Incorporated in 1975 and listed on Bursa Stock Exchange since 1995, Padini Holdings Berhad (KLSE: 7052) or “PADINI” has been recognized as one of Malaysia’s top 30 Most Valuable Brands. Through its subsidiaries, the Group engaged in the distribution and retail of fashion wears and accessories in Malaysia. The Group also have several franchise stores in ASEAN countries (i.e. Brunei, Myanmar, Cambodia and Indonesia). The Group offer its products under various brand and some of the most well-known ones are “Padini”, “Vincci”, “Brands Outlet”, etc.

Since November 2015, the Group’s share price has been on an uptrend and have hit a record high of RM5.37 per share. If you’ve invested in PADINI since year 2015, you would have gained approx. 380% in 2 years’ time excluding the dividend declared by the Group. Such gain in its share price was the result of being profitable despite the weak consumer sentiments in Malaysia. However, the main question that everyone is asking including us is that “Can PADINI continue to sustain its financial result? How much higher can its share price go?”

On 16 November 2017, the Group held its 36^th AGM for the Financial Year Ended June 2017. We went for the AGM to get our two main questions answered (as above). So here are the 13 key insights from PADINI’s 2017 AGM:

In summary, shareholders have raised their concerns mainly on 3 areas; 1) the Group’s 2017 financial result; 2) its future expansion strategy; and 3) its E-Commerce platform.

In relation to Financial Result

#1: For the FYE 2017, PADINI has achieved RM1.57 billion revenue, a growth of 21% as compared to previous year’s revenue of RM1.30 billion. However, its gross profit (“GP”) margin have compressed by 3% as compared to previous year. The GP margin compression was mainly due to increase in cost of sales as a result of significant increase in inventories written off, inventories written down and inventories losses (collectively known as “inventory losses”) amounted to approx. RM32 million. These inventories losses are consists of aged items, slow-moving and out of fashion items.

The Management explained that such material increase in inventories losses was because the Group has embarked on a more stringent inventory policy with the use of stricter write off/ down estimates. Some of the benefits of implementing a more stringent inventory policy are as follows:

• Better usage of the limited space at the selling floor and hence improved return per square feet in the outlet;
• Saving on warehouse storage cost;
• A step to ensure shorter marketing period and faster cash collection from the inventories; and
• Imposing a control mechanism to control and improve inventories turnover where brand managers will review the stock condition and ageing on a more frequent intervals, etc.

#2: The Minority Shareholder Watchdog Group (“MSWG”) have asked whether such material inventories losses would continue in FYE2018. The Chairman of the Group explained that the monitoring of inventories turnover is a continuous effort and inventory losses is common to the Group – It is part and parcel of the fashion business industry. As such, the Management were unable to conclude the inventories condition for the FYE 2018. However, they do not expect any major financial impact in relation to the inventories losses going forward as it should be regularized after this exercise (implementation of a stricter inventory policy).

#3: For the FYE2017, PADINI’s same store sales growth (“SSSG”) stood at 8%. In addition, VINCCI’s PBT margin have also improved significantly from 13% in FYE2016 to 21% in current year. A shareholder asked whether such PBT margin is sustainable and the Executive Director, Ms. Chew explained that the improvement of PBT margin was the result of the Group’s continuous efforts in strengthening the supply chain to be more efficient and effective. However, the sustainability of the PBT margin depends on several factors and some of it were due to general macro-economic condition such as consumer sentiments in Malaysia which is beyond the Management’s control. Nonetheless, the Group will constantly improve its product offered under the VINCCI brand.

In relation to E-Commerce

#4: In view of the changing consumer trend to digital platform, a shareholder raised his concern on what the Management of the Group is doing to ensure the bricks and mortar business model continue to be relevant and grow. The Chairman of the Group explained that although there are evidence of changing consumer trend to digital platform, the change is yet to be significant as Malaysians still preferred to “look, touch and feel” when purchasing clothing-related items. Having said that, the Chairman explained that initiatives have already been taken to set-up e-commerce website. The Management also have been constantly monitoring whether there are any needs or changes to cater for the changing consumer trends.

#5: In the FYE2015, PADINI have invested an e-commerce platform in view of the changing retail trend from traditional stores to digital stores. However, the revenue contributed in this segment is still insignificant for the FYE 2017. A shareholder noted that PADINI’s product pricing for both online stores and physical stores are identical which seems to have no obvious advantages for having an online stores. As such, wanted to know how the synergy for both channel works. Executive Director, Mr. Benjamin Yong explained that at the moment, PADINI’s online store complements with its physical store in terms of being a catalog and gateway to the Group’s brands (i.e. showing the product prices, current or upcoming promotions, etc.). That is why the Management believe that the product pricing for both channels should be the same for the sake of consistency. This is similar to ZARA.

