BEAUTY is now our top BUY in the sector because it looks set to be one of the best recovery plays. We expect earnings to switch from a 1.1% YoY dip in 1Q14 to 15.5% YoY growth in 2Q14 and to 38% YoY expansion in 2H14, driven by better existing store performances, new store openings and the debut of Beauty Market. The valuation is also attractive. The stock price has risen 4% since we added BEAUTY to our top BUY list on June 23, but its PERs are 26.4x for FY14 and 20.9x for FY15, versus peer averages of 31x and 25x, respectively.
The fastest recovery
The firm has recovered faster than the other stocks under our Retail coverage. Sales have improved since March and they should be even stronger in 2H14, thanks to rising consumption spending. Management said that SSSG rebounded from only 1.9% in 1Q14 to high single-digit territory during April and May, while BEAUTY’s daily sales set a new record on May 31 (one week after the coup).
Another growth driver is expansion. BEAUTY targets opening 31 Beauty Buffet (BB), 20 Beauty Cottage (BC) and 15 Beauty Market (BM) outlets this year, which would make for a total of 210 BB locations, 70 BC branches and 18 BM stores at YE14. Despite the political unrest that has prevailed through to May, the firm still opened eight BB, six BC and three BM outlets during 5M14, and will soon open another nine BB, five BC and four BM shops within the next few months. Moreover, BEAUTY is confident that it will achieve its target of rolling out 13 BB/BC outlets in CLMV countries, which would take the number of overseas stores to 19 by YE14.
Beauty Market is building scale and value
Since the debut of its first store in 3Q13, BM has proved successful and is now more welcome among shopping mall developers. The firm expects to maintain its rollout rate of at least 15 outlets per year for the next 3-5 years. Not only should sales grow rapidly in tandem with aggressive expansion, but margin should fatten as bargaining power increases and suppliers are coerced into offering volume rebates. We believe BM will enhance the firm’s value over the long-term.
The player with the best distribution channels to end-consumers and bargaining power over suppliers to select only best-seller products for its shelves will have the highest value in the supply chain, we believe. BEAUTY increasingly fits that paradigm!