Faster deterioration in Q3 sales
Daphne reported an 18.1% YoY decline in Q3 same-store sales, implying faster deterioration in sales. We recall Q1 and Q2 same-store sales fell 2.5% and 13.7% YoY. We continue to believe Daphne is facing challenges from low-p rice online p rivate labels in terms of design as well as price. We believe the trend o fdeteriorating sales might not reverse in 2014.
Lifting prices was a mistake in our view
Q3 ASP rose slightly as a result of less aggressive discounting, but has negativelyimpacted volume. We believe Daphne should lower its price tags by 30% (insteadof offering deep discounting) if the company continues to under-invest in brand-building.
Store closures could accelerate
Daphne closed 40 franchised stores and added 23 new directly-managed stores in Q3, taking net store closures to 17. Management noted its continued efforts torestructure underperforming stores in Q4. We highlighted earlier that about 15% ofstores could be at risk of closure under restructuring and think store closures willaccelerate in 2014.
Valuation – Maintain Sell with PT of HK$3.50
We maintain our Sell rating with a DCF/VCAM-based PT of HK$3.50. We see downside risk to 2013/14/15 estimates due to faster deterioration of sales andmaterial threats from e-commerce.