FY2014 results better than market expectation
FY14 sales increased by 3.1% to HK$6,746.9mn, slightly better than consensus of 2%. Net profit decreased by 27.1% to HK$279.6mn, but much better than market expectation of Rmb190~215mn, mainly due to gross margin recovery in 2H on fewer promotional campaigns. Full-year dividend payout ratio was 44%.
Sales breakdown by region: HK decreased by 2.2%, Mainland China increased by 16.5%, Japan decreased by 13.4% (due to foreign exchange, sales in Japanese Yen increased by 5.5%,), and Macau increased by 8.9%. SSSG: HK -4.0%, Mainland China flat.
Gross profit increased by 5.1% with GP margin of 59.9% (FY13: 58.8%). Margin by region: HK 59.3% (+1.3ppt), Mainland China 57.3% (-0.6ppt). Operating expense ratio increased 2.3ppt to 53.8%.
Trend improved in 2H: Sales increased by 6.4% YoY, compared with -0.9% YoY in 1H; net profit decrease also narrowed sharply.
Trends to watch
The company will take measures to lift sales performance.
Meanwhile, gross margin should continually improve along with less discounting frequency and mix optimization. However, I.T shared a loss of HK$41.8mn for the JV with Galeries Lafayette (store opened in mid-October), store performance needs to be watched.
Earnings revisions
Revise up FY2015 net profit by 18.0% to reflect the improving trend (slightly on sales, mainly for gross margin).
Valuation and recommendation
Maintain ACCUMULATE. I.T’s operations have been affected by a high markdown environment. However, 2HFY14 showed some signs of turnaround, we expect it to bottom out in FY2015. Lift TP to HK$2.55 (10x FY15E EPS) from HK$2.27.
Risks
Consumption slows down further.