#6: The same shareholder also noted that recently there has been some changes in Taobao ever since Digital Free Trade Zone (“DFTZ”) is established such as a direct English translation to penetrate non-chinese consumers. Taobao also have entered the Malaysian online retail market through Lazada Malaysia and the clothing prices listed at Taobao website were significantly cheaper than PADINI’s product. As such, the shareholder asked how do the Management see this as a threat and where does PADINI stand in pricing of its product.

Executive Director, Mr. Benjamin Yong acknowledged that the entrants by Taobao is definitely an area of concern. However, fashion industry is slightly different from other consumer products in the sense that fashion requires a company to establish trusts among its consumer over the product’s brand. The Executive Director further gave an example that consumers are comfortable in buying PADINI’s products as the brand gives them an impression that the product is value-for-money.

The Chairman of the Group adds that PADINI have certain economic moat in Malaysia (known as “local strength” as claimed by the Chairman) as the branding is strong in the domestic market. In terms of e-commerce threat, the Management is of the opinion that it is currently yet to be a major threat to the Group. Nonetheless, the Management will constantly monitor the situation.

In relation to Expansion Plans

#7: During the FYE2017, the Group has incorporated a subsidiary in Cambodia. The Chairman of the Group explained that for the coming FYE2018, the Group plans to open two (2) Padini Concept Store (“PCS”) and one (1) Brands Outlet (“BO”) with total gross floor area of 35,000 sq. ft. This will incur a capital expenditure of approx. RM20 million.

In domestic market, the Group intends to open 6 PCS and 6 BO with some major refurbishments for at least 1 PCS and 3 BO in the upcoming FYE2018. This will incur a capital expenditure of approx. RM40 million.

#8: A shareholder asked whether there is any reasons for choosing Cambodia as the Group’s expansion plan instead of other ASEAN countries such as Indonesia, Thailand, Brunei, Myanmar, etc. Executive Director, Mr. Benjamin Yong replied that for the Group to open PCS requires certain conditions to be met (i.e. size, locations, populations, etc.) and AEON at Cambodia has given a more favorable terms to open stores with them than the other ASEAN countries. Nonetheless, the Group is open to expand into other countries provided the terms are favorable.

#9: A shareholder raised his concern on the current challenging economic condition and wants to know the Group’s strategy moving forward to ensure its topline and bottom-line growth continues. The Chairman assured that the Group is taking the necessary actions to improve its financial result, however, it also depends on the country’s disposable income. Unfortunately, there are many factors affecting the country’s disposable income and most of it were beyond the Group’s control such as the increase in petrol prices will surely reduce the disposable income. In addition, increase in unemployment rate will also affect consumers demand. Nonetheless, various steps have been taken to ensure the Group’s bottom-line continue to grow such as cost management.

#10: For the FYE2017, the Group have also spend an amount of RM47 million worth of PPE acquisition as reflected in the Group’s 2017 Cash Flow Statement. The said acquisition relates to warehouse expansion which located next to the Group’s headquarter.

Others

#11: A shareholder raised his concern over the recent brand re-designing exercised undertaken by the Group particularly on Brands Outlet which seems to have change its logo to just “BO” instead of using its full brand name “Brands Outlet”. The said shareholder concern this would give negative impression to consumers as he recalled that when VINCCI+ was introduced it gives an impression to the consumer that the products offered under VINCCI+ are plus size clothing instead of fashion accessories. The Chairman takes note of it.

#12: One of the agenda of PADINI’s 2017 AGM are to seek shareholders’ approval on the “Authorisation of Share Buyback Resolution” and this have led to a shareholder expressed his opinion that the Group should not raise this as an agenda since the Management are not in the business of fund management. His opinion is that the moment company buyback its share, they becomes fund manager. Hence, instead of focusing on the retail business (i.e. growing sales, improving merchandising, etc.), the Management focus on the company’s share price. The Chairman takes note of it and assured that the Group will only initiate share buyback in the event where the need arise.

#13: Another shareholder request the Management of the Group to provide a financial briefing to all the shareholders in the next AGM 2018. The Chairman takes note of it but does not assure that there will be a financial briefing by the Group’s CFO in the coming AGM 2018.

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