Padini faces tough battle with cost-effective fashion

This article was first published in The Edge Malaysia Weekly from 7 October 2019 to 13 October 2019.

The ever-evolving world of fashion, combined with a growing consumer preference for online shopping, is making things tough for retailers, with California-based Forever 21 being the most recent to file for bankruptcy.

In these difficult times, homegrown fashion company Padini Holdings Bhd believes that the best business model to adopt is cost-effective fashion with a focus on high-tech and functional materials.

“Instead of raising prices, we want to increase the quantity and quality of our products to keep our customers happy,” Padini executive director Benjamin Yong Tse Jett told The Edge in a recent interview. . “We believe this is the best way to go because today’s customers are price-sensitive and well-informed about the products offered on the market. It’s fashion with high cost performance.”

Padini’s net profit margin has been declining, dropping to 9% for the year ended June 30, 2019 (FY2019) from 10.6% in FY2018 and 10% in FY2017. For FY2019, Padini reported a 10.1% year-on-year decline in net profit to RM160.18 million due to a decline in gross profit margin, but a 6.2% increase in sales to RM1.78 billion.

Benjamin said the group aims to grow sales by enhancing its products and will launch new product lines as early as next month. “While we do not intend to introduce new brands, we will further expand our product line. For example, we are focusing on technical fabrics and textiles with functionality, such as warm innerwear and non-iron shirts. We’re also working with the Walt Disney Company on a product line that appeals to both children and adults.”

The group has 141 stores in Malaysia, including 48 Padini concept stores, 28 freestanding stores, 55 branded outlets and 10 consignment counters. There are no plans to close the store in the short term, as the group hopes to carry out renovations as necessary.

“We need to consider the store’s lease contract and its performance. If the store’s performance deteriorates, we will consider closing or renegotiating the terms of the lease. Opening a store depends on the conditions. [lease offered by the malls] “It’s positive for us, but we don’t have a set number of stores we want to open,” Benjamin said.

In 2020, the Group will be required to adopt the Malaysian Financial Reporting Standard for Leases (MFRS 16), which will require the recognition of all leases, including operating leases, on the balance sheet. Padini Chief Financial Officer and Executive Director Sharon Sun said the group had assessed the impact of adopting MFRS 16 on its income statement. “The first period affected is the first financial quarter ended September 30, 2019 (first quarter 2020), which we plan to announce in November. I can’t talk about quantum at this point.”

Also present at the press conference was Andrew Yong Tse Hau, Padini’s executive director and Benjamin’s older brother. Benjamin will be responsible for Padini’s design, merchandising, retail and branding activities, while Andrew will manage and lead support department operations.

Andrew said that apart from new product lines, the company is also looking at revamping its internal processes. “There is a lot of discussion around Industry 4.0, so we are considering our own structure to further digitalize and keep our processes up to date. Industry 4.0 has many pillars. , we are considering them one by one and slowly improving our processes. For example, we are considering implementing robotics in our warehouse operations to speed up our operations.”

Padini has enough cash piles for such a process. The group reported a cash balance of RM472 million against borrowings of RM23.9 million as of FY2019. However, Benjamin stresses that the group intends to be conservative in its spending. “Padini has been a very conservative company for many years, which has allowed us to keep our cash flow healthy. We look for opportunities, whether it’s improving our supply chain or opening new malls. But we don’t, for example, blindly open 20 stores to achieve a certain level of revenue growth and then 15 of them go out of business.”

The brothers have spent more than 10 years at Padini, a company founded by their parents, Managing Director Yong Pan Chaung and Executive Director Chong Chin Ling.

Padini has paid a consistent dividend over the past 10 years, with an average yield of 4.4%. The group has declared dividends of 11.5 sen per share in the past four financial years (2016-2019), up from 10 sen per share in 2015. Despite the decline in FY19 profit, its performance beat analysts’ expectations, sending the stock price up to RM3.76 last Thursday.

Some analysts believe the stock is outperforming its fundamentals, as it is up 12% since the company announced its 2019 results on August 27. In a note dated September 24, Alliance DBS Research revised its recommendation on the company’s stock from “hold” to a target price of 3.05 ringgit (lower), as it expects the group’s profit growth rate to remain modest. (19%) downgraded the rating to “satisfactory.” With a growth rate of less than 5% from FY2020 to FY2022, it no longer fits the profile of a growth stock. Maybank IB Research takes a more optimistic view. In a September 19 note, the company said it believed Padini’s valuation remains undervalued at 14.5 times FY2020 price-to-earnings ratio, so it called a “buy” price target with a 22% increase to RM4.60. repeated.

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