We came away from PADINI’s analyst briefing with the following key takeaways:

i) Higher sales during the festive seasons

ii) Closure of 5 non-performing stores

iii) Prospects for the year

Reiterate Buy with an unchanged target price of RM4.40/share based on 15x CY25 EPS.

Higher sales during festive seasons

Based on the historical track record, Padini’s quarterly revenue has averaged around RM500.0mn with a GP margin of approximately 39%. In 4QFY19 & 22, its top line was supported by stronger sales during Hari Raya, while 2QFY23 was driven by Chinese New Year (CNY) sales. We gathered that the pocketsize during Hari Raya and CNY is hovering around RM105 to RM110 (the normal period stood at about RM100). The sales volume for Hari Raya is higher than CNY, with a similar pocketsize. Breaking it down by segment, the Padini Concept Stores (PCS) pocketsize of RM102 is higher than Brands Outlet (BO) at RM96 due to different pricing categories. Barring any unforeseen circumstances, we expect 2QFY24 revenue to be around RM480mn to RM500mn, with a GP margin of approximately 38%.

In the Pipeline of Closing 5 Non-performing Stores

Padini is planning to close 5 non-performing stores in FY24. Currently, less than 10% of the store is loss-making. In FY23, Padini had a local net expansion of 1 store, but the gross floor area narrowed to 1,362k sf (from 1,387k sf). We believe that the closure of non-performing stores last year was cost effective. The focus on improving the product range and quality has led to revenue growth, despite reduction in gross floor area. As of latest same store sales growth in 2QFY24, it stood at -5% due to recent expansions (6MFY24 gross floor area: 1,404k sf).

Prospects for the Year

As Padini is in the fast fashion industry, which offers a variety of products with affordable prices. We are slightly concerned about its top line expansion due to current weaker market sentiment. However, we think the upcoming sales clearance will reduce its inventory eventually. Padini is expected to introduce a fair bit of new and trendy products during Hari Raya to boost its sales performance. Above mentioned, we believe GP margin will sustain at this level due to its favourable sales mix.

Impact

No Changes to Our Earnings Estimates.

Valuation

Reiterate Buy on PADINI with an unchanged target price of RM4.40/share, based on 15x CY25 EPS. We remain optimistic on the long-term sustainability of Padini’s business, and the stock is likely to remain a defensive stock that could pay higher dividend due to its net cash position.

Source: TA Research - 4 Mar 2024