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Loss-making Sa Sa will continue to cull stores if landlords won’t compromise

Beauty-products retailer Sa Sa International says it will continue to renegotiate rents and quit locations where it cannot get satisfactory rent reductions as it struggles to return to profitability in the decimated Hong Kong retail market. 

The company has just reported a loss of US$66.6 million for the year to March on sales down 29.9 per cent to $737.7 million. The previous year, Sa Sa International posted a profit of $60.7 million. However, if a one-off impairment related to retail store assets in line with changed accounting standards, and a loss of $5.3 million related to the closure of the company’s Singapore business are excluded, the trading loss would have been a more modest $26.4 million.

Retail and wholesale sales in Hong Kong and Macau fell 33.2 per cent to $611.5 million. 

Between October 1 and June 14 this year, Sa Sa has closed 12 stores in Hong Kong, primarily in the tourist districts of Tsim Sha Tsui, Causeway Bay and Mongkok. 

“As we move into FY2020/21, we strive for significant rental reduction in the renewal negotiations or closures of shops with unsatisfactory rental reduction in order to reduce the rental expenses of the group as more leases will expire in this financial year,” said chairman and CEO Simon Kwok in a commentary for shareholders.

“Meanwhile, we will continue to negotiate with landlords for temporary rental relief for shops with leases not yet expiring in the near term.”

With new leases, the company is exploring changing from fixed-rental rates to turnover rent, which is the arrangement adopted for almost all of its current leases in Hong Kong and Macau.

“This would help merchants such as Sa Sa and our landlords to align interests during market fluctuations,” said Kwok. “However, some landlords are willing to offer this arrangement only on a temporary basis.”

Like most Hong Kong discretionary retailers Sa Sa has been hit heavily by declining tourist numbers from Mainland China, at first related to general economic malaise across the border, then concerns over protests from June last year and finally Covid-19 effectively ending border crossings since January. 

The chart below shows the change in the number of inbound mainlanders entering Hong Kong month by month between April last year and March this year (blue line), the decline of total retail sales in the territory (pink line) and the change in sales of medicines and cosmetics (black line).

The year-on-year decline in Mainland tourist sales was 80.2 per cent in the fourth quarter, reaching 97.4 per cent in February for Hong Kong and Macau SARs combined. In the three months to March last year, mainlanders accounted for 71 per cent of Sa Sa International’s sales, but in the same quarter this year just 38 per cent. 

“Local consumption declined less by comparison, decreasing by 16.6 per cent in the fourth quarter thanks to our quick shift of product sourcing towards personal protection equipment,” said Kwok.

Inventory reduction

On a more positive note, Sa Sa managed to cut its inventory by $52.6 million to $129.8 million, thanks to clearance sales and wholesale measures. Turnover days decreased by three days from 104 to 101 during the year. 

While the group’s cash balance reduced to $82.8 million at the end of March, the company says reserves are adequate for its current operational needs. 

“Currently, the top priority for Sa Sa is to manage our costs and working capital to navigate and survive the storm and to adjust our business strategy to ride on the much awaited wave of gradual recovery,” said Kwok. 

“In addition to closely monitoring our inventory and cash positions, we aim to reduce our inventory by implementing aggressive clearance activities, as well as implementing stringent controls on product order placement to ensure that funds will only be allocated to strategically focused products. 

“While striving to retain stores and staff as much as we can, we aim to realise a leaner cost structure and enhance operational efficiency in order to achieve long term healthy development for the group.”

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