Author: Mei Ling Tan

Hong Kong headquartered watch retailer City Chain plans to close more stores as sales slid 12.1 per cent and profits crashed by 86.4 per cent in the first half year to just HK$15.7 million.

Parent Stelux says turnover was “sluggish” in Hong Kong, Macau and Southeast Asia, with a narrowed gross margin. But inventory reduced by 16 per cent compared with the end of March.

The City Chain Group operates stores in Hong Kong, Macau, Mainland China, Singapore, Thailand and Malaysia together with online stores at City Chain Tmall and Titus Tmall. Turnover for the six months to September 30 was $957.9 million.

“We are rationalising our store portfolio based on shop profitability when considering shop renewal or relocation to achieve lower rental to turnover ratios,” the company said, without providing any indication of how many stores are likely to be culled.

Already stores have been closed in Singapore and Thailand.

Sales in Hong Kong and Macau fell 14.2 per cent to $646.6 million due to reduced tourist spending, shop consolidation measures and a high comparable base last year, when the group achieved record breaking monthly sales. That triggered a 56.5 per cent drop in pre-tax earnings to $67.9 million.

“A combination of factors, namely, a decrease in turnover, narrowed gross profit margin due to stock rationalisation and the time lag in containing operating costs such as shop rentals led to the decline. Operating costs other than shop rentals decreased by around eight per cent despite inflationary pressure. The group continues to tighten operating expenses to adapt to existing turnover levels to improve performance,” Stelux said in its earnings statement.

It was a rosier picture in Mainland China, now considered “a key market” for the group, which is pursuing a long term growth strategy there.

First half sales rose 11.2 per cent to $113.2 million despite the slowing economy, driven mostly by positive same store sales growth especially in the Eastern (around 27 per cent) and Southwest regions (around 40 per cent).

“Due to aggressive price cuts by competitors and a change in stock management strategy, gross profit margins came under pressure. Stock clearance initiatives have proven successful and we are on track towards maintaining a healthier and more competitive inventory balance. Losses, standing at $28.6 million, remained similar to that of last year since most of the uplift in sales was offset by the drop in gross profit margin. Notably, the loss posted by existing operations in Northern China fell by around 57 per cent compared to the same period last year due to restructuring efforts taken in Quarter 2,” the company said.

“We expect to accelerate network expansion, increasing penetration in regions where we have a presence, and also setting up in multiple second and third tier cities where we do not yet have a presence to achieve economies of scale.”

Southeast Asian first half sales were adversely affected by weakening economic fundamentals, with poor consumer sentiment and weak local currencies. Turnover dropped by 15.7 per cent to $198.1 million. But in local currency terms, turnover dropped by just four per cent.

The Southeast Asian operations recorded a loss of $23.6 million, but a large part of that was attributed to the sharp depreciation of the Malaysian ringgit. On an exchange neutral basis the loss would have been $13.2 million, compared with $12.5 million during the same period last year.

“The retail sector in Malaysia was severely affected by the introduction of GST in April 2015 and the depreciation of Malaysian ringgit. Despite this, turnover in local currency terms remained stable due to successful restructuring and re-merchandising measures adopted.

“In Singapore, store consolidation and productivity enhancement measures have been very successful and we have seen sales per shop month improving significantly by 22.5 per cent and at the same time operating costs have fallen by 19.6 per cent. This has helped to narrow the loss by 33.6 per cent to $8.3 million.

“The unstable political situation in Thailand and high household debt ratio has resulted in very low consumer confidence which has continued to fall since January 2015. Due to this, our Thai operations, posted a 24.2 per cent (FX neutral: 18.8 per cent) decline in turnover. We have implemented aggressive store consolidation measures with over 10 non-performing stores closed, and these store consolidation efforts will continue in the second half. Cost control measures were also implemented reducing our operating costs by 22 per cent.”