Belle reported weak 1HFY17 with earnings down 20% y/y and 12% below ourestimates due to miss in sportswear while footwear EBIT was down 25% asexpected. Post results, we cut our FY17 earnings estimates by 3% and downgradeto UW with a revised PT of HK$4. Share price run in 3Q was largely related toimproving footwear SSS decline and stable sportswear. While sportswear is likelyto stabilize after the margin reset of 1H, we do not see improvement in footwearand believe recent SSS improvement is on back of store closures. Managementcontinues to mention that there will be less emphasis on department stores andbetter O2O integration, which we believe needs a change in pricing strategy (ascurrent offline prices are at a level which is difficult to integrate with online) andseamless online offline integration with same SKUs and pricing. These willinevitably bring margin pressure. We would avoid the stock until potentialearnings reset pass.
Channel reform is likely to bring further margin pressure: Managementnotes weak footwear is due to its exposure to department stores. It will continueto close stores and focus on O2O integration by: i) offering online experience tooffline customers, and ii) increasing the return rate of repeated customers andinteraction with new customers. We think this will come with lower pricesoffline and thus continue to put pressure on margins.
Sportswear stable but not saving the day. After recent margin reset in 1H weexpect sportswear to be stable. Margins have come down to sustainable levelsas we do not expect further notable erosion but not go back to DD levels. Thispoints to c6% earnings growth for sportswear making up c40% earnings but theremaining 60% earnings from footwear continue declining.
2H17E outlook. Sep/Oct trading is weak with no signs of improvement. Storeclosure is likely to help footwear SSS but we still expect it to post 7.5% SSSdecline in 2H17 and sportswear to post 6% SSSG. We model 320bps EBITmargin erosion for footwear and stable sportswear margins. We expect earningsto decline 17% in FY17 and down 5% in FY18E.