Tighter margins impact on Sasa International profit

Squeezed margins eroded beauty retailer Sasa International profits in the last financial year.

The company says its profit slumped 14.8 per cent to HK$326.7 million (US$41.89 million), despite a decrease in turnover of just 0.6 per cent to $7.746 billion. Sales in its core Hong Kong-Macau market were broadly flat at $6.267 billion. Same-store sales there fell 1.8 per cent.

But Sasa has reported rising sales and basket size in the last two quarters of the year and expects savings from renegotiated rents to begin to impact on the group’s bottom line this current year.

“The decrease in retail sales continued to narrow starting from the first quarter, with an increase in retail sales being recorded in the third and fourth quarters,” the company said in its earnings statement. “An increase in same-store sales was also recorded in the fourth quarter, mainly driven by growing numbers of Mainland China customers, with the number of their transactions also growing by 8 per cent.”

The company said the decline in sales was due to a continued decline in Mainland tourist arrivals in Hong Kong, a weaker renminbi and changing consumer preferences, as well as the growing preference of Hong Kong residents for outbound travel.

“Keener online and offline competition and the evolving nature of the customer journey also played their part.”

Sasa said it arrested the decline by adjusting its product range to meet changing consumer preferences. The group added lower-priced, trendy Asian products to its offer and expedited product-purchasing procedures.

“The time required for product launch was reduced through flexible and effective sourcing procedures. The optimisation of product mix and improved product display also helped to realise the potential of product sales.

“These measures have already made a positive impact. The share of new products as well as trendy Asian products in the total product mix has increased. This has helped drive store traffic and the number of transactions, thereby improving retail performance and recovering Sa Sa’s market share. Similar positive factors drove the gradual increase in mainland tourists’ retail sales, which grew by 0.9 per cent over the year.”

Gross profit margin decreased from 43.2 per cent to 41.5 per cent.

House brands falter

Meanwhile, the rapid change in consumer preferences led to a decrease in house brand sales mix from 41.9 per cent to 38.5 per cent.

“Efforts to drive sales in a slower market by launching a continuous program of promotions also contributed to a lower gross profit margin. Actions have been taken to tackle the decreased gross profit in this financial year, with the percentage decrease slowly narrowing,” the company said.
Now it is focusing on expanding its own-label portfolio and launching new lower-price own brands to raise consumers’ purchasing desire.

“Stringent cost controls” have helped alleviate the pressure on profit. Expenses ranging from shop expenses to administrative expenses all decreased, partially offsetting some of the negative impact of a weaker gross profit margin.

During the year, the group relocated certain shops, which while resulting in duplicated rentals after opening nearby stores in better locations during the transitional period, will result in lower rent overheads from this year onwards.

“If the group had not taken advantage of a weaker rental market to improve the positioning of its stores, the result of rental costs’ control would have been more pronounced. As the rental adjustment cycle continues, market rentals are expected to progressively decrease.”

Mainland China

Overall turnover in Mainland China in local currency decreased by 3.9 per cent to HK$276.5 million, while same-store sales decreased by 3.4 per cent. The loss for the year amounted to $15.1 million.

Sasa International says the main reason for weaker turnover was the delay of new private label product launches while the respective China Food and Drug Administration registrations were processed. “As soon as these registrations are completed in the next few months to complement online to offline promotions in the group’s stores, the competitiveness of the group’s product mix will improve.

Singapore
Turnover for Singapore was HK$200.7 million, down 9.7 per cent in local currency terms, with same-store sales dropping 7.6 per cent.

Sasa’s total retail space in Singapore has increased steadily over the past two years, diluting foot traffic in existing stores and leading to a decrease in turnover. Falling sales of own-brand products also contributed to the decline.

Malaysia
The group’s turnover in our Malaysia market was $332.1 million, up 12.4 per cent in local currency terms, while same-store sales increased 6.2 per cent.

“The fundamentals of the group’s business in Malaysia are strong. Driven by a robust retail network and effective marketing campaigns, the group’s sales performance in Malaysia outperformed its competitors and the overall retail market. However, due to a high base factor in the previous financial year, a faltering economy, declining consumer-spending power, and the allocation of some management resources to Singapore, sales performance in the second half of the year was weaker – although performing better than the overall market.”

Taiwan

Turnover in the Group’s Taiwan business during the financial year decreased to HK$195.1 million, representing a drop of 24.4 per cent in local currency terms, while same-store sales fell 16.8 per cent.

Sasa International says its sales performance was affected by poor consumption sentiment and a continuing decrease in Mainland Chinese visitors to Taiwan. “The group continues to improve Taiwan’s performance by strengthening the management team and rationalising the store network, increasing the profitability of profitable shops, and closing those with lower productivity.”

E-commerce

Online sales increased 9.5 per cent year-on-year, totalling $475.2 million.

Aggressive promotions in the second half helped drive higher sales, which were supported by improvements in customer order fulfillment.

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