Cosmo Lady – Initial Thoughts

Cosmo Lady (2298.HK)

[August 29, 2019]

Interim Results Announcement @ Mandarin Oriental

Background

I was attracted by the ugly stock price chart and had a feeling that the company might be struggling like other traditional retail players.

Initial Thoughts

As expected, the company is struggling and delivered terrible financial results in the first half of 2019 with operating profit declined by around 80% year over year.

  • Top line declined mid single digit without any noticeable performance among product lines or sales channels. The e-commerce channel grew only by 6.9%.
  • I expect there won’t be turnaround of sales trend in the short term.

The company spent most of the time discussing reasons for weak operating performance and turnaround initiatives it had taken.

  • Appointed a new CEO of the Group in mid August
  • Hired a new sales head
  • About to recruit a brand management head and a retail operation head
  • Engaged Boston Consulting Group on a long-term basis
    • YN: the reason for engaging external consultant is that the management team is not capable to formulate strategy and/or implementation to turnaround for the last two years
    • The scope of engagement is quite broad
  • Engaged Shanghai olBP SCM to reform product merchandising management
    • At least the company understands that IT/SCM infrastructure is the backbone of data-based decision making and operation. This also shows that the company under invested in this area leading to disadvantage.

It seems the company is left behind the race but trying to catch up. So the question is how much time it takes for the company to show the turnaround result if implementation goes well? Maybe it will decline further before things get better. Considering the timeline, I think the “initial results” should reflect in the second half of 2020 no matter it gets better or worse. If the progress is beyond the expectation, probably the company will aggressively attend roadshow between earnings season.

It’s turning around but not a story yet. Existing investors face execution risk and onlookers face the risk of being trapped because the stock might be cheap optically on certain metrics at some point in the future.