The author is an analyst of NH Investment & Securities. She can be reached at jiyoony@nhqv.com. — Ed.
FILA Holdings is forecast to report significant 4Q22 earnings decline due to domestic sales channel adjustments and US inventory disposal. In 1Q23, however, a gradual improvement in fundamentals, starting with the domestic division, should become apparent. We maintain a Buy rating.
Awaiting main business turnaround
In Korea, FILA Holdings is to embark upon retail-related changes from 1Q23, including online/offline store renewals and a 25% increase in tennis wear SKUs. In the US, inventory depletion is to continue through 1H23, with new product launches likely to kick off in 1H24, given the easing of fixed cost burden and lead-time considerations following global team restructuring. In China, FILA retail sales contracted y-y in 4Q22. However, as it is recognized as a premium sports brand in China, FILA should benefit from re-openings and sports events (Summer Universiade/Asian Games) in 2023 and enjoy stable design service fees (DSFs).
Although we slightly trim 2023E NP to reflect adjustments to our average annual forex rate projection, valuation burden remains limited for FILA Holdings, with its shares trading at W35,200 as of Jan 19, which equates to a 12-month forward P/E of 7x if excluding the value of stakes in subsidiaries. While sluggish earnings are still expected through 1Q23, such negative has largely been reflected in the share price. Believing that hopes for a turnaround at the main business after 1Q23 will have a bigger impact, we maintain a Buy rating and TP of W42,000.
4Q22 preview: Significant gains expected from channel adjustments and discount sales
FILA Holdings is forecast to post consolidated 4Q22 sales of W874.7bn (+2% y-y) and OP of W9.9bn (-61% y-y), with both figures to miss consensus.
FILA sales are forecast at W284.2bn (-20% y-y) and OP at W6bn (-87% y-y). Sales growth (y-y; won-basis) is sized at -16% in Korea (excluding DSF), -32% in the US, +10% for royalties, and +7% for DSF. Given the reduced portion of wholesale sales and disposal of aging inventory over the past year, domestic sales likely turned to a loss of W2.2bn. In the US, overstock depletion efforts through outlets have been ongoing since Nov 2022. Given one-off costs related to severance pay and inventory disposal losses, we estimate a US operating loss of W27.6bn (loss widening q-q). Considering other global marketing expenses, drastic reductions in operating results at the main business look inevitable.
Acushnet likely saw sales of W590.5bn (+17% y-y) and OP of W3.9bn (TTP y-y). As of Nov 2022, cumulative golf rounds played in the US was down 3% y-y.
