Joeone:Revenue declined YoY;higher expenses dragged Q216earnings
H116 net profit dropped 11% YoY
In H116, the company recorded revenue of Rmb980m (down 4.1% YoY), operatingprofit of Rmb210m (down 24.8% YoY) and net profit of Rmb200m (down 11.4%YoY), below consensus expectation. Gross margin came in at 58.3%, basically flat YoY.Selling expense rose 17.6% YoY, mainly due to increases in advertisement expenses (up54% YoY) and channel expansion & renovation costs (up 203% YoY); administrativeexpenses were basically flat YoY; overall expense ratio was 36.9%, up 7ppts YoY.
Sluggish sales in Q216, expenses under pressure
In Q216, the company recorded revenue of Rmb400m, down 13.8% YoY, notablydeteriorating compared with 4% YoY growth in Q116, mainly due to sluggish retailsales and rainy days. Operating profit came in at Rmb50m, down 58.5% YoY; growthin non-operating income enabled YoY drop in net profit to narrow to 27.6%. Q216EBIT margin was 11.5%, a low in the same quarter historically, mainly due to drop inrevenue, and transformation of retail stores caused selling expense to grow 23.7% YoYand overall expense ratio to grow 16.7ppts YoY.
Promoting retail transformation, but offline business still under pressure
In H116, the company continued to push forward retail transformation. It established aspecial team to choose some pilot areas and push forward standardized retailoperation. It also consolidated end-market stores and launched optimized store imagedesign. The transformation showed notable effect with directly-operated stores, whoserevenue only declined 1% YoY, while franchise business revenue declined 12% YoY.Stores under the main brand had a net reduction of 29, with 105 newly-opened storesand 134 stores closed; most of the closed were franchised stores. The company's subbrandFUN recorded 135% YoY growth in revenue, mainly thanks to successfulexpansion after adjustment in stores and brand strategy, with a new addition of 8stores. Overall, offline stores still face pressure, with revenue down 8% YoY; onlinebusiness revenue grew 38% YoY.
Valuation: price target of Rmb17.06, Neutral rating
We derive our price target of Rmb17.06 based on UBS's DCF model (WACC=8.2%).We have a Neutral rating on the stock.