Lifting of Lockdowns in China in May~June to Be Key
The author is an analyst of NH Investment & Securities. She can be reached at jiyoony@nhqv.com. -- Ed.
F&F registered an earnings surprise for 1Q22. Domestic performance outperformed market expectations, and MLB China posted sales similar to the recent peak season (4Q21) number. Company-wide OPM reached 31%. But directly-run store and duty-free channel sales in China proved sluggish in April. A key factor for 2Q22 earnings is to be whether Chinese lockdowns are lifted after Labor Day.
Lifting of lockdowns in China in May~June to be key
With the Korean government’s easing of social distancing measures in April, the current domestic business environment is favorable compared to March. However, out of 563 stores in China, stores in Shanghai and Beijing (roughly 20% portion) have shortened their hours of operation or closed since end-March. Accordingly, our sales forecasts for 23 direct-managed stores in Shanghai are inevitably trimmed down from our previous estimates. As wholesale orders for agent-operated stores are shipped at least one to two months in advance, no major impact was likely until early April. But, given the possibility that the lockdowns will prolong, we maintain a conservative view towards wholesale reorders in May and June.
We maintain a Buy rating and a TP of W200,000 (W1,000,000 before par split) on F&F. Chinese Online (Tmall) sales, an indicator of brand power, are still solid. And, with a 2022E ROE of 57% and a P/E of 13x, F&F’s valuations still appear attractive even compared to global apparel stocks. However, in order for the firm’s share price to rise, it will be important to see if Chinese lockdowns are lifted after the Labor Day holidays (Apr 30~May 4).
1Q22 review: Maximizing operating leverage effects
F&F announced consolidated 1Q22 sales of W437.1bn (+57% y-y) and OP of W134.6bn (+94% y-y), with both figures significantly exceeding consensus.
[Domestic] MLB Korea (excluding exports) recorded W137.6bn in sales (+25% y-y), and growth (y-y) by channel of +57% for stores and +3% for DFSs. MLB Kids recorded sales of W30bn (+40% y-y), with growth rate (y-y) by channel showing +22% for stores and -12% for DFSs. Discovery booked sales of W110bn, enjoying the benefits of booming outdoor activity and the expansion of categories/lineups by opening four exclusive Kids stores in March.
[Overseas] MLB China’s sales reached W150.9bn (+205% y-y), similar to the level seen during the 4Q21 peak season. Growth rate (y-y) by channel clocked at +242% for offline and +64% for online. The number of agent-operated stores reached 540 (+68 stores q-q) in 1Q22. Store openings and a resultant top-line growth and reduced commission payment led to sustained operating leverage effects. MLB Hong Kong sales were held to W10.4bn (+3% y-y) owing to a drop in customer traffic caused by the Covid-19 resurgence in March.