KUALA LUMPUR: Padini Holdings Bhd, which has been feeling the heat of competition recently from foreign retail players like Swedish multinational clothing company Hennes & Mauritz AB (H&M) and Japanese casual wear designer Uniqlo Co Ltd, has gone back to the drawing board to restrategise its game plan.

This is not surprising as Padini, one of Malaysia’s largest home-grown apparel retail companies, saw its net profit for the first quarter ended Sept 30 of financial year 2015 (1QFY15) fall 30.62% to RM19.24 million from RM27.74 million a year ago, on declining sales from its consignment, wholesale and single brand stores.

Although revenue for the quarter appears to have improved by a marginal 4.39% to RM226.75 million from RM217.22 million in 1QFY14, gross margins have actually fallen by about 2%, due to more aggressive sales campaigns. That, coupled with rising operating costs, has resulted in weaker earnings for the quarter.

Hence, one of the first things it has decided to do is realign the supply chain of its Vincci stores, which have seen revenue decline from RM223.7 million in FY13 to RM206.1 million in FY14.

“For Vincci Stores, we have relied on local manufacturers for a long time. But we have realised that we can’t depend on them anymore as consumer preferences and our preferences have gone further ahead. Therefore, we have decided to work with China manufacturers instead, as manufacturing lead times in China are much shorter. Their designs are [also more akin] to the latest trends,” said Padini executive director Chan Kwai Heng.

Padini’s competitive strategy has always been its continued focus on the middle-income market. But that is not all, Chan noted that its presence as a locally headquartered Malaysian company with a distribution network that is spread throughout the country is also an advantage.

“[Most] major foreign brands do not wish to set up stores in small towns, but we have a presence there. When we set up stores in these areas, we ensure [they] align with the local demographic. For example our stores in Kota Baru, Kelantan, tend to be more conservative to cater to the local preference,” he told reporters after the company annual general meeting (AGM) last Friday. And it plans to further sharpen the edge from its local distribution network by opening 12 new stores next year.

“In FY14, we opened five new Padini Concept Stores and 7 Brands Outlet stores. In FY15, we are targeting to open six new Padini Concept Stores as well as six more Brands Outlet stores,” said Chan. These will be sprinkled throughout the Klang Valley, in Taiping, Perak, as well as Kota Kinabalu, Sabah, and Bintulu, Sarawak.

This will bring its store tally from 29 Padini Concept Stores and 27 Brands Outlet stores as at June 30 this year to 35 and 33, respectively.

This may appear confounding when the nation is tightening its belt and consumer sentiment is set to dampen further due to the uncertain impact of the impending goods and services tax (GST) next year. But Chan said down times are actually the best time to expand.

“We are in the business with a long-term view. Now, when the market is down, is actually the best time for us to negotiate more attractive terms,” he said, adding that other retailers might scale down their business development plans in such times, making competition for resources less intense.

On the imminent GST, Chan said Padini will not raise prices of its existing products when the consumption tax comes into play.

“A product that you see in our stores next March 31 will still carry the same price on April 1 [when GST is implemented]. Only [prices of] new products will be [adjusted],” said Chan.

Padini was picked as Insider Asia’s “Stock of the Day” on Nov 28, when it noted that Padini’s diversification into the value-for-money segment with Brands Outlet stores appears to be paying dividends. From FY08 to FY14, sales and pre-tax profit from these stores grew at an annual compound rate of 47.7% and 100.9% to RM253.3million and RM44 million, respectively.

MIDF Research analyst Izzat Esa echoed that view. He said Brands Outlet stores cater well to mass market needs in the current, more challenging economic environment.

“They are more flexible in terms of product mix and deliver the needed profit margins to the group,” he said.

The counter shed eight sen to close at RM1.53 last Friday, giving Padini a market capitalisation of RM1 billion.

This article first appeared in The Edge Financial Daily, on December 15, 2014.