End of inventory depletion in China

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The author is an analyst of NH Investment & Securities. She can be reached at jiyoony@nhqv.com — Ed.

F&F’s 1Q23 earnings are likely to arrive short of expectations due to slowing domestic consumption and inventory depletion in China. However, with SSSG in China surpassing the 20%-level in March, we expect a full-fledged acceleration of store openings and export momentum from 2Q23.

Chinese growth just around the corner

Although maintaining a Buy rating, we lower our TP on F&F by 5% to W210,000. Our TP adjustment reflects a 1.6%p cut to our GPM estimate to account for: 1) the delayed recovery of the DFS channel in 1Q23; and 2) the consolidated incorporation of new businesses (Sergio Tacchini, Victory Contents).

In China, growth is imminent. Although same-store sales growth (SSSG) remained in the single-digit (%) range in January and February, the figure was reaching 20~30% in March. Due to the nature of wholesale sales, inventory adjustments were inevitable through 1Q23. However, considering the net addition of targeted store openings this year (+250 stores), steep sales growth, rather than inventory depletion, should emerge from April. In Hong Kong and Taiwan, in addition to reopening effects, sales volume is accelerating from store openings. Also worthy of attention over the mid/long term are the rise of new brand Sergio Tacchini (sales: +30% y-y) and the entry of Duvetica into China (+20 stores).

1Q23 preview: Temper expectations for domestic demand and DFS channel

We expect F&F to post consolidated 1Q23 sales of W474bn (+8% y-y) and OP of W137.5bn (+2% y-y). For 1Q23, OPM should reach 29% (-1.8%p y-y), affected by slowing domestic apparel consumption, sluggish sales at DFS channels, and decreased sales volume in China due to local inventory depletion in 4Q22.

MLB adult sales are estimated at W257.8bn (-2% y-y). DFS channel sales should total W47.6bn (-30% y-y), showing similar growth to that estimated for Korea’s duty-free market (-30% y-y) following the reorganization of Daigou commissions. We forecast domestic MLB sales of W68.3bn (-3% y-y), MLB Kids sales of W31.6bn (+5% y-y), and Discovery sales of W105bn (-5% y-y), amid overall mild weather and heavy negative base burden at department stores, which are a major sales channel.

MLB Hong Kong sales are projected at W18.6bn (+79% y-y). Hong Kong + Macau is enjoying sales growth of +100% y-y, helped by Omicron-related base effect, with the figure reaching +40% y-y for Taiwan thanks to new store openings. MLB China sales should top W187bn (+24% y-y), with y-y growth by channel sized at +26% y-y offline and +6% y-y online (online is about 10% of total sales). As of end-1Q23, the number of local stores in China amounted to 899 (including 16 temporary stores).

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