We think customer profiles are the main difficulties for RALS. It’s 1H10 underperformance according to RALS was not due to rising cost but margin slippage as RALS cut prices, which effectively reduce merchandise margin. Despite increasing GDP/capita, RALS’ main customers still see no increase in spending power. On the other hand, the required service has increased with RALS no longer can reduce its stores’ comfort. Change of approach is required and RALS has to go through trials and errors. Hence we are Neutral on the stock.
Restructuring organization into department stores and supermarket. Commenting on the 1H10 high salary and benefit costs (1H10 :Rp190.3bn, + 17.3% yoy) and utility charges (Rp93.0bn, +21.6% yoy) even before planned electricity tariff hike, RALS unveiled its new strategy. Regarding the salary and benefit cost increases, this was due to internal organization restructuring. RALS split their regional management (there are 7) into two from regional head down to merchandising, one for d! epartment store and one for supermarket. RALS plans to improve supermarket performance, to boost gross margin to 16-17% from 14% currently.
No more aircon temperature control and escalator shutdown. Another interesting aspect is the utility cost increase. RALS no longer apply cost cutting measures such as rising air conditioner temperature, or shutting off its escalator after such measures drove away customers from their stores. RALS now are applying standard operational services to lure its customers to visit.
1H10 bad on customer price-sensitiveness. As for 1H10 poor performance, RALS blamed it more on the margin slippage in the revenue due to merchandising which sell cheap products. It seems RALS could not get away from perennial headache of not improving purchasing power in their customers. Despite more people having jobs and wage increase, spending pattern did not change due to inflation. The observation was also confirmed by recent Nielsen studies which showed that fresh food still contributed 50% plus of average monthly spending.
Lowered earnings estimates, maintain Neutral and Rp800 target price. We lowered revenue estimate and fine tune the margins. We still hoped for good Lebaran sales to cover RALS 1H margin underachievement. Long term, RALS has to redefine their business model to adjust with shift in customer profile and requirements. This has been our central question for RALS as they are competing with cheaper mom and pop stores in trade centers selling products at cheaper prices as they are able to dodge tax payment.
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