Look beyond weak FY13F; BUY. We cut our FY13/14/15F estimates for Daphne by 15%/14%/13% to reflect much-worse-than-expected 2Q13 SSSG-led operating deleveraging. Nonetheless, we maintain our BUY rating on Daphne given an easier comparison base for 2H13F, while further inventory write-offs are less likely in 2H13F, which would ease the drag on gross margins follo wing the clearance of off-season stocks in 2Q13. We derive our new TP of HKD7.57, as we keep our target multiple at 12.7X FY14 PER. We expect its supply chain management and efficiency enhancement efforts to bear fruit from FY14 onwards.
Poor interims to come. 2Q13 SSSG came in at -13.7% vs -2.5% in 1Q13, despite a more favourable comparison base in 2Q than 1Q. Poor sales were attributable to tough macros, adverse weather and the avian flu outbreak. SSSG came in at -9.2 % for 1H13 compared with full-year guidance of mid-to-high single digit growth. Meanwhile, losses at the mid-to-high end brand segment were largely comparable to last year. The company therefore anticipates a meaningful YoY earnings decline in 1H13, given the high fixed cost structure of its footwear retail business (~80% of stores are street st ores subject to fixed-term leases).
That said, we believe earnings will recover in 2H13 on improving SSSG. We expect 1H 13 net profits to decline by 31% YoY while 2H13 earnings to be largely flat YoY.
Key highlights. Management expects inventory days to increase slightly YoY from 1H13’s 202 days due to slow sales. However, with the aggressive clearance of off-season items and discounts offered in 2Q13, we believe the company will be in a good position to bring down FY13 inventory days on a YoY basis. We also think a better-focused A&P effort in upcoming quarters will drive customer traffic, as the company intentionally reduces its A&P exercise amid weak market in 1H13. We expect the company to see a 29.3% net profit CAGR over FY14-15F with satisfactory operating margins of 12-13%, as the installation of its new retail management system will allow more efficient product planning and orders in future, to avoid la rge fluctuations in inventory.