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Feb.17, 2012
Event: Strong sales growth and bargaining power are LT catalysts. (Positive.)
Primasia Comment
•Conclusion: Citing impressive sales from its two new stores in Taichung and Banchiao, Far Eastern Department Stores (FEDS) guides 2012 y-y sales growth of 40%-50% for FEDS and 10%-11% for SOGO, respectively. Although the company gave a cautious outlook for its China operations, increasing economies of scale and its bargaining power over suppliers may provide a boost to its overall profitability. We therefore expect FEDS to outperform the general retail sector because of its strong revenue growth and the success of its strategy focus on large scale operations over its competitors.
•Strong sales at new stores propel top-line growth. While the company didn’t provide detailed figures for last year’s bottom line at the meeting, FEDS, SOGO and A-Mart delivered solid y-y top-line growth of 12%, 4.7% and 9.5%, respectively. The company’s two new stores in Taichung and Banchiao, which generated robust January sales of NT$1.4bn and NT$1bn, respectively, should easily help surpass their 2012 break-even sales volumes of NT$9bn and NT$6bn. Riding the sales momentum from these two stores, along with sales at SOGO, FEDS is expected to overtake Shin-Kong Mitsukoshi as the market leader in Taiwan’s department store sector.
•Challenging conditions and regulations hinder revenue growth in China. As China’s equity and property markets struggle and inflation remains a lingering concern to Chinese consumers, y-y revenue growth is expected to decelerate from 2010’s 25% for FEDS China and 5.6% for Pacific Department Stores, to 12.5% and 4.0%, respectively, this year. The company notes that new government regulations on retailers' promotional tactics may also depress revenue. The new regulations explicitly prohibit retailers from marking up prices before promotions in order to mislead consumers with large discounts off the much higher prices. The government's regional economic development policy also plays a significant role for retailers as China’s official policies reallocate resources away from northern and coastal areas to emphasize development in interior regions. As a result FEDS has seen same-store sales declines in Beijing and Tianjin while same-store sales grew at a robust y-y rate of 8%-10% in Sichuan Province, where FEDS China expects to generate over 50% of its total revenue.
•Increasing economies of scale and bargaining power to boost company's bottom-line. Combined with SOGO, FEDS is expected to overtake Shin-Kong Mitsukoshi as the market leader in Taiwan this year. Given the importance of relationships with key vendors in the luxury retail sector, FEDS is expected to extract greater bargaining power from its suppliers in both product offerings and pricing. Its market leadership also enables it to negotiate more favorable terms for rent revenue and commissions from tenants and theme restaurants operating at its stores. Greater market share entails stronger operating leverage and profitability.
•Size matters in this business. Given the success FEDS has seen at its new megastores, the company will continue to pursue large store formats for future expansion. SOGO's new Big City store in Hsinchu, which will open on April 28, boasts 60,000 pings of floor space in a shopping mall format. Management expects to replicate the success of Taiwan’s megastores in China as well.
Source: Primasia Investment Consultancy Co., Ltd.
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| TAIEX |
7921.5 |
| Electronics Index |
295.9 |
| Financials Index |
845.02 |
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