Tuesday, February 26, 2008

FJ benjamin

Since I did Ossia, I might as well do a little analysis on FJbenjamin too. This have a similar business to that of Ossia of retail. FJben sells watches, apparels and have a 30% stake in St.James power house too. Flipping their annual report for FY07, this is what I see:

Turnover increases at a CAGR of 25.0% from 2003 to 2007
Net earnings increases at a CAGR of 94.8% for the same period.

Operating margins---1%----------2%---------2%----------7%-----------8%----
ROE (%)-------------2%----------3%---------6%----------11%---------11%---
EPS (cents)----------0.52--------0.70--------1.50--------3.53----------5.07--

COGS as % to revenue-------------------------------------59.0%-------59.2%--
Gross margins---------------------------------------------41.0%-------40.8%-
Net margins (with exceptional items)----------------------5.4%----------8.3%--
Net margins (without excep. items)------------------------4.8%----------6.8%-

Wow, that's impressive isn't it? How did fjben manage to earn so much more profit from a proportionately lower increment in turnover? Earnings per share went up by 81.9% CAGR from 2003 to 2007 too. How did they do that when the turnover only grows at 25%? Very interesting!

Second thing I noticed but Fjben is that they have no non-current bank borrowings. Nil. Zero. They do have current borrowings (meaning have to repay within a year from June 07) but no long term borrowings. Is that too prudent? Why are they not leveraging on other people's money to boost their returns?

(Just saw that their shares had increased by 67.1%. Perhaps their plan is to use shareholder's money instead of bank's money to fund their growth. Not sure about the warrant stuff, though I know the warrants will expiry in 16 July 2007, with an exercise price of $0.45. Total amount is around $236 million, not at all a small sum. This deserves a closer look.)

They are sitting with a lot of cash in their piggy banks. Way too much in fixed deposits with an interest rate of 1.5 to 3% per annum. Maybe that's why they are giving a fat dividend last time round.

(Realised from their presentation slides that the fat dividend is due to capital reduction exercise, to return $74 million to shareholders)

A few things to worry about:

1. I noticed the advertising amount spent had dropped slightly, from 3.9% to revenue in 2006 to 3.6% in 2007. Branded goods have to keep on appearing in people's mind in order to create a perceived difference in the quality of the goods. Okay, I admit, I'm rather blind to advertisement and I don't watch TV. Not exactly in a position to comment on advertisment and its effectiveness :)

2. Rental of premises is increasing from 8.1% to revenues in 2006 to 9.3%.

3. Staff costs dropped from 14.5% in 2006 to 14.1% in 2007. Are they mistreating their employees as I heard from someone in it? Sales staff, if poorly motivated by rewards, will have poor services. I personally haven't tried the service of their brands, and I wonder if their services are okay?

Now I realised that branded goods isn't such a wonderful business. Yes, it's a cash cow business but the margins aren't that fantastic. To bring about brand awarenss, the shops have to be in high end places, not neighbourhood shopping malls (even though I see some brands carried by Fjben in Tampines mall). Such places are naturally going to be more expensive in rental. But I think FJben is doing well to keep costs rather constant, at least for FY06 and FY07.

How then to grow earnings?

1. Charge a higher price
2. Sell more
3. Sell another product or have a new revenue stream
4. Acquisition

I think fjben have the options of 1 to 3. It's not that 4 isn't an option, it's a rather funny option. (I saw in the presentations that their strong cash position allows them to do potential acquisitions. On who? Ossia? haha1) If they can do (1), it'll mean that they have a certain competitive advantage in the sense that they can control pricing. Retail at this branded goods level depends much on the brand, I guess. How about (3)? I think they're doing that currently by bringing in new brands (banana republic, is that right?)

I really wish they can show us the turnover figures for the respective brands they carry. As well as the margins. But i think that's too much to ask for as it's a sensitive information that can be used by their competitors against them. I'm especially interested in their house brand Raoul. Are there certain brands that aren't doing too well but is covered up by one or two brands that's doing very well. I guess we'll never know unless you're from the inside. Oh well, let's take a look at the segmented information:

Turnover by region---------------------------
North Asia----------19.8%------14.6%------
Turnover by segments-----------------------

They mentioned in their presentations that their store growth had grown double digits. With fashion up 55%, timepieces up 15% and licensing up 44%. What much they make from each segment is not mentioned. If they give that, it'll be interesting.

The management seems very positive about the FY08. They citied a retail renaissance in SE asia with buoyant consumer spending. In singapore alone, there are 5 major orchard road malls being build or refurbished in 2008 and 2009, along with 2 IR (2010, 2011), resulting in more retail spaces and hopefully more revenues for the products. This in in addition to F1 Grand prix in 2008 and the much touted Tourism board to double tourist arrival by 2015 to 17 million from the current 10 million. M'sia have new landmark malls to open - Pavillion and Gardens (date to open is not mentioned). Indonsia there are 2 too - Grand indonesia and pacific place.

They expressed confidence in their 3 new brands - GAP, Banana Republic and Celine and they hope to strengthen their market share in those 3 brands. Guess brand must be their cash cow, as they plan to increase their no of stores in 2008 by 71 for guess alone. For GAP - increase by 19 stores. Banana republic by 7 stores, La Senza by 35 stores, Raoul by 30 stores and Celine by 9 stores. Just looking at their number of stores, I suppose we can guess which are the ones who're doing well (or at least expected to do well enough to justify the expense to open up new stores)

In order of highest stores opening in FY08:

1. Guess (71)
2. La Senza (35)
3. Raoul (30)
4. Gap (19)
5. Celine (9)

As a retail swaku who buys clothes maybe once every 9 months or so, I'm only interested in Guess products. La Senza is of course not my cup of tea ;)

Due to my incompetence in this retail industry, I'll gladly stay out of it. I'm not interested in branded goods, nor am I very confident of their earnings especially in bad times. My only brush with branded goods are those that went for sale (like the recent store wide sales at Springfield - yummy! my fav brand!). Not interested in Fjben :)