Local retail market to remain challenging

PETALING JAYA: The local retail market remains challenging as consumer purchasing power will continue to fall whilst retail players face increasing competition, as new local and foreign retailers flood the local market, according to MIDF Research.
In a recent report its analyst Nabil Zainoodin said, in the near term retail sales will grow, driven heavily by promotion and price discounting, as consumer look for value for money purchase, with ample choice. Hence, he said this creates unconducive scenario to raise selling prices.
"We expect that the recovery in the local retailing segment will improve starting from the 1HFY18 as the multiplier effect of better gross domestic product (GDP) number, translate into better consumer spending power."
In the meantime, he said local retailers need to expand to seek untapped markets to sustain their earnings.
"Hence, we are maintaining our "neutral" call (on the consumer sector) due to the aforementioned reasons."
Nabil further noted that retailers under the research house coverage recorded results within expectation from the recently concluded earnings season, as the second quarter (Q2) is seasonally a strong quarter for retailers, due to the effect of Hari Raya spending.
This has led MIDF Research to maintain its full-year earnings estimates for Aeon Co (M) Bhd, Padini Holdings Bhd and Panasonic Manufacturing Malaysia Bhd, with a target price of RM2.21, RM3.79 and RM35.75, respectively.

During the quarter, he said all three companies reported earnings growth of 32.7% year-on-year (y-o-y), 5.7% y-o-y and 3.3% y-o-y respectively.
AEON Co's earnings jump of 32.7% y-o-y was on the back of improvement in margins due to cost efficiency efforts and aggressive marketing and pricing strategies.
Generally, Nabil noted that year-on-year improvement in earnings for retailers is attributed to spending during festive periods that come with aggressive price discounts, new store openings and recovery in earnings driven by export sales.
On the other hand, he said the departmental store cum supermarket and department store sub-sectors has recovered from a poor Q1.
Based on data compiled by the Retail Group Malaysia (RGM), he said both departmental store cum supermarket and department store sub-sectors showed a recovery from the poor performance last quarter with a year-on-year growth of 4.1% y-o-y and 15.1% y-o-y respectively.
"This corroborated with Aeon Co and Parkson's year-on-year revenue growth of 2.3% y-o-y and 21.30% y-o-y respectively."
He said the recovery is within expectation as Q2 is historically a stronger quarter for these sub-sectors due to the Hari Raya celebration, which boosted spending on the back of heavy promotions offered by retailers.
In the coming quarter, he said RGM forecasts departmental cum supermarket and department store sub-sectors to decline 2.5% y-o-y and 1.5% y-o-y.
"We concur with this view as the growth of both subsectors will normally return to the red in the Q3 in line with the historical trend."