Tuesday, July 2, 2013

What's wrong with Padini?

In the process of searching for a better stock, sometimes we forgot what we already know. Clutter is bad. It confuses us. Reading too many financial reports are bad as well sometimes, it makes us wanted to focus too much on just the financial data, hoping to find a better company. The one I have seen seems to be not good enough. Human being always wanted to look for something better, and in the process, I missed out the company which I already knew all along.

I have bought Padini and sold the stock because I thought I have found a stock which I can make some short term gain - SP Setia, which I did. However, after having sold SP Setia myself, I forgot all about the Padini stock. It is supposed to be a long term stock.

Anyway, to digress a little bit. For a while, I have not been shopping or do a walkabout until last weekend when someone within my family wanted to look for some clothes. Hence, I took her to one of the shopping complexes. Well, if anyone is telling me the Malaysian community is not running on a tight budget, sometimes I may not believe. Last weekend was the final day of the month and that means, salary is already banked in and since it is one week before the Ramadhan month, probably many people are getting their bonuses as well.

The mall was hence crowded, and I have decided to bring the family member to the Padini Concept Store. The place really had some very good deal, considering that she does not have much budget, but still she could get several pieces of clothing from Padini at a very reasonable price. I had to wait for quite while waiting for her to try out the clothes. While waiting, I did some looking around, and I found something I like (or with price reasonable enough) to decide to try them out and perhaps make a purchase. I took the 2 pieces of clothes and guess what, after waiting for about 10 minutes, I was still waiting for my turn to the changing room. There was still one person in front of me, with several pieces of clothing in her arms.

I counted the number of changing rooms that that Padini Concept Store has. It was not a large store - but it has 10 rooms - all fully occupied. So, what's wrong with Padini? Not having enough changing rooms? Frustrated (because of waiting), I just returned the clothes to the place where I got them and since we have paid for the clothes which have been chosen by the person I brought along, we went off.

Now, the problem with Padini is not by having too few changing rooms, but the people who tried out their clothes just picked too many pieces to try them out, hence the queue OR it is just the sheer number of people whom are buying! And people who bought their clothes do not just buy one, but several. It then dawn on me that Padini is doing well. Maybe just the place that I went to for that day, could it be? No. It happens, just about many other places that it has its stores.

Now, going back home, I decided to read through the financials again just to refresh myself. Its ROE is 25%. Its borrowings is decreasing and it is about to announce a better dividend this year - I think should be 8 sen per share. My biggest fear, which was the inventory turnover, has just reduced to a very strong level of 63 days! Receivables are amazing (RM18 million for a company with a full year revenue of RM800 million) as it shows that its business from its own stores are much better than the consignment ones. It's price is  not that cheap - trading at around 14x, but hey one should not be looking at just PE, as there are just too many great numbers within this retailer which I should not say no.

And I am about to overdose myself with retail stocks.

12 comments:

KAI said...

Your observation was right. Padini is still doing good. Not to forget Brands Outlet as well, it is really a huge success that it make itself known in such a short time. Its way ahead of FOS now.

Having said that, the concern of expansion of Uniqlo and H&M is real also. They will definitely eat into Padini share.

I think the next stage of growth should come from other states, which Padini is doing now.

Chelsea_C said...

Padini and Bonia are quite similar ... They are not high end or "trendy" brands but they have their supporters. I think the environment is challenging for Padini in Klang Valley with the invasion of brands like Uniqlo, Cotton On, H&M and Forever 21. However, I believe Padini would do well in second tier cities as competition is less intense there, I will add this stock to my watch list too.

panaceaasia said...

I buy clothes & other items from Uniqlo. H&M clothes are poor quality. Vincci products are at best average. I cannot understand why anyone wants to buy these products.

Can anyone tell me what is so good about Padini products?

Akagi Shigeru said...

