FY24 results were roughly inline with CMBI/BBG est.. Some investors could be concerned about the softened performance in 2H24, but this should be partially expected. The conservative tone for FY25E is not surprising and guidance should likely be achieved, thanks to further upgrades in member management and customer services, resilient GP margin and a better channel mix, etc. All in all, we think the downside is still limited, given the stock is just trading at 7x FY25E P/E and 11% FY25E yield.
FY25E guidance is conservative, but it is expected and achievable, in our view. First of all, the FY25 guidance provided by management is very prudent, which is foreseeing only positive sales and net profit growth (CMBI est. 7% sales growth and 8% net profit growth). However, we do think that is totally understandable, because: 1) direct retail sales growth was almost flattish during Jan-Jun 2024 (so as the SSSG) and 2) growth of active members and VIPs also slowed down. In our view, such a slowdown is kind of expected by investors already given the current macro backdrop.
Nevertheless, we are still cautiously optimistic on sales growth, because: 1) the long-term target is still valid and reiterated by management (RMB 10bn retail sales, RMB 6bn listco-level sales, 65%+ GP margin and 15%+ NP margin) and that is still implying an 8% sales CAGR during FY24- 26E, 2) retail sales growth softened a bit in Jun 2024, but should have sequentially improved in Jul-Aug 2024, thanks to the accelerated e- commerce sales, 3) there will be more upgrades in member management and customer services (more segmentation will be carried out and additional benefits will be added to the higher tiers, and more membership data sharing with shopping malls has already been implemented), 4) there will be more advertising around the Company’s 30-year anniversary, in order to boost brand equity and sales, and 5) more product series/ lines will be introduced, like the Black label for the menswear CROQUIS.
Margin-wise, despite the potential drag from sluggish offline SSSG, we think it could still be stable, thanks to: 1) resilient GP margin, supported by improvement in brand power, a highly healthy inventory level and limited retail discounts, 2) disciplined advertising and marketing expenses (we only expect a MSD to HSD YoY increase in terms of absolute amount, despite the 30-year anniversary), and 3) a favourable channel mix, where sales contribution from wholesale and e-commerce could still increase, due to the shift of direct-retail stores to distributor stores and rapid sales growth from e-commerce channels like Douyin.