Not much to cheer about for retailers

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This article first appeared in The Edge Financial Daily, on January 5, 2017.


KUALA LUMPUR: Consumer sentiment is expected to bounce back this year, but not enough for retailers to cheer about as shoppers remain prudent in their spending.

According to Padini Holdings Bhd, 2017 does not look rosy, presenting retailers with more challenges given the country’s unfavourable economic and political situations, as well as external conditions.

“We would expect consumers to get jittery too. As such, the year 2017 will not be easy as our products are dependent on discretionary spending,” the retailer told The Edge Financial Daily via email.

To tackle the challenges ahead, Padini has laid out a series of strategies to maintain, if not better, its performance in the financial year ended June 30, 2016 (FY16).

“We will continue with our business as usual, giving quality at good prices, providing a good shopping environment and experience for customers, and expanding whenever there is a suitable opportunity,” it said.

“Further, our merchandising, pricing and promotional strategies will continue to be focused on being relevant to our customers. Concentration will still be on design, quality and affordability, where we strive to bring the best value to our customers in the shortest time-to-market possible,” Padini added.

Aside from focusing on physical store sales, Padini said it will continue to put in the effort to increase awareness of the availability of its products at its online store.

“We believe digital retailing of the group does have potential in the years to come and this process should not be rushed as we are not only building a distribution channel, we are building our people as well in the process,” it said.

In FY16, Padini’s net profit grew 71.3% to RM137.39 million, from RM80.22 million the previous year, while revenue climbed 33% to RM1.3 billion, from RM977.9 million in FY15.

Teo Guan Lee Corp Bhd managing director Toh Kian Beng is also expecting further challenges in the macroeconomic outlook this year.

“The retailing business has been very soft in the past year including the garments segment,” she told The Edge Financial Daily.

“There are still a lot of uncertainties in the market such as the depreciating ringgit, which has pushed up the cost of imports,” said Toh, noting that it would be difficult for the company to raise selling price amid the challenging operating environment.

As such, she said the company will continue its efforts to improve gross margins by improving the sourcing of products, leveraging its bulk ordering and simplifying the procurement process to bring down the cost of goods and control inventory levels.

“We will continue to introduce more value-buy products to capture the middle-end market. We can’t afford to slash our prices further. Hence, we will price our items so that they are affordable to the public,” said Toh.

Teo Guan Lee, which retails brands like Kikilala, Cuddles, Sesame Street and Garfield, has a total of 527 consignment outlets and 12 boutiques to date.

Toh said the company will continue to focus on increasing its business partners by opening new consignment outlets at strategic locations.

For FY16, Teo Guan Lee saw its net profit jump 22.8% to RM5.44 million, from RM4.43 million in FY15, while revenue fell 1.3% to RM100.31 million, from RM101.61 million.

However, major listed retailers including Bonia Corp Bhd and The Store Corp Bhd did not fare as well last year, reporting weaker-than-expected earnings.

“The recently concluded third-quarter calendar year 2016 (3Q16) results did not excite, with consumer stocks under our coverage reporting more misses while none exceeded expectations,” said AllianceDBS Research in a note dated Dec 13.

“The disappointing earnings were mainly driven by higher-than-expected operating cost and more expensive imported inventories due to a weak ringgit,” the research firm added.

AllianceDBS Research, which ran a reality check on the consumer sector, noted that recovery in domestic consumer spending has been slow, uneven and fragile, even though more than six quarters have passed since the imposition of the goods and services tax in April 2015.

“We believe that the slower-than-expected recovery in consumer spending was dragged [down] by slowing economic growth momentum, concerns over job prospects, the ringgit volatility, high household debt and higher cost of living contributed partly by the removal of subsidies by the government,” it said.

It said its observation is supported by the latest statistics released by the Malaysian Institute of Economic Research, which saw the Consumer Sentiment Index dropping five points quarter-on-quarter to 74 points in September and remaining well below the threshold level of optimism of 100.

“Further, private consumption growth [as a component of gross domestic product] has also moderated in 3Q16,” AllianceDBS Research said. Given this factor, it expects margin compression to be the key earnings downside risk going forward for consumer stocks under its coverage.

AllianceDBS Research sees Padini impacted by the weaker ringgit, as it sources about 70% of its products from China and the remainder mainly in US dollars.

As such, the ringgit’s persistent weakness against both currencies could continue to increase Padini’s inventory cost and put downward pressure on its margins in the coming quarters.