The 2Q13 same store sales of core brands business decreased by 13.7% yoy (substantially lower than our expectation of -4%), due to the slow consumption recovery in China and unfavorable weather condition. The gross profit margin in the first half of this year is expected to be squeezed by low single digit though ASP decreases only slightly yoy, which we believe is resulted from inventory provis ion for fall and winter products. Net profit margin is expected to decrease to mid-single digit from the 9.5% in 1H2012 due to the slowing down of sales, gross profit margin contraction as well as the operating deleveraging.
The weak economy in the first half of this year suggests the retail sales performance of ladies footwear may be still sluggish in the second half of this year although the base is lower for Daphne. We are now modeling a -6% SSSG for 2013, cutting again from 0%. The Company slowed down the network expansion pace to narrow new stores’ loss. In other words, the store expansion pace may further slow down and we cut our net store addition forecast from 500 to 450. We have revised down our basic EPS forecasts by 30.1%/24.4%/25.2%, respectively, to HKD0.365/0.414/0.453 in FY13/14/15.
We now expect the 2013 basic EPS to decrease by 37.2% yoy and the valuation de-rating is still on the way. We maintain the Company’s ‘Reduce’ rating and cut target price to HKD4.39, which corresponds to 12.0x and 13.0x 2013 basic EPS and fully diluted EPS, to factor in our lower earnings forecasts.