to RM5.28.

After its profit contracted in FY2015, earnings jumped 71% in FY2016 to RM137.4 million and 15% in FY2017 to RM157.38 million.

Revenue also gained significantly, by a third to RM1.3 billion, and rose by a fifth to RM1.5 billion in FY2017.

Many believe Padini has run ahead of its growth prospects as its current price-earnings ratio stands at 21.07 times compared with its average forecast PER of 17.6 times.

There are an almost equal number of “sell” and “hold” calls on the counter: five to six.

Analysts agree better-than-expected earnings could trigger a rerating.

MIDF’s Nabil observes that the Consumer Sentiment Index (CSI) for the fourth quarter of 2017 rose 5.5 points to a three-year high of 82.6 points, and is expected to improve this year.

“Going forward, we expect the upward momentum will be supported as the strong growth in the external sector will continue to spill over into the domestic economy. In addition, we expect the CSI will gradually improve in FY2018 as the ringgit strengthens due to the strong positive correlation between the two indicators. Improvement in consumer sentiment will lead to a greater propensity by consumers to spend and hence, benefit retailers like Padini.”

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