This article first appeared in The Edge Malaysia Weekly on September 25, 2023 - October 1, 2023

SHARES of InNature Bhd — operator of The Body Shop stores in Malaysia, Vietnam and Cambodia — recently sank to their lowest levels in almost three years, weighed down by concerns that sales would be affected by the current subdued consumer sentiment.

Amid the more challenging outlook for the retail sector, analysts expect the group’s earnings to decline this year before improving next year.

“InNature faces a challenging outlook, whereby sales volume trends are declining while store operating costs from labour have steadily increased. Although management has strategies in place to tackle elevated costs, we believe that meaningful earnings recovery will only return when domestic consumer sentiment improves or inbound tourism recovers,” Maybank Investment Bank Research said in an Aug 29 report.

The research house, which has a “hold” call and target price of 50 sen on the stock, sees the group’s net profit falling to about RM11 million this year from RM21.34 million last year, and improving to RM20 million in FY2024.

InNature’s 2Q2023 earnings fell by a sharp 67.7% year on year (y-o-y), and 39.7% quarter on quarter, to RM1.81 million. This led to first-half earnings declining 52.6% to RM4.81 million, which accounted for only 23% of consensus estimates for the full year.

The stock hit a 32-month low of 43.5 sen on Sept 11. As at Sept 20, it had declined 21.4% year to date to 44.5 sen, for a market capitalisation of RM314.1 million. Bloomberg data shows that of the four research houses that track the stock, only one has a “buy” while the others have a “hold” call, with the average 12-month target price at 51 sen.

Managing director Datin Mina Cheah-Foong anticipates a gradual improvement of the group’s operating environment next year. “We expect the operating environment in Malaysia and Vietnam to remain challenging for the rest of 2023 due to macro headwinds and inflationary pressure affecting consumers’ discretionary spending as well as our cost of doing business,” she tells The Edge when sought for comment.

“In Malaysia, we were also impacted by the softer tourist arrivals, particularly those from China. Any improvement in these areas should begin to materially improve business conditions for InNature. Despite the challenging operating environment, we expect the group to remain profitable in 2023. We also expect gradual improvement of the group’s operating environment in 2024.”

Amid the gloom, however, there are some bright spots, one of them being that InNature recorded an improved gross profit margin of 68.5% in 1H2023, which gives it flexibility in carrying out targeted promotions to stimulate customer spending, Cheah-Foong notes.

She says the group has also accelerated e-commerce in Vietnam, which has resulted in a strong double-digit growth through this channel in 2Q2023.

“InNature continues to enjoy a high degree of loyal customers. Over 70% of the group’s transactions come from our active Love Your Body loyalty programme members. Sustaining an effective loyalty programme is important for InNature in the face of retail headwinds. This ensures a stable position even in times of uncertainty,” she adds.

The group is in a net cash position, with a cash balance of RM46.3 million as at June 30. “This has allowed us to continue making all the necessary investment in the business to ensure that we are ready for the turning of the current tide,” says Cheah-Foong.

InNature had initially started out the year bullish. It had planned to embark on a more aggressive expansion plan this year, riding the back of what was supposed to be a more favourable post-pandemic operating environment, especially with the reopening of China.

However, retail sales prospects gradually dimmed, given the rising macroeconomic headwinds globally. Earlier this month, Retail Group Malaysia cuts its growth rate forecast for the Malaysian retail industry to 2.7% compared with its June estimate of 4.8%, owing to the sector’s poorer-than-expected performance in the second quarter. Retail sales contracted 4% y-o-y in 2Q2023 after a solid 13.8% growth in 1Q2023, partly affected by the high base effect of the previous year. For the third quarter, it is seen growing at just 1.4%. 

In an interview with The Edge in February, Cheah-Foong said InNature planned to open as many as 12 stores this year compared with five last year. On whether those plans have now changed, she says: “We are responsive to market conditions and adjust our plans accordingly. In 1H2023, we had a net reduction of one store. We expect that in 2H2023, there will be a net addition of three stores.”

As at June 30, the group had 113 stores, of which 73 were in Malaysia, 37 in Vietnam and three in Cambodia.

In late July, InNature announced plans to potentially acquire an equity interest in Mayfair House Co Ltd, a move that would enable it to enter the beauty and retail business in Taiwan. Asked if it would be a substantial or minority interest, Cheah-Foong says: “We are still assessing the potential deal … we are unable to comment further due to a non-disclosure agreement with the owner of Mayfair House.”

Meanwhile, the group has managed to resolve the issue of a shortfall in its public shareholding spread. The shortfall was triggered last September when Prudential plc, which had been progressively buying InNature’s shares, emerged as a substantial shareholder with a 5.8% stake. The group’s public spread then fell to under 20% — below the mandated minimum of 25% — and Bursa Malaysia had required it to rectify this.

On May 12, InNature announced that it had come to understand that “a substantial shareholder’s” shareholding in the company was held through closed-end funds, unit trusts or investment funds. “Hence, these shares are considered ‘public’, pursuant to the listing requirements. With that, the public shareholding spread of the company is 25.004%,” it said in a stock exchange filing. Incidentally, Prudential’s interest in InNature has dwindled to 5.063%.

Cheah-Foong, together with her husband Datuk Simon Foong and their two sons, are understood to collectively hold about 70.5% of InNature through four private companies.

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