Belle says FY17 profit will be down 15-25% yoy due tooperational deleveraging, goodwill impairment and changes instock incentives
　　4Q FY17 footwear decline narrows; sportswear stableMaintain Hold with unchanged TP of HKD4.50FY17 profit warning. Belle released a profit warning on 19 March, in which it said itexpects FY17e net profit to be down 15-25% yoy. The mid-point of the range impliesa net profit of RMB2.35bn, 28%/33% below our/consensus forecasts. The companyattributed the decline to: 1) the operational deleveraging of the footwear business;2) an impairment on goodwill and intangible assets related to the weak footwearbusiness; and 3) changes in the stock incentive scheme to incentivize management.
　　While we had expected a margin contraction due to negative footwear same-storesalesgrowth (SSSG), the scale of the impairment likely came in higher thaninvestors’ expectations. Belle booked a similar impairment of RMB1bn in FY16 andhas RMB1.16bn intangible and goodwill remaining under the footwear business.
　　Decent footwear data in 4Q FY17: Footwear SSS decline narrowed to -6.2% yoy in4Q FY17 (Dec-16 to Feb-17), from -13% in 3Q FY17, thanks to a lower base. Apartfrom lower volume, we believe average selling price (ASP) was under pressure toodue to higher online sales and change in product mix. We estimate a sharper-thanexpectednormalization in February has offset strong performance during Decemberand January given an earlier Chinese New Year this year. This trend is similar to thatshown by Le Saunda (738 HK, not rated). Belle closed 83 stores during the quarter,implying a full year closure of 5%, in line with management’s guidance.
　　Sportswear stable: The sportswear segment reported 4.5% SSS growth during thequarter, on par with 3Q. We estimate this was driven by a higher ASP thanks to afavourable product mix. However, it came in below our expectation as Pou Sheng(3813 HK, not rated) saw sales growth pick up sharply into the same period. We arenot overly concerned about the CCTV report (15 March) on Nike’s false marketing inChina given their strong brand equity and their prompt response in compensatingaffected customers.
　　Maintain Hold: Belle’s share price is up 24% year-to-date, outperforming the HSIwhich is up 10% in the same time frame. While we are encouraged by the improvingfootwear business, we believe this is in the price already. Our unchanged SOTPbasedTP of HKD4.50 implies 17% downside. We reiterate our Hold rating on Belleas we think the 5% FY18e dividend yield should provide valuation support.