We held an investor conference call with Urban Beauty to learn about the latest developments in their business transformation.
The online channel will be the company's focus area in FY21, and is expected to contribute 25% to 30% of total revenue and record high growth (accounting for around 20% of total revenue in FY20).
Same-store sales growth in the fourth quarter of FY20 was better than management's expectations. We currently expect same-store sales growth of 4.6% and 3.0% for FY21-22, respectively.
Meanwhile, revenue is expected to grow by 14.6% and gross margin to reach 50.8% in FY21.
Maintaining the “hold” rating, the discounted cash flow target price remained unchanged at HK$1.46.
Online channels will be the focus of development in FY21
The company's online sales are expected to grow 15-20% year over year in FY20, accounting for about 20% of total sales (up from less than 15% in FY19). In January 2021, the company's sales on Tmall and JD both increased by more than 40% year over year. The online channel will be the company's development focus in FY21, and it is expected to record high growth and contribute 25% to 30% of total revenue. With 60 million private domain members, the company's live streaming marketing campaign reached a new milestone in January 2021, with a total of 2.38 million viewers.
The goal of the live event is to increase brand awareness, showcase new products, and drive online traffic to its offline stores. This O2O model was very effective in increasing the repurchase rate, which increased from 24% in FY19 to 31% in FY20. In order to compete with new online peers, Urban Beauty has successfully developed its own popular product, which has popular comfort features. The product has recorded good sales in recent sales activities.
Accelerate the renovation and opening of offline stores
In FY20, the company's total number of stores was reduced, 200 inefficient stores were closed during the period, and some new stores were opened with 30% to 40% lower rents. In FY21, the company's total number of stores will increase slightly, and it is expected to open 100 self-operated stores and 400-500 franchised stores in 50 major commercial districts across the country. During the period, it will also open 10 shopping malls, Cosmo Lady Home, which focuses on family lifestyle, and 150 to 200 factory stores for clearance purposes. Currently, 700-800 seventh-generation stores have been opened or are being renovated, and the company will begin upgrading 600-700 stores in FY21. The company's track record shows that store upgrade programs can increase store sales by an average of 20%. The company is also actively promoting digital operations to increase the visibility of stores, products, and customers across the lifecycle. In the fourth quarter of FY20, the company achieved good same-store sales growth, which was better than management's expectations. Currently, we expect same-store sales growth of 4.6% and 3.0%, respectively, for fiscal year 21-22.
Used inventory has decreased and sell-out rates have increased
By the end of 2020, the value of the company's used inventory for more than one year had decreased by 50% year-on-year. Currently, new inventory represents 50% of total inventory.
Less than a month ago, the company launched the Spring/Summer 2021 collection, which had a sell-out rate of 50%, while the 30-day sell-out rate for the Fall/Winter 2020 series was less than 50%, an increase of 6-7 percentage points over the previous year. The company's gross margin for the second half of 2020 is expected to be 44-45%.
We anticipate revenue growth of 14.6% and gross margin of 50.8% in FY21.
Maintaining the holding rating, the discounted cash flow target price remained at HK$1.46. As the company has taken a number of transformation measures, we expect the company to re-record net profit in FY21. Key catalysts include higher-than-expected same-store sales growth, accelerated online channel growth, and corporate mergers and acquisitions. Risk factors include rising raw material prices and a slower than expected recovery in profits.