Related Earnings Still to Come
The author is an analyst of NH Investment & Securities. She can be reached at jiyoony@nhqv.com. -- Ed.
FILA Holdings’ 2Q22 results surpassed consensus on an earnings surprise at Acushnet and favorable forex rate effects. In 2H22, achieving sound earnings at the main business looks challenging amid efforts to reinforce manpower at FILA and a change in sales channel (wholesale → retail/online). Recommending a long-term approach, we advise looking towards 2023, which promises both a domestic expansion of the firm’s tennis product lineup and a US earnings turnaround.
Earnings turnaround at FILA necessary for share price to rise
For FILA Holdings, FILA rebranding effects are unlikely to materialize immediately. However, reflecting such, the firm’s 2023F P/E (7x) has already fallen to the bottom end of that for global apparel stocks, limiting the possibility of further correction. At the US business, although losses are expected in 2H22 due to inventory depletion, royalties and DSF revenue (64% of FILA’s OP in 2021), which contribute a large share to the company’s profits, should increase. Sales growth of +10% y-y is anticipated at Acushnet in 2H22, considering forex rates, its current low inventory level (below that of 2019), and expectations for robust demand. Noting that FILA Holdings’ current market cap (W2tn, as of Aug 12) is less than 6x of its 12-month forward P/E, excluding the value of stakes in subsidiaries (50% discount, W1.3tn), we view the stock as being attractively undervalued. Accordingly, we maintain a Buy rating and TP of W42,000.
2Q22 review: Earnings surprise on Acushnet and forex rate effects
FILA Holdings posted consolidated 2Q22 sales of W1.17tn (+15% y-y) and OP of W152.4bn (-12% y-y), with sales exceeding consensus.
FILA recorded sales of W342.9bn (+8% y-y) and OP of W40.9bn (-20% y-y). However, excluding one-off sales (about W40bn) related to sourcing/shipping, sales growth likely came in negative. Sales growth (y-y) arrived at -10% in Korea (excluding DSF), -8% in the US, +15% for royalties, and +7% for DSF. In the US, GPM deteriorated to 21.4% (-5.1% y-y) due to shrinking consumption (demand side), conservative inventory management by retailers, and channel overhaul efforts. However, GPM remained at 26% if excluding the pre-reflection of 3Q22 costs. In Korea, GPM slid to 59.1% (-2.6% y-y) due to rising manufacturing costs and fixed cost burden. At the DSF business, sales arrived sluggish over April~May (-20% y-y) but turned to double-digit growth in June on a solid performance during China’s Jun 18 shopping festival (ranked 3rd in sales behind Nike and Adidas). Royalties grew in all regions except North America (ending of Kohl’s contract) amid brisk demand for the performance and tennis lines.
Acushnet logged 2Q22 sales of W829bn (+18% y-y), OP of W111.5bn (-9% y-y), and OPM of 13.4% (-4.1% y-y). Although operating expenses (eg, investment in fulfillment, R&D, and marketing) increased, solid golf-related demand and the high tag-price sales portion of FootJoy continued.