We expect the 2Q13 same store sales of core brands business to decrease by 4% yoy, which is worse than the 1Q13 SSSG of -2.5%, due to the slow consumption recovery in China and unfavorable weather in April. And the ASP in 2Q13 is expected to drop further due to a 5% greater discount being provided for spring products in Ma y and June. The slight ASP decline is expected to further squeeze the gross profit margin of the Company.
We are now modeling a 0% SSSG for 2013, cutting from 2% but maintain network addition of 500 stores. The inventory provision for out of season fall and winter inventory is expected to further squeeze gross profit margin besides the retail ASP drop. One third of contracts are up for renewal this year and rental expenses are expected to increase by 20-25%. The newly opened around 1,000 stores last year with high rental expenses will further increase the rental expenses as a percentage of sales from the 21.5% in 2012. Also, t he Company is still expecting 10-15% staff costs increase this year. As a result, we hav e revised down our basic EPS forecasts by 10.1%/13.5%/14.1%, respectively, to HKD0.522/0.548/0.606 in FY13/14/15.
We now expect the 2013 basic EPS to decrease by 10.2% yoy and we believe the 2013 first half basic EPS may decrease over 20% yoy as SSSG decreases. We maintain the Company’s ‘Reduce’ rating and cut target price to HKD5.66, which corresponds to 10.9x and 12.0x 2013 basic EPS and fully diluted EPS