Karmarts

Karmarts Plc
Beat our estimate by a country mile
KAMART reported a 3Q13 net profit of Bt50m, up by 25% YoY and 39% QoQ. The result beat our estimate by 30%, due to a fatter gross margin than modeled.
Results highlights
Revenue rose 36% YoY and was flat QoQ at Bt226m, in line with our expectation, underpinned by greater sales volume through modern-trade channels. Gross margin expanded to 52.2% in 3Q13 from 48.6% in 3Q12 and 46.7% in 2Q13. The higher-than-expected GM was mainly attributable to the firm employing fewer promotional discounts to attract spending than we assumed. Another driver of the margin expansion was greater sales through modern-trade retailers, which yields a fatter margin than any other channel.
The SG&A/sales ratio declined slightly to 22.7% from 22.8% in 3Q12 and 22.9% in 2Q13, thanks to the building of economies-of-scale. EBIT margin, thus, improved to 30.1% in 3Q13 from 26.8% in 3Q12 and 24.9% in 2Q13.
Outlook
Seasonality should make for an even stronger 4Q13 performance. Problems with franchisees should be resolved soon, so the rollout of new Karmart shops is likely to resume in late 4Q13.
What’s changed?
We have revised up our FY13-14 earnings forecasts by 10% and 7%, respectively, to factor in an expanded expectation for the margin trend. As such, our YE14 target price rises to Bt6.20 from Bt5.80.
Recommendation
Given 15% upside to our target price, we have upgraded our KAMART rating to BUY from HOLD. However, in cosmetics retail space, we still prefer BEAUTY due to its more concrete long-term strategy and lower operational risk.