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Management Discussion and Analysis

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Management Discussion and Analysis MANAGEMENT DISCUSSION AND ANALYSIS BUSINESS AND OPERATIONS The Group is principally engaged in the operation of the “Parkson” and “Centro” brands department stores. Its stores offer a wide range of internationally renowned brands of fashion and lifestyle related merchandise in 4 main categories namely, Fashion & Apparel, Cosmetics & Accessories, Household & Electrical, and Groceries & Perishables, essentially targeting the young and contemporary market segment. In addition, the Group is also involved in the retailing of fashionable goods, operation of gourmet supermarkets and food and beverage (“F&B”) outlets, and consumer financing business. The businesses of the Group are spearheaded by Parkson Retail Group Limited (“PRGL”), listed on The Stock Exchange of Hong Kong Limited, which operates and manages 47 retail stores in China; and Parkson Retail Asia Limited, listed on the Singapore Exchange Securities Trading Limited, that houses 66 retail stores in Southeast Asia. The number of owned and managed stores in each location is as follows: Number of Stores As at 30 June 2018 2017 Malaysia 44 45 China 47 49 Vietnam and Myanmar 7 8 Indonesia 15 17 113 119 OVERVIEW 2018 2017 Change Consolidated Statement of Profit or Loss RM Million RM Million Gross sales proceeds 11,092 11,629 -5% Revenue 3,982 3,964 0.5% Operating profit/(loss) 3 (142) >100% (Loss)/profit before tax (83) 224 (#) - >100% Consolidated Statement of Financial Position Total assets 8,948 9,757 -8% Deposits, cash and bank balances 2,594 3,143 -17% Total liabilities 5,340 5,908 -10% Total borrowings 2,499 2,697 -7% Net assets 2,234 2,391 -7% (#): Included (i) gain on disposal of a subsidiary in China of RM828 million; and (ii) impairment losses on assets amounting to a total of RM428 million. For the financial year ended 30 June 2018 (“FYE 2018”), the Group generated a lower gross sales proceeds of RM11,092 million compared with RM11,629 million a year ago mainly due to store closures and lower merchandise sales derived from concessionaire sales. Nevertheless, the Group registered a marginal growth in revenue to RM3,982 million following the increase in direct sales from fashion house stores and private labels which has mitigated the decrease in commissions from concessionaire sales, due to intensive promotional activities carried out across the Group’s operating countries. 41 The Group’s efforts in optimising stores’ productivity and implementing cost rationalisation have yielded encouraging results which enabled the Group to register an operating profit of RM3 million for the FYE 2018 against a loss of RM142 million last year. Overall, the Group reported a loss before tax of RM83 million for the FYE 2018 which included impairment losses on property, plant and equipment, an investment property, intangible assets, investments in associates and joint ventures, and receivables totalling RM89 million. As at 30 June 2018, the Group’s total assets decreased by 8% to RM8,948 million whilst the Group’s total liabilities were reduced by 10% to RM5,340 million. During the financial year, the PRGL Group had fully settled the Notes with an outstanding principal amount of US$484.5 million maturing in May 2018 through new bank facilities. The Group’s net assets stood at RM2,234 million or RM2.09 per share (2017: RM2,391 million or RM2.24 per share). REVIEW OF OPERATIONS Malaysia (Parkson) Financial year ended 30 June 2018 2017 Same store sales (“SSS”) growth (%) (1.5) 2.8 Revenue (RM Million) 1,032 987 Segment loss (RM Million) (52) (6) 7DAYZ The Group’s Malaysia operations achieved a 5% revenue growth to RM1,032 million for the FYE 2018 due to contribution of new retail stores. The operations however, reported a negative SSS growth of 1.5% for the FYE 2018 largely due to the more festive buying days a year ago following the shift of the Hari Raya festive calendar. The announcement of the zero-rating of Goods and Services Tax effective 1 June 2018 pending the introduction of the Sales and Service Tax to start on 1 September 2018 had also diverted consumers’ spending to big ticket items with the consequential impact on our final quarter’s SSS growth. A higher operating loss of RM52 million was recorded which was attributed to the impact from the gestation period of new retail stores and the margin erosion resulting from the promotional activities. During the financial year under review, Parkson stepped up on its continuous efforts to enhance its position as a trendsetter with lifestyle services and unique brand mix. Department store operations are now complemented with F&B outlets, bakeries, gourmet supermarkets and children’s playground, with emphasis on convenience and an entertaining shopping experience. In offering consumers a variety of cutting-edge fashion and accessories choices under one roof, the Group continued to add agency lines from various international brands which are exclusive to Parkson. The Group’s in-house