The growth in same-store sales of major brands deteriorated from-7.5% in the fourth quarter of 2014 to-15.9% in the first quarter of 2015. The decline in income was mainly driven by a decline in volume. Despite enhanced marketing in 2014, operating results for the first quarter of 2015 and the fourth quarter of 2014 were disappointing. The company noted that the e-commerce business maintained strong momentum in the first quarter of 2015. Online and offline businesses may erode each other.

No reversal is expected in the short term. Weak sales momentum is likely to continue into the second and third quarters of 2015, and we expect a decline in same-store sales in the other two quarters. Due to the company's strict discount policy, we previously expected a strong gross margin recovery in 2015. However, weak sales mean a slower inventory clearance and inventory build-up in the recent quarter.

Downgrade to "neutral" and target price to HK $2.02. We lowered our revenue forecasts for 2015 and 2016 by 7.1% and 9.9% respectively to reflect the sluggish sales outlook. We increase our forecasts for sales, general expenses and administrative expenses to reflect the escalation of marketing expenses and the increase in rental and labor costs due to operational deleveraging. We lowered our earnings per share forecasts for 2015 and 2016 by 53.7% and 56.4%, respectively. We downgraded the company to "neutral" and lowered its target price from HK $4.45 to HK $2.02, corresponding to 14.4 times and 12.0 times 2015 and 2016 earnings per share, respectively.