Local apparel manufacturer Padini Holdings Bhd is banking on its value-for-money clothing stores, known as Brands Outlet, for its next phase of growth.

From 2007 to 2010, the group expanded its network of retail outlets comprising standalone stores, consignment counters and franchise stores for its mainstream brands — Vincci, Padini Authentics, PDI, Padini, Seed, Miki and P&Co — from 179 to 232 as at June 30, 2009. Its outlets are mainly in urban malls.

While these stores have been around for a while, the first Brands Outlet only opened its doors in 2007 in Ampang Point, Kuala Lumpur, with 14,000 sq ft. As at June, the group had 10 Brands Outlet stores generating annual revenue of RM54 million, compared with just RM700,000 from that first store back in 2007. In FY2009 ended June 30, Brands Outlet contributed RM28.85 million or 6% to the group’s total revenue compared with 10.3% in FY2010.

“We see growth in this area. This is a value-driven business which you can move to non-urban areas where the main brands can’t go,” says Chan Kwai Heng, executive director of Padini.

Brands Outlet sells a mixture of Padini’s own generic brands and those supplied by third parties on consignment. Consignors pay Padini basic rent plus a commission on their sales, or just a commission. For FY2010, revenue contribution from consignments amounted to RM4.2 million, says Chan.

But that’s not to say the growth of Padini’s mainstream brands will stagnate.

“Ours are very urban brands. How many more stores can you open? Growth has to be organic in the years to come,” Chan explains.

In fact, Padini chairman Datuk Dr Abdullah Abdul Rahman says in the 2009 annual report: “We envisage that over the medium to long term, the Brands Outlet operations will contribute more in terms of profit, as we believe that with its current network size, the scale of its operations has already reached critical mass.” 

Chan says Brands Outlet stores will be the group’s area of focus in the next three to five years. At least three new stores will be added in FY2011; one is already open for business in Sunway Pyramid, two more are in the pipeline in Kota Baru and Setapak.  

The group is so confident of domestic growth, especially through its Brands Outlet stores, that it is not aggressively growing its export market. About 10% of its revenue comes from the close to 100 stores it has, mainly in Asean and the Middle East. 

“We are not particularly driving the export market as the domestic market is still lucrative and the proximity makes sense. There is still scope for growth,” says Chan.

He adds that foreigners visiting Malaysia who came to know of Padini’s products approached the group to set up stores overseas. Saudi Arabia is now the group’s biggest foreign market.

Established in 1981, Vincci, which sells affordable but up-to-date lady’s shoes, bags, belts and accessories, is still the group’s best-selling brand. However Chan concedes the group made a mistake in  selling expensive and quality shoes through Vincci Plus. “The original intention of Vincci Plus was to create a premium line but that didn’t work because of perception. You can’t move from a value proposition to a premium brand. Branding doesn’t work that way,” he explains.

The group is realigning Vincci Plus’ merchandise. Instead of just selling a premium range of shoes, it will focus on high-end leather bags. “The intention is to get customers to go to Vincci Plus to buy bags, but they may see a pair of shoes they like and buy them too,” says Chan.

For FY2010,  the group’s revenue and earnings rose 9.6% and 22.6% to RM522.9 million and RM60.7 million, respectively, from FY2009. While the group registered impressive y-o-y growth in 4Q, there was a visible slowdown in sales and earnings from the quarter before.

However, the figures correspond to Retail Group Malaysia’s data which showed retail sales growing at a slower than expected 5.8% in the April to June quarter compared with 7.9% in 1Q. Retailers interviewed for the survey had expected growth of 7.1% for 2Q.  Even during the period leading up to the recent Hari Raya Aidilfitri celebrations, retailers say sales were slow. “Sales have not been growing as fast as anticipated. I believe customers have adopted a wait and see attitude,” says Chan who is unperturbed by any signs of a slowdown as the group has weathered three recessions since its founding.     

Padini’s merchandise is aimed at toddlers to tweens and those aged 18 to 35. It hardly advertises, spending only 3% or 4% of revenue on advertising and promotion. Chan explains the group prefers to focus on branding within its stores using in-store displays. It spends lavishly on new stores — RM200 per sq ft on its mainstream stores. “We spend considerable sums on our stores. They are well-appointed, there’s a nice international feel to them. We don’t scrimp on our store façades,” he says.

The cost of furnishing new stores is written off within three years. While this means a store may not be profitable in its infancy since it would still be building its presence in a new location, after three years much of its sales would go straight to the bottom line. Chan says for 2010 to 2013, the bottom line will be supported by savings from depreciation since the group has been adding stores aggressively since 2007.  “This will keep our bottom line intact, it may even grow faster than sales,” he says.

With a net cash position of RM88.9 million as at June 30, will the group increase dividend payout to shareholders or is it sniffing potential acquisitions? The answer is somewhere in between.  The group does not have an official dividend policy but it points out that its dividend payout has been rising given its expanding share base. In fact, with an impending one-to-five share split to improve the stock’s trading liquidity, outstanding shares will increase from 131.6 million to 657.9 million.

“We can pay more, but we would like some comfort holding cash if the opportunity to acquire a synergistic outfit comes along,” Chan explains.

Padini also welcomes competition with more international players entering the market. The latest newcomer will be Uniqlo, a Japanese retailer of casual wear, which will be opening a 23,000 sq ft store in Fahrenheit 88 in Kuala Lumpur on Nov 4.

“It is a good thing because they bring new ideas. We don’t see them sounding the death knell for local brands,” says Chan. 

Padini’s share price has risen 58.3% over the last year, closing at RM4.97 last Thursday. Part of the interest in its stock may have been due to the share split but one fund manager likes the stock simply for the appeal of its products.

“If you look at what executives are wearing, it’s either G2000 or Padini,” he says.  

Having reached its target price, the stock was recently cut to a “neutral” by OSK Research, while PM Securities has a “buy” call.

As it embarks on the next phase of growth, it will be interesting to see if more people, especially those in smaller towns, take to Padini’s value-for-money offerings.

This article appeared in Corporate, The Edge Malaysia, Issue 828, Oct 18-24, 2010