private label, 7Dayz, which offers stylish and affordable ladies’, mens’ and children’s wear, is progressing well within Parkson department stores and in the standalone concept. The Group also launched Play Up Advance, a multi brand beauty concept store offering international and local brands with many of these being a first in the Malaysian beauty scene. During the financial year under review, Parkson Malaysia added 4 new Parkson stores at Kuantan City Mall in Kuantan, Paradigm Mall in Johor Bahru, M Square Mall in Puchong and Evo Mall in Bangi; whilst 5 underperforming stores were closed down after due consideration. The Group has also disposed of its entire 70% equity interest in Super Gem Resources Sdn Bhd in June 2018, a company operating the LOL-branded retail chain. Moving forward, the Group will strive to drive topline growth proactively by enhancing its brand enrichment strategy, as well as to optimise both the operational efficiency and network of stores. The Group will continue to nurture its lifestyle retail concept business model vigilantly, with the focus on selective private labels. 42 China (Parkson) Financial year ended 30 June 2018 2017 SSS growth (%) 0.5 (1) Revenue (RM Million) 2,651 2,623 Segment profit/(loss) (RM Million) 111 (42) The “new retail”, a new concept that integrates e-commerce and physical retail stores seamlessly, has flourished in China, with tech giants investing actively in physical retail companies to expand their offline presence. While the emergence of “new retail” has brought increasing challenges to the entire retail industry in China, the Group sees ample opportunities and positive signs ahead, in view of the gradual recovery of the retail market there as evident by the steady Gross Domestic Product growth rate in China. The Group’s execution of transformation strategies involving the diversification of retail formats and optimisation of operations and omni-channel marketing has yielded encouraging returns. For the FYE 2018, Parkson China posted a positive SSS growth of 0.5% with revenue increasing to RM2,651 million. The higher revenue coupled with improved operating efficiencies have enabled Parkson China to turn profitable with an operating profit of RM111 million against a loss of RM42 million a year ago. • Diversified retail formats on the right track Over the years, Parkson has demonstrated its capability in retail mall management. The high occupancy rate, excellent tenant mix, creative marketing campaigns and efficient management of the Qingdao Lion Mall have enabled the mall to turn profitable during its first full year of operation. Riding on the success of the Qingdao Lion Mall, the Group was invited to manage a property in Nanning. This development constitutes part of the transformation strategies, which aligns with the Group’s asset-light model and introduces more collaboration opportunities with commercial property developers in China. As Parkson transforms into a lifestyle concept retailer, Parkson Newcore Citymalls in Shanghai and Nanchang are well known for the popular Korean themed merchandise and lifestyle elements. 2 more Citymall concept stores are scheduled for opening to expand the market share. The Group will continue diversifying its brand portfolio and enhancing lifestyle elements in the merchandise selection to attract young millennials and customers who seek quality lifestyle choices. During the financial year under review, the Group’s key F&B brand, Hogan Bakery, a popular bakery chain from Taiwan, continued to record strong growth and receive favourable feedback from customers who are opting for healthier and more lifestyle offerings. More Hogan Bakery outlets are scheduled to open in other provinces of China. Following the solid progress of our new retail initiatives, the Group has further developed its cosmetic segment, one of the significant and resilient growth key business units in Parkson’s offering, to becoming standalone businesses and brands. The Group launched its first specialty standalone concept store “Parkson Beauty” in Changsha in May 2018, followed by the official opening of Play Up, the first beauty collection brand of Parkson that gathers more than 70 brands for young customers, in June 2018. In its continuous efforts to diversify product and service offerings, the Group will continue to explore the feasibility to grow more key business units into standalone businesses. 43 • Optimisation of operations and omni-channel marketing The Group’s continuous measures in maximising operational efficiencies, including the use of mobile point of sales and the store network optimisation exercise, have borne fruit in the FYE 2018, resulting in improved profitability and reduced same stores’ operating expenses. Following the closure of 2 underperforming stores during the financial year under review, Parkson China has a network coverage of 47 stores in over 30 cities in China. With a strong presence of physical retail stores, Parkson China has been capitalising on its online channels to drive visitor traffic to the stores.
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