Padini in expansion mode

by **Cals** Mon 04 Aug 2014, 02:04

Published: Saturday August 2, 2014 MYT 12:00:00 AM
Updated: Saturday August 2, 2014 MYT 12:23:34 PM
[size=40]Padini in expansion mode
BY JOHN LOH[/size]
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Models parading in smart casual attire from Padini Concept Store during Gurney Paragon Mall’s Spring Summer 2014 Fashion Week opening gala.
Padini Holdings Bhd was probably the hardest hit among the local retailers when Swedish clothing giant Hennes & Mauritz (H&M) made a splashy entrance in Malaysia two years ago.
Its shares saw an 13% dip in October 2012, after frenzied shoppers camped overnight and a 1,500-strong crowd descended on Lot 10, Kuala Lumpur, for the opening of H&M’s inaugural flagship store.
But the homegrown retailer isn’t bowing to pressure from international chains like H&M and Uniqlo, whose mass-market offerings compete directly with Padini’s.
It is expanding at a torrid pace again this year, with an aggressive pipeline of 14 new stores planned between now and December 2015.

At a time when retailers are scaling back to cope with rising costs and GST-induced pessimism, Padini will roll out seven Padini Concept Stores and seven Brand’s Outlets by the end of next year, executive director Chan Kwai Heng tellsStarBizWeek in an interview.
He says the group is likely to grow its floor space by between 80,000 and 90,000 sq ft during its financial year ending June 30, 2015 (FY15), similar to FY14.
This will include stores in high-profile malls like IOI City in Putrajaya, Empire City in Damansara Perdana, Sunway Velocity and Putra Mall in Kuala Lumpur, as well as in secondary cities such as Kota Kinabalu’s Imago and Vivo City in Kuching.
In Mid Valley Megamall, Padini is en route to shuttering its six single-brand stores, which are spread throughout different parts of the shopping complex.
It plans to consolidate its position into one concept store near the high-traffic north court area measuring nearly 20,000 sq ft, larger than all the current six stores combined, Chan says.
To stave off competition from foreign brands and tap into Malaysia’s resilient value-for-money market, Padini is expanding into far-flung places like Taiping, Seremban, Miri, Bukit Mertajam and even Langkawi island.
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The move is a win for Padini on multiple fronts: it gets a first-mover advantage to build brand affinity with customers outside of the capital, broadens the group’s distribution network and saves on rentals.
Despite the stronger buying power in urban centres, Chan shares that Padini’s big-city stores don’t necessarily make money than their suburban counterparts.
“In a major city, we have to work harder to gain market share,” he quips.
Of the eight analysts tracking Padini, four have rated it a “buy” and four “hold”, with target prices ranging between RM1.80 to RM2.55.
Shares of Padini have swung between RM2.13 and RM1.58 over the past one year. The stock yielded a total return of 20.38% over the same period, according to Bloomberg data, compared with 8.84% for the benchmark FTSE Bursa Malaysia KL Composite Index.
It closed Thursday at RM2 apiece.
AllianceDBS Research sees Padini hitting the RM1bil turnover mark as early as FY15.
Analysts point out that Brand’s Outlet, Padini’s low-cost range, will be the key to its growth over the next few years as it gains a foothold in smaller towns, where demand for affordable fashion may be more defensive.
But is Padini over-expanding? No, say analysts, because this is the only way to grow in a soft market.
“We strongly believe that earnings growth for retailers will either come from same-store sales (SSS) growth or floor space expansion.
“As we anticipate slower SSS growth due to weak consumer sentiment post-GST, it is crucial for retailers to expand their distribution networks to drive revenue and earnings growth amid a slowing market,” explains AllianceDBS analyst Ian Wan.
The move will also put Padini ahead of its rivals once the current cautious sentiment ebbs.
In the meantime, AllianceDBS is taking a conservative stance on the group’s SSS, forecasting a tepid 5% growth in FY14-FY15, and only 1.4% in FY16.
This is because Padini’s FY16 will bear the full brunt of the GST, which comes into effect next April. Any drag on consumer spending is likely to play out between six to nine months following the new tax regime. “Our understanding is that prices will not change overnight, so consumers will not feel the pinch immediately. But the impact is mainly a psychological one.
“We have already been through several rounds of subsidy cuts, and after the initial reaction, life goes back to normal. Clothes are not big-ticket items like houses or cars – a 6% change will not make a huge dent in your wallet,” Chan says.
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Nonetheless, he concedes that the “jury is still out” on how GST will affect garment prices.
“The (knee-jerk) impact on sales may last for six months, and then we will have to rethink our pricing strategy. It all depends on how the market and our competitors react.”
Even so, AllianceDBS is projecting a 17% compounded annual growth rate in earnings for Padini in FY14-FY16, backed by its new stores.
The group’s dividend payout ratio could also increase to 75.6% in FY16 from 61.6% in FY13, the research house’s estimates show, given its solid balance sheet and rising free cashflow.
That would lift net dividend yields to 8.1% from 4.2%.
It is worth noting that Padini’s capital expenditure will peak in FY14-FY15 at RM30mil and RM36mil, respectively, as its store expansion continues apace.
From just one Brand’s Outlet in 2006, Padini today operates 24 of them alongside 28 concept stores.
Its affordable clothing segment made up 25% of group revenue in FY13 and 28% of pretax profit, versus the core Padini brand’s 31% of revenue and 35% of pretax profit.
Analysts say Brand’s Outlet could overtake the Padini range in both sales and profit by FY16.
Despite Brand’s Outlet cheaper products, margins are anything but slack. For FY13, Brand’s Outlet recorded a pretax profit margin of 17%, just a hair above Padini’s 16.6% margin.
Its low-end range hasn’t hurt profitability – Brand’s Outlet enjoys lower costs per sq ft of retail space and also better sales.
And using a bundled sales strategy, the group has been able to raise sales volumes while maintaining average selling prices (ASP).
“For example, you can buy one pair of pants for RM119 or two pairs for RM168. If you opt for the bundle, you are effectively paying RM84 per pair.
“This way, I sell twice as many goods without having to resort to heavy discounts,” Chan quips.
“By selling two garments in a bundle, I book a smaller profit margin but higher absolute sales, which I can then use to offset my fixed costs.”
Retailers have often complained that seasonal discounts distort the market by training consumers to wait for sales, leading to short-term spikes in demand.
Bundling, Chan says, allows Padini to create something of a year-long discount without sacrificing its ASP.
“If I tell you we are going on sale for the next two months, you’ll take your own sweet time (to buy). We try to minimise our sales days in a year,” Chan adds.
For the group, attention to detail is paramount.
“Our Miri outlets look just as good and are outfitted to the same standards as our KL stores. The way a company puts up its stores and presents the merchandise reflects how we respect our customers.
“I’m asking you to come and spend your hard-earned money in my shop. It follows that I should give you an environment that is pleasant, so you will feel good coming into the store,” Chan notes.
“The fit-out for all our stores, be it Kuantan, Kluang or KL, is the same. We don’t say, ‘OK lah, since we are opening in a small town, let’s stinge on the fittings because it won’t be so profitable.’
“There will come a day when that customer who shops in Kuantan or Kluang goes to KL.”
Profitability, however, remains the single most important factor.
“We are not in this business to break even. When we open a store, we would be reasonably confident that it will make money from the first day,” Chan says.