Stable retail performance; high score and red label; buying
Taobo revealed that the total sales volume of the 3QFY24 retail and wholesale business increased by a low range of 10-20% year-on-year, which accelerated from the 8% year-on-year increase of 1HFY24, partly due to improvements in the base figure. According to management, sales for the first nine months of fiscal year 24 had recovered to the level of 80-85% in the same period in 2019, and since December, the sales growth trend has been similar to 3Q, and retail discounts have continued to improve. We believe that the company's inventory has recovered to health, and Taobo, as a leading multi-brand retailer in China, is expected to maintain double-digit growth in retail sales next year, driven by the gradual launch of new products and the resumption of marketing activities. At the same time, Taobo's high dividend rate (FY24:7.5%) is also attractive to investors. We slightly lowered the basic EPS of FY24E/25E/26E by 1.7/3.2/ 4.0% to $0.38/0.46/0.53, and reduced the target price by 1% to HK$8.2, based on 17.0x target PE (dynamic PE average for 12 months since launch, +0.5SD, to reflect international brand recovery and new brand growth after the pandemic) and dynamic EPS of $0.45. Maintain “buying.”
The increase in retail sales was mainly driven by same-store sales
The increase in retail sales of Taobo 3QFY24 was mainly driven by the increase in same-store sales; the number of stores on a quarterly basis was still net closed, mainly due to a one-time strategic adjustment by one of the brand's customers. Other than that, the number of other brand stores has begun to open net stores; the gross sales area of direct-run retail stores increased 0.5% month-on-month during the quarter, down 1.7% year-on-year. In terms of channels, retail sales in direct retail channels grew at a high rate of 10-20% year on year, faster than wholesale channels; both online and offline channel flow increased by double digits year on year. In terms of brands, the retail sales growth rate of non-major brands surpassed that of major brands, and both recorded double-digit year-on-year growth; brands with retail sales growth above the company average had a weighted growth rate of 10-20%; while the weighted growth rate of other brands below the average was in the middle unit, without considering strategic brand adjustments, it was a low range of 10-20%.
Inventories are healthy; operations are back on track
By the end of November, the company's inventory value had declined by double digits year on year, roughly the same level as at the end of August, while the number of higher units had declined compared to the end of February, partly due to the entry of new products in autumn and winter. The inventory turnover ratio narrowed sharply year over year to slightly less than 4x. The sell-out rate of new products launched in 3Q-4Q at the end of November improved year-on-year, partly due to the restart of marketing activities, such as the “Only Basketball” basketball event hosted by Nike in Beijing in October, and the Nike China High School Basketball League held in 3Q. The brand's vigorous marketing activities also contributed to a year-on-year improvement in retail discounts during the Taobo season, which also improved slightly compared to 1HFY24.
Appropriate strategies will be adopted to face the declining market under consumption stratification
According to management, Taobo also has a rich layout and store network in third-tier cities and below, and has paid attention to the current trend of stratification in the consumer market; due to intense competition in the sinking market, and the aging population is more serious than in higher-tier cities, the company will adopt a style more suitable for the sinking market, rather than simply downgrading existing products or reducing prices at the expense of profit margins, or simply copying the existing large store model.
Risk warning: 1) The weak economic recovery has led to increased competition in the industry, and retail discounts continue to deepen; 2) the expansion of new brands in China falls short of expectations; 3) Channel inventory removal is slow.