| ERATAT LIFESTYLE (formerly China Eratat Fashion) shares were weak yesterday, closing down 1 cent to 15.5 cents after the company reported a 23.5% slide in net profit to RMB27.1 million for the quarter ended June 30.
Revenue for the quarter was weaker by 8.7% year-on-year to RMB237.2 million.
At a lunchtime briefing by Eratat management at M Hotel, it was, however, highlighted that :
L-R: Eratat executive chairman Lin Jiancheng, CFO Ken Ho at yesterday's briefing. They were wearing Eratat casualwear. Photo by Leong Chan Teik
a) RMB500 million in orders for delivery in the July-Dec season is an increase of 12% year-on-year.
b) The company will be increasing Average Selling Prices of its goods, and ‘expects to improve gross profit margins' in the second half of this year.
Some salient points about the 1H results covered higher ASPs and higher cost of materials:
* The Group delivered RMB388 million of its 2010 Spring/Summer Season (also 1H2010) orders of RMB400 million. The shortfall of RMB12 million (or 3.0%) was mainly due to the company reducting its delivery of Eratat brand footwear to under-performing distributors.
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Excerpts from CIMB analyst William Tng's report this morning on Eratat Lifestyle:
* Fundamental BUY, TP S$0.29. 1Q Mar 11’s sales and profit decline should be seen in the context of Eratat’s Lifestyle’s transition to casual lifestyle products.
• Going forward, the Company will distance itself further and further away from sports related apparel.
• Focus will also be on store quality and brand building to raise overall ASPs. Pure numbers game of having more and more retail points is no the point.
• Downside risk remains low:
* Latest net cash per share is 5.7cts
* Net net working capital per share is 22.6cts
* Historical NTA per share is 27.6cts
* Dividend yield at 6.2%
• 1Q10 results generally in line with our forecast with sales/gross profit/net profit achieving 23.4%/23.0%/26.5% of our full year expectations. |
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The Group managed to replace the shortfall by securing additional sales of Third Party Brand footwear of RMB18.5 million (or 162.3%) to RMB29.9 million.)
* Footwear and apparel accounted for 59.7% and 40.3%, respectively, of the Group’s revenue. (1H 2009: 62.8% and 37.2% respectively).
* The Group continues to increase the apparel sales contribution ratio so as to provide wider apparel product range, which is part of the Group’s business strategy to focus on growing its Eratat brand equity.
* The ex-factory average selling price of Eratat Brand footwear rose by more than 10% year on year in the quarter ended June 2010.
While the cost of production of footwear increased due to higher cost of materials resulting from better quality material used, the Group managed to improve its gross profit margin, as compared to the 2009 Autumn/Winter Season (July-Dec 09).
* The ASP of Eratat Brand apparel range also rose by more than 50% in the quarter ended June 2010, but the overall ASP stayed at RMB58 per piece mainly because of overall product mix.
The cost of apparel (which are currently 100% outsourced) had risen substantially due to better quality of materials used.
However, the ASP did not increase in direct proportion with the increase in cost of production, thus resulting in a decrease in gross margin for apparel.
You can read more information in Eratat's press release here.
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