Ramayana Lestari Sentosa March same-store sales growth: Continued weakness - Bahana

§ In spite of the start of the harvesting period, RALS reported weak March same-store sales growth (SSG) of 3.2% y-y, further decelerating compared to 6.7% in January and 3.9% in February (exhibit 5). Taking into account inflation, RALS continued to register negative real SSG.
§ Like in the first two months of the year, March sales of IDR402b disappointed, coming in 7.5% below management’s expectation.
§ This brought 1Q11 sales to IDR1.24t, 21.8% of our full-year estimate, but only 18.1% of management’s expectation and 18.6% of consensus estimate. With 1Q11 sales already more than 5% below management’s guidance, we expect the street will be revising down forecasts to our level.

Outlook: Earnings downgrades on the cards
It is clear that RALS is suffering operationally given declining margin trend. Note that gross margin in March decelerated to 23.5% (exhibit 7), compared to 24.9% in January and 24.3% in February, partly due to lower contribution from the higher margin ex-Java region of 52.8% from 54.5% in January and 53.8% in February. This will necessitate earnings downgrades in our numbers as we have assumed 31.9% gross margin for RALS in 2011.

Recommendation and valuation
Going forward, we expect lack of pricing power for RALS shoppers to persist. This coupled with rising prices from suppliers (cotton prices: +38.5% ytd to USD4,420/ton) will mean further margin weakness. RALS is a HOLD at best.