This article first appeared in The Edge Malaysia Weekly on December 2, 2024 - December 8, 2024

IT might not be that fashionable to be in the fashion retail business these days, given the highly competitive market, both online and offline, which in turn compresses retailers’ profit margins.

This is the tough business environment in which Padini Holdings Bhd (KL:PADINI) — which owns multiple brands of fashion products, ranging from casual outfits and shoes to children’s clothing and accessories — is operating currently.

The company’s latest quarterly results bear evidence of it.

Last Friday, Padini announced that net profit for its first financial quarter ended Sept 30 (1QFY2025) shrank nearly 57% to RM11.52 million — the lowest level since 1QFY2022 — although revenue inched up 1.3% to RM393.14 million.

The company attributed the earnings contraction to a net unrealised forex loss of about RM9.2 million, higher staff costs and increased depreciation due to expansion in the number of outlets. Its operating profit also suffered a big drop — down 44.5% from a year ago — to RM22.46 million during the quarter in review. Meanwhile, its administrative expenses swelled to RM29.62 million in 1QFY2025 from RM18.6 million in the previous year. This does not augur well for a company that is in the highly competitive retail business, where the edge lies in keeping costs down.

Padini’s net profit margin narrowed to 7.6% in the financial year ended June 30, 2024 (FY2024), which was a steep fall from the 12.2% achieved in FY2023, the financial year in which Padini posted a record-high profit of RM222.69 million as shoppers returned, after the end of the Covid-19 pandemic, and all its stores were operating at full capacity.

“We were clearing old stock, which may have impacted our margin. However, compared to Covid-19 levels, our net (profit) margin actually improved from between 5% and 6% to 7.6% in FY2024, which is not too bad actually. There is pressure from rising costs but I think we are managing well,” Padini group chief financial officer and executive director Sung Fong Fui tells The Edge in a recent interview, before the release of its latest quarterly results.

In fact, the retailer’s net profit margin narrowed further to 2.9% in 1QFY2025.

Acknowledging the difficult operating landscape, Padini’s senior management says they are continuing to find new ways to defend their market share.

Padini’s head of design, merchandising and retail, Benjamin Yong Tze Jet, says the group is broadening the product range among its own brands, particularly by introducing a wider variety of sportswear.

“Previously, we didn’t offer much in terms of sportswear. For example, under the Porto­fino brand, we now feature a wide variety of sportswear, and options for both men and women. This is just one example of how we are expanding our product range.

“Other areas of expansion include innerwear and the introduction of new materials in these categories,” says Tze Jet, adding that these product expansions are expected to provide better margins for Padini.

“When it comes to products in the competitive fashion market, it’s about who has the best. We are a mass-market brand, so we focus on offering the best price, value and quality for the price.

“We still sell products that are under RM50 or RM60, which our competitors find hard to match. For example, Uniqlo jeans are over RM140, while Brands Outlet remains cheaper than that. The quality is also not too far off. In terms of a value proposition, this is how we stay competitive,” he explains.

“There may be many companies entering the market, but as long as our offering of that particular item holds good value for the customer, I think the customer will reward us,” says Tze Jet, who is also an executive director of the company.

He is the son of Padini’s managing director, Yong Pang Chaun, and executive director Chong Chin Lin. The couple are the major shareholders of Padini, with a 43.74% stake held through Yong Pang Chaun Holdings Sdn Bhd. Apart from Tze Jet, the Yongs’ other sons, Tze How and Tze-Yao, also serve on the Padini board as executive directors.

When asked about Padini’s plans for the future, Tze Jet says the company will focus on domestic growth and restrategise on its international expansion for now.

Padini operates more than 140 stores in Malaysia, six in Cambodia and seven in Thailand. It also has 19 franchise stores in countries such as Brunei, Bahrain, Oman, Qatar and the United Arab Emirates. Its brands are available online as well through e-commerce sites in Malaysia and Singapore.

Domestic operations accounted for about 96.6% of the company’s consolidated revenue in FY2024 while the overseas markets contributed 3.4%.

“We will grow organically where the locations are good. As for international expansion, we need to refine our processes before moving ahead,” says Tze Jet.

Going forward, Padini plans to refurbish nine stores, including two outlets — Brand Outlet and Padini Concept Store — in Paradigm Mall in Petaling Jaya, according to Tze Jet. The company aims to open four new outlets and close one location in the country as part of its efforts to streamline retail operations.

Nonetheless, it will close a Vincci store — one of its seven outlets in Thailand.

“Every brand eventually reaches a point where its store begins to look tired and outdated and efficiency starts to decline. When we revamp or renovate, we create new efficiencies, improve layouts and make space for newer products. These changes typically have a positive impact on our sales,” Tze Jet explains.

It is worth noting that Padini is in the process of implementing RFID (Radio Frequency Identification) to streamline inventory management, improve tracking and enhance overall efficiency.

“With RFID in place, we will be able to do more, but it’s crucial that our back-end systems are solid before taking the next step. Refining these processes is a top priority for us, along with the refurbishment of our stores,” says Tze Jet.

Despite the sharp fall in its quarterly earnings, Padini declared a second interim dividend of 2.5 sen for FY2025, scheduled to be paid on Dec 27. This raises its total year-to-date dividend for FY2025 to five sen per share.

The retailer has declared regular dividends over the years, given its sizeable cash pile. It paid 11.5 sen per share for both FY2023 and FY2024 — the same amount it declared between FY2016 and FY2019, before the pandemic. Even during the pandemic, Padini declared a 2.5 sen dividend per share for FY2021 and 10 sen per share for FY2022.

Its cash-rich balance sheet is the envy of others, although some may disagree with its cash hoarding strategy with zero borrowings. As at the end of September, Padini’s cash balance stood at RM765.92 million, which translated into cash per share of RM1.17. Its share price closed at RM3.40 last Friday.

“I think the good times have peaked for them (Padini), given that apparel and fashion are highly competitive. Hence, the outlook is not so good for them,” comments an analyst who declined to be named.

“This, with or without sportswear, will be the same. The core challenge lies in brand awareness, where Padini seems to be losing its edge amid fierce competition from other brands.”

The July-September period was a slower shopping season. It will be interesting to see how Padini performs in the next two financial quarters during which Christmas and Chinese New Year fall. 

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