Beauty Community

Investment thesis

BEAUTY looks to be the best small-cap retailer at the moment. Its 2H14 outlook is outstanding. SSSG, total sales growth and earnings growth are all expected to be the highest in the sector in 2H14. Its valuation is also attractive—PERs of 27.8x for FY14 and 20.3x for FY13 versus peer averages of 34.4x and 27x, respectively. We have rolled over our investment horizon to YE15 and arrived at a new target price of Bt35, up substantially from our erstwhile YE14 target of Bt26.50. BUY!

Robust sales continue

BEAUTY should deliver the swiftest SSSG in the sector this year. After posting an impressive SSSG of 15.2% in 2Q14. Management guides that SSSG in July-August remained in double-digit territory and momentum is likely to continue throughout the year. The major SSSG contributors were still stores in Bangkok—particularly Beauty Buffet—while same-store sales in the provinces have risen only modestly. We expect SSSG of 11.5% in 3Q14 and 9% in 4Q14.

Expansion check

BEAUTY opened seven Beauty Buffet (BB), six Beauty Cottage (BC) and three Beauty Market (BM) stores in 1H14, which is slower than the trend necessary for it to achieve its FY14 rollout targets of 31 BB, 20 BC and 18 BM outlets. However, management is confident that the targets are achievable. During July-August, the firm opened another six BB, two BC and three BM stores and is currently fitting seven BB, five BC and two BM shops.

To speed up expansion to CLMV

BEAUTY increased its rollout target for CLMV countries again (from 10 outlets early this year to 13 in June and to 14 currently), as it has resolved a problem it had opening stores in Vietnam. The firm said demand for its products in CLMV markets is solid, so it recently established a team to directly manage overseas expansion. As such, the number of stores to open in CLMV countries next year should be greater than the number in FY14. However, for the moment, we maintain our assumption of 10 new stores a year in CLMV nations.

The strongest 2H14 earnings growth profile in the sector

BEAUTY's 2H14 earnings outlook is really good—we expect it to post the strongest bottom-line growth in the sector of 36% YoY, driven by robust SSSG, aggressive expansion and the low base set by the spending power shock in 3Q13. Sales are expected to jump 41% YoY in 2H14, driven by stronger sales at BB stores and the debut of BM outlets in 2H13. The firm’s gross margin is likely to decline slightly, due to a greater revenue contribution by BM, which has a GM of 43% versus 70% for both BB and BC.