Luk Fook Holdings (International) Ltd (LKFLF) (H1 2025) Earnings Call Highlights: Navigating ...

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Thu, Nov 28, 2024, 12:00 AM 5 min read

Revenue: HKD5.45 million, a 27.2% decrease year-over-year.
Profit Attributable to Equity Holders: Decreased by 53.9% to HKD434 million.
Basic Earnings Per Share: Decreased by 54% to HKD0.74.
Proposed Interim Dividend: HKD0.55 per share, with a payout ratio of 74%.
Gross Margin: Increased by 4.9 percentage points to 32.7%.
Gross Profit: Fell by 14.4% to HKD1.78 billion.
Total Operating Expenses: Increased by 8.4% to around HKD1.2 billion.
Gold Hedging Loss: HKD230 million, compared to a gain of HKD55 million last year.
Operating Profit: Decreased by 53% to HKD540 million.
Net Cash: HKD526 million, slightly lower than the end of March 2024.
Return on Equity (ROE): Decreased by 8.3 percentage points to 6.6%.
Net Decrease in Shops: 175 globally, including a net decrease of 186 local shops.
Inventory Balance: Around HKD9.9 billion at the end of September 2024.
Revenue from Hong Kong, Macau, and Overseas Markets: Decreased by 27.3% to HKD3.5 billion.
Retailing Revenue: Decreased by 22.7% to HKD4.66 billion.
Wholesaling Revenue: Declined by 57.8% to HKD385 million.
Licensing Income: Decreased by 26% to HKD404 million.
Sales of Gold and Platinum Products: Decreased by 24.1% to HKD3.7 billion.
Sales of Fixed-Price Jewelry Products: Decreased by 34.8% to HKD1.4 billion.
Same-Store Sales Growth: Negative 34% overall.

Warning! GuruFocus has detected 1 Warning Sign with LKFLF.

Release Date: November 27, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

Luk Fook Holdings (International) Ltd reported an increase in overall gross margin by 4.9 percentage points to 32.7%, benefiting from rising gold prices.
The group's NAV per share increased by 2.4% compared to March 31, 2024, and by 5.8% compared to the same period last year.
The company plans to expand its footprint in the overseas market with a net addition of approximately 15 shops in the current financial year.
Luk Fook Holdings (International) Ltd has successfully integrated strategies to attract target customers and foster high customer loyalty, with membership base increasing nearly 30% to over eight million.
The company is optimistic about the immense growth potential in the overseas market and plans to allocate more resources for expansion.

Negative Points

Revenue decreased by 27.2% compared to the same period last year, primarily due to a decline in sales of gold products caused by record-high gold prices.
Profit attributable to equity holders decreased by 53.9%, and basic earnings per share decreased by 54%.
There was a net decrease of 175 shops globally, including a significant reduction in local shops.
Total operating expenses increased by 8.4%, leading to a higher TOE-to-revenue ratio of 21.3%.
The surge in gold prices resulted in a gold hedging loss of HKD230 million, compared to a gain of HKD55 million last year.

Q & A Highlights

Q: Could we have the latest guidance on our top-line by market, store opening targets, and gross and operating margins for the second half of fiscal '25? A: We expect better performance in the second half compared to the first half due to a lower base. While it's challenging to provide concrete figures, we anticipate a smaller negative drop in the third quarter and potential positive growth in the last quarter. For store openings, there might be a slight increase in Hong Kong and Macau, but a net decrease in Mainland shops. We plan to add around 15 shops overseas. Operating margins should improve as gold prices stabilize.

Q: Why did the wholesaling business incur losses in the first half, and do you expect improvement in the second half? Also, how are you supporting franchisees financially? A: The wholesaling business suffered due to sluggish diamond demand in Mainland China. We don't foresee a rebound in diamond sales soon, but losses should decrease in the second half due to restructuring efforts. For franchisees, we offer financial support by lending back deposits with interest and providing lower-cost shop renovation options.

Q: In which cost categories do you see room to reduce expenses in the next 6 to 12 months? Are you on track to achieve breakeven operations for 3D-Gold in about a year? A: We've already implemented significant cost controls in the first half. Further reductions depend on macroeconomic conditions. Our target for 3D-Gold is to achieve breakeven in three years, not one, and we are on track for that.

Q: Could you share the sales performance in October and November, and the sales outlook for the second half of '25? A: Due to early promotional events, we combined October and November figures, showing better performance than the previous quarter. Although not positive due to a high base, the decline has narrowed. We expect the second half to outperform the first half, especially with a low base in the January to March quarter.

Q: Can you provide guidance on store closures for the second half of '25 compared to the first half, and the outlook for 2026? A: We anticipate a slower rate of net store closures in the second half compared to the first. While it's difficult to predict 2026, we expect an improved position compared to 2025. We will announce a new three-year plan in June 2025, providing clearer guidance.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.

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