Rebound in Chinese Consumption to Drive MLB Earnings
The author is an analyst of NH Investment & Securities. She can be reached at jiyoony@nhqv.com. -- Ed.
F&F’s 4Q22 results arrived short of consensus, impacted by a contraction in domestic consumption and shipment adjustments in China. We maintain a Buy rating, however, as retail growth in China looks encouraging, as of 1Q23.
Rebound in Chinese consumption in 2023 to drive MLB earnings
As of 1Q23, China’s retail apparel consumption is displaying pent-up demand effects. It is encouraging that F&F’s SSSG (y-y) in China showed double-digit (%) growth in January despite y-y high-base burden. Due to the nature of wholesale sales, shipment volume adjustments are possible through 1Q23, considering the inventory situation for non-seasonal products in China. However, considering net store addition in China (2023E: +260 new stores), earnings should trend upward. From this year, consolidated sales are forecast to rise by at least 20% y-y, helped by the reflection of wholesale earnings from Indonesia/Philippines/Cambodia (+70% y-y) and annual earnings from Sergio Tacchini (+30% y-y). We maintain our Buy rating and TP of W220,000.
4Q22 review: Slowing domestic consumption and aftermath of Covid-19 in China
F&F posted consolidated 4Q22 sales of W558.9bn (-1% y-y) and OP of W154.5bn (-16% y-y), falling short of our estimates. In 4Q22, OPM came to 27.6% (-5.0%p y-y, -3.7%p q-q), hampered by sluggish sales during the domestic peak season and a decrease in high-margin sales volume in China.
MLB adult sales reached W245bn (-18% y-y). The DFS channel booked sales of W61bn (-16% y-y), with the pace of negative growth narrowing compared to 2Q22 (-38% y-y) and 3Q22 (-24% y-y) and outperforming the 4Q22 growth rate for downtown DFSs (-18% y-y). Domestic sales divided as: MLB W76bn (-7% y-y), MLB Kids W32bn (flat y-y), and Discovery W205bn (-2% y-y). We attribute the weak domestic sales to: 1) warmer-than-usual weather in October~November; and 2) a slowdown in domestic clothing consumption in 4Q22. But, in the DFS channel, Discovery achieved quarterly growth with sales of W5.4bn (+39% y-y).
MLB Hong Kong sales climbed to W17.3bn (+28% y-y), helped by Hong Kong’s early reopening compared to the mainland. MLB China sales reached W121bn (-19% y-y), with y-y growth by channel sized at -27% offline and +15% online (online sales portion: 27%). Offline business disruptions were unavoidable due to local lockdowns over October~November and reduced out-of-the-home activity amid the re-spreading of Covid-19 in December. At end-December, store number in China totaled 865 (including 25 temporary stores).