SLOWING consumer spending is expected to hurt Voir Holdings's (RM1.39) earnings in the current year. But the retailer's prospects over the longer-term remain positive.

The company is one of the biggest local fashion retailers in the country and its brands — such as VOIR, Applemints and SODA — are very popular. Currently, Voir has about 340 consignment counters at various shopping malls and 34 concept stores as well as six “Voir Gallery” stores, which are much larger outlets.

We expect 2009 will be challenging. But Voir may yet win market share if weaker retailers start to fail. The company is on fairly firm financial ground. Gearing is comfortable at about 37% while net tangible assets stood at RM1.16 per share at end-2008.

The company is well-positioned to benefit from the expected turnaround in 2010. Nonetheless, despite a relatively clean balance sheet, Voir did not declare any dividend for last year in view of the uncertain economic conditions.

4Q08 showed impact of slowdown
Voir's financial results for 4QFYDec2008 showed early signs of consumers tightening their belts as the global economic downturn gathered pace.

Sales grew by only 0.7% year-on-year (y-o-y) to RM40.6 million in 4Q08. Perhaps more tellingly, sales were 10% lower from the immediate preceding quarter — even though the year-end period is traditionally the best quarter for retailers with consumers splurging for the various festivities.

For the full year, Voir's turnover grew 16% y-o-y to RM149.4 million, thanks to robust conditions in the first nine months of 2008. However, net profit dropped 6.2% y-o-y to RM9.8 million. Adjusting for the RM3.3 million in total gains from assets disposal, net profit decline was steeper, down by about one-third to RM6.5 million.

In addition to slowing sales, Voir was also hit by rising costs. In particular, cost of goods sold has been rising throughout 2008 as the ringgit weakened against the Chinese yuan. Most of Voir's apparel are contract-manufactured in China. The ringgit-yuan exchange rate averaged at about 2.10 yuan to the ringgit in 2008 compared to 2.22 yuan in the previous year, or a depreciation of roughly 6%.

Rising costs will hurt margins
The ringgit has depreciated further against the yuan this year, down by another 9% in the year-to-date from the average exchange rate in 2008. Continued cost inflation will hurt Voir's profitability.

Given the weakening demand, company is unlikely to be able to fully pass on the higher costs to consumers, at least not immediately. Indeed, Voir may have to focus more efforts on marketing and promotional activities to spur sales. If demand weakens substantially, competition will intensify and some retailers may be forced into price discounting in order to clear stock and generate cash.

Consumer confidence on the wane
Whilst the impact from the global credit crisis has still, by and large, yet to hit local shores, clearly many Malaysians have started bracing for tougher times ahead. The softening in consumer spending, which began in 4Q08, will be even more pronounced in 2009.

Malaysia barely managed to eke out any growth in the last quarter of 2008 — and will very likely dip into recession in 1H09, at least. The jobs market is expected to get worse in the coming months as slower external and domestic demand hits hard at businesses across sectors.

Furthermore, despite the sharp reduction in petrol prices and cut in electricity tariffs, anecdotal evidence suggests that prices for goods and services are still rising. This could be attributed, in part, to the weakening of the ringgit resulting in imported inflation. Price inflation, albeit at a lower pace, will eat into disposable incomes and further damp consumer spending on discretionary and big-ticket items.

The Retail Group Malaysia revised downwards, again, its forecast growth for the sector to 3% in 2009 — down from the 5% growth estimate made in December 2008 and 8% growth forecast prior to that. It estimates sales will grow by just 1%-2% in 1Q09 and slip into the red in 2Q09 before recovering in 2H09. We do not discount the probability that the actual numbers could be worse.

Profits likely to contract in 2009
Voir will be feeling the pinch. We estimate sales for this year to stay flat at last year's level while margins are likely to narrow, going forward, on the back of rising costs.

Net profit is estimated at RM4 million in 2009, down by about 38% from last year after adjusting for one-off gains. That implies Voir shares are currently trading at relatively rich P/E of about 20.8 times our estimated earnings.

As such, interest in the stock will likely stay lacklustre — until there is greater clarity on an economic recovery. On the positive note, we are confident that Voir will be able to ride out these difficult times and capitalise on its solid brand name and franchise in the eventual recovery.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.