Low-single -digit net margin in 2013 guided
Daphne reported SSS of -5.4% YoY in Q4. Management noted operation in Q4 was adversely affected by a slowdown in consumer sentiment, keen competition, bad weather conditions, and the high prop ortion of newly trained staff. Management guided flat 2013 top-line and earnings to decline significantly with net margin at low -single -digits after booking inventory provision and impairment loses from store closures.
Narrowing Q4 SSS might be distorted
W e recall that SSS had deteriorated over the last 7 quarters before Q4. Though the decline in Q4 SSS narrowed sequentially to -5.4% (vs. -18.1% in Q3), Q4 SSS could be distorted due to store closures. We note that Daphne closed (net) 222 directly managed st ores in Q4 and 23 franchised stores. Hence, we could not conclude the operation is bottoming by interpreting SSS narrowing in one quarter.
Price increase might not address the core issue
Daphne reported a mid-single digit decline YoY in ASP for 2013 due to inventory clearance. Management shared a possibility of setting higher prices on new products in 2014. We think the new pricing strategy does not resolve the core issue behind underperformance – we previously highlighted that Daphne should reduce price tags by 30% as it faces stiff competition from cheaper and high -quality alternatives available on online platforms.
Valuation: Maintain Sell with lower estimates
We maintain our Sell rating with a PT of HK$3.00 based on DCF/VCAM methodology. We trim our 2013 top -line estimates slightly and cut our 2013 GAAP earnings estimate by 40% to include HK$100m inventory provision and impairment charges and to reflect higher overhead costs.