I used to be a Padini share holder. I brushed off the thereat post by Uniqlo and H&M until I visited their outlet. In term of price and trend wise, Padini is not out of the league. In Kalng Valley I strongly believe H&M and Uniqlo will eat into Padini share market. Outside Klang Valley,padini still ahs it's edge. However, I doubt how will Padini grow with such a threat in town. I sold Padini.

Fung C.F. said...

The lack of changing rooms issue is just like the issue of carpark lots for shopping malls/commercial shoplots or cashier counters for McDonald's. That is, they will never solve it, because whatever it is it will eat up more space.

On the growth side, I'm doubtful too on Padini repeating its glory growth in the next 5-10 years. In the past 10 years, the CAGR of 30% on earnings was supported by the unbroken trend of increasing PAT margin (from 3.5% in 2002 to 13% in 2012). However, the trend has broken in 9M2013 (down to 11%). I think the margin has reached the bottleneck level and the competitions will not help. A long term growth rate of 10% per year is reasonable, 15% would be an over-achievement.

Personally, I value Padini at approx RM1.30 only (yea I know that's crazy). By saying that, the current price gives no Margin of Safety to me, unless the profit margin starts rising again.

felicity said...

That's low Fung :)

Fung C.F. said...

Hahaha I know. That's the "problem" of using DCF. Padini has a strong branding and I actually willing to give some premium to it, but the max is only up to RM1.60 (yea I know it is still crazily low XD)

felicity said...

Fung,

Its the cashflow - as in this article which lacks financial data but I have highlighted few things: - low receivables;
- now the inventory is very manageable;
- strong cashflow which is why its dividend is to improve;
- strong balance sheet;
- with all of those above, it will have a very strong ROE as to have good ROE you will need all of the above.

I agree competition is something to be wary of.

Fung C.F. said...

I think most of us agreed that Padini is a financially sound company (be it balance sheet or ROE whatsoever). Forgetting the share price, I'm actually a huge fan of Padini.

The toughest part is to forecast growth, to which even Buffett won't be 100% accurate in any case. Therefore, for conservative reason (as explained in the previous comment), I don't give Padini a high price.

I may be wrong, it may turn out to be like Aeon or GAB. But at this price, I think it is fair but not exciting.

Value Investor said...

I have been holding Padini shares before its share split of 5 to 1. It's one of my best investment so far as it has given me more than 200% returns in the last 8-9 years.
It will be difficult growing double digit as the market cap is more than RM1 Billion. Even a 5% growth topline and bottomline is pretty commendable in light of the current competitive environment.

Apart from reading its quarterly and annual reports, I strongly suggest to serious investors to attend Padini's AGM in Dec at their HQ in Glenmarie.

Speak to their CEO (founder) and their CFO cum Executive Director and ask the right questions. I have learned so much about the retail industry by just talking to them.

As long as they stay focus on their operations in Malaysia and continue to grow their brands, Padini is still one best investment on Bursa (ROE >20%) with dividend yields of at least 4% at current price.

kinwing said...

I had been holding Padini shares for many years and eventually sold those shares after the bonus issued few years where I made few hundred per cent return in few years. Nevertheless, I am still indirectly holding Padini shares through the investment in iCapital.biz.

Back to you write up on the update of Padini, I believe if like what you mentioned that Padini improves its collection of receivable and fast turnover of stocks, this indicates the cash conversion cycle is shortened now and thus its free cash flow would be in a better position. With this, Padini would be able to distribute more dividend and hence increase its payout rate which could eventually spike up its P/E.

Kin Wing

K C said...

To estimate the intrinsic value of Padini, the most important assumption is the future growth. Padini's past growth has been fantastic at about 20% for the last 5 years. If its growth can continue at that rate for another 5 years, Padini's intrinsic value can be even more than RM3.00 per share. But the problem is can it? I highly doubt so. With competitions coming in which is a normal phenomenon of a capitalist market, that kind of high growth is very difficult to sustain. I would be surprised if Padini can grow at 10% for the next 5-7 years. Even with that growth, Padini's share price has not much, if any, margin of safety.