Impacted by COVID-19 and Restructuring Costs

The author is an analyst of NH Investment & Securities. She can be reached at jy.lee@nhqv.com. -- Ed.

 

FILA Holdings’ 1Q20 results missed consensus on Covid-19 effects and restructuring costs (Acushnet). Believing that 2Q20 will represent the roughest point, we lower our TP from W49,000 to W41,000.

2Q20 to represent roughest point

With Covid-19 having evolved into a global pandemic, we further downgrade our forecasts for FILA Holdings’ US earnings and global royalties income. Downwardly adjusting 2020E and 2020F EPS by 31% and 18%, respectively, we lower our TP from W49,000 to W41,000.

With FILA Holdings’ earnings inevitably to be harmed by the global pandemic, we believe that 2Q20 will represent the roughest point. That said: 1) the firm’s online sales have almost doubled recently; 2) its brand power remains solid; and 3) likely structural improvements (including a reduction in overall costs) stemming from downsizing amid the Covid-19 crisis should translate into an earnings recovery from next year. We adhere to a Buy rating, noting both valuation merit (the firm’s shares are trading at P/E of only 7.6x based on 2021F EPS) and the company’s strong global brand power.

1Q20 review: Impacted by Covid-19 and restructuring costs

FILA Holdings posted consolidated 1Q20 sales of W789.9bn (-5% y-y) and OP of W67.1bn (-42% y-y), with OP missing consensus by 24%.

FILA brand recorded somewhat sluggish sales of W302.0bn (-13% y-y) and OP of W44.4bn (-25% y-y). With the domestic division being impacted by Covid-19 since March, its sales fell 7% y-y. But, Chinese market sales grew 5% y-y. In the US, the brand’s channel inventory has yet to be exhausted, and its sales have fallen off 20% y-y since late March due to spread of Covid-19. Elsewhere, the firm’s 1Q20 global royalties were unscathed by Covid-19, but overall OPM narrowed 2.4% p y-y on a general decrease in operating efficiency.

Acushnet recorded sluggish earnings for 1Q20, showing sales of W487.9bn (0% y-y) and OP of W25.4bn (-55% y-y). Covid-19 effects on its earnings were prominent in the Asian region, and one-off costs of around W14bn were booked for voluntary retirements.

 

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