Belle announced its 4QFY17 operational update over the weekend
It recorded 6.2% SSS decline for footwear business and 4.5% SSS growth forsportswear business. During the quarter, the company closed net 83 footwearstores and increased net 169 stores, bringing the total store number to 20,716.SSS for footwear composed of a 2% decline in ASP, mainly due to mix change(online sales was up but expensive boots were down). SSS for sportswearcomposed of 4%+ ASP with volumes slightly down due to mix shift asaccessories were down, while footwear/apparel was the driver.
Profit warning - NP for FY17 expected to decline by 15%-25%
Belle expects its NP for FY17 will decline by 15%-25%, mainly due to 1)impairment of goodwill and intangible asset on footwear; 2) operatingdeleveraging for footwear business; 3) significant increase in non-cashexpense due to share award scheme adjustment approved on 26 May 2014.
Deutsche Bank view. Intangible asset and goodwill impairment from footwear
amounted to ~RMB1.1bn. We believe ~ 90% will be written down. Belle willhave additional adjustment for its 10-year share award scheme, which willshorten its amortization period, but be offset by ~RMB100m gain fromBaroque’s IPO in Nov 16. We believe this implies core NP decline of ~ 20% toHK$3.4bn, 9%/2% lower than DB/market forecast. For FY18, mgmt remainsmore positive on sportswear (we believe 2HFY17 EBIT will be as good as 1H)while cautious on ladies’ footwear. The rate of SSS decline for ladies’ footwearshould narrow but visibility remains unclear. We believe mgmt might review itsdividend policy. Our Buy call is geared on our view that the market has alreadyfactored in a slowdown in footwear, even in FY18/19 (which is what we areseeing in 4QFY17), but note its dividend policy is also important. We thusbelieve share price might slightly soften or at best trade sideways until there ismore clarity on Belle’s dividend policy when it announce its results in May.