InNature Bhd (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,” said Maybank Investment Bank (Maybank IB) in a recent report.
At INNATURE’s 2Q23 briefing, management shared that sales trends declined in Malaysia and Vietnam with negative group SSSG of -12% YoY in 1H23, led by cost inflationary pressures in both countries alongside continued supply chain disruptions and a higher base effect from 2022 in Malaysia.
Sales trajectory in sequential quarters are also expected to remain soft as consumer spending turns cautious.
“We expect INNATURE to emphasis on its marketing and promotional efforts in the coming quarters in order to drive higher sales volume within its existing and new customer base. A new marketing system is also being implemented internally to improve its customer outreach, which would lift operating expenses in the next two quarters, we understand,” said Maybank IB.
As consumer sentiment remains weak, INNATURE will look to manage costs more stringently in order to sustain its current level of net profit margins. Maybank IB also does not discount the possibility of further product price hikes if store operating costs continue to rise.
On store opening strategies, the group plans to close two underperforming stores in Malaysia while store expansions in Vietnam may be put on hold due to high rental expenses. Instead, store kiosk formats will be preferred in both Malaysia and Vietnam given its lower capital expenditure requirements.
There are several risk factors for their earnings estimates, target price and rating for INNATURE.
Weak consumer sentiment and heightened industry competition within the health and beauty industry could adversely affect sales while rising cost of operations could also be additional earnings risk. INNATURE recommends Hold with a Target Price of RM0.50.
