AS Caring Pharmacy Group Bhd reviews its marketing strategies to improve sales amid a competitive environment, analysts say it will take time for the retailer to reap the benefits of the revamp.

Two weeks ago, the group reported a poor set of financial results for its second quarter ended Nov 30, 2014 (2QFY2015). Although revenue and net profit for the quarter improved 5.4% and 14.8% respectively from a year ago, for the cumulative six months to Nov 30, net profit shrank 63.4% to RM2.64 million compared with the previous year.

Caring’s (fundamental: 2.05; valuation: 0.9) revenue expanded 5.8% to RM177.4 million for the six months due to improved contributions from its new outlets.

Analysts attribute the sharp decline in earnings to the increasingly intense price war between pharmacies.

RHB Research Institute says in a report that it believes the operating environment will continue to be challenging for Caring throughout the year, but sees better prospects for the group going forward as outlets opened last year start to bear fruit. It expects improvement in revenue and net profit to continue into 2HFY2015.

Meanwhile, Hong Leong Investment Bank Research maintains its “sell” rating on Caring and lowers its fair value to RM1 from RM1.20 after revising its earnings estimates.

It is a known fact that competition in this industry is stiff. Caring’s management has acknowledged this and said in its most recent financial results announcement that it will “re-look at its marketing strategies to improve sales to sustain its market share”.

Caring has had to compete with more established and larger retail pharmacies like the unlisted Watsons and Guardian.

“In shopping malls, there seems to be customers in Watsons and Guardian outlets. Caring outlets are sometimes quiet. It takes time for customers to switch to Caring as it is relatively new,” says an analyst.

Analysts are convinced that it is the right move for Caring to reassess its marketing strategies. However, they are sceptical about the revamp bringing immediate positive results.

Caring’s share price has fallen some 50% to close at RM1.10 last Friday from a high of RM2.20 last July.

A bank-backed research analyst says the company is unlikely to reap benefits from the revamp in the current financial year nor in FY2016 as consumer sentiment is weak.

“Yes, we think it is the right move. But we don’t expect it to be reflected in the numbers so soon. It is a long-term thing,” she adds.

Caring’s new outlets have had some difficulty achieving break-even as competition remains stiff. Typically, it takes 18 months for an outlet to achieve it.

Hong Leong IB Research points out in a Jan 28 report that the closure of one Caring outlet was most likely due to its failure to deliver after the gestation period.

It is believed the said outlet was one of the first few set up by the group under its aggressive expansion programme. On average, Caring opened five to seven new outlets per quarter in FY2014, compared with only two per quarter in FY2015. To date, it has 102 outlets.

The group’s financial statements show that a large chunk of its expenses stemmed from selling and distribution, which contributed 18.5% of its revenue in 2QFY2015 and 16.8% in 1QFY2015. The bank-backed research analyst says this could mean that the current promotional and marketing activities are not bringing the desired results given its weak performance.

Furthermore, net margins appear to be slim for the group — 0.9% and 2.4% for its 1QFY2015 and 2QFY2015 respectively. As a comparison, retail product-centric AEON Co (M) Bhd’s net margin is 4.7%.

The bank-backed research analyst believes Caring should focus on improving contributions from its existing outlets and its expansion plans should take into account the locations, without encroaching on its competitors’ territories.

A silver lining for Caring could be the drug dispensing policy to separate prescription and dispensing of medicine. The policy, if introduced, may allow Caring’s pharmacists stationed at its outlets to dispense medicine to patients, thereby raising the group’s revenue.

However, an analyst opines the policy is unlikely to be implemented in the next three to five years, given the ongoing discussions on the effective implementation of the policy. Concerns have surfaced, such as whether clinics and pharmacies are near each other, especially in rural areas. Another concern is whether 24-hour pharmacies will be introduced to complement 24-hour clinics.

For now, only time will tell whether Caring can weather the tough operating conditions to ensure its outlets remain financially sustainable on the back of management’s proposals to revamp its marketing strategies.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on February 9 - 15, 2015.

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