This article first appeared in The Edge Malaysia Weekly on June 6, 2022 - June 12, 2022

InNature Bhd, which operates The Body Shop (TBS) stores in Malaysia, Vietnam and Cambodia, anticipates better earnings from the second quarter onwards, following a strong comeback in mall traffic at home after the economy fully reopened last month.

Managing director Datin Mina Cheah-Foong cautions, however, that a return to pre-Covid-19 levels will take time as consumers are still somewhat cautious, given ongoing issues such as the war in Ukraine and rising food prices.

Additionally, tourists — particularly from China and the Middle East, who like shopping — have yet to return to Malaysia in a big way despite the re-opening of international borders. Hence, to expect a quick recovery in retail sales is “wishful thinking”, she says.

Most of the Main Market-listed company’s TBS stores are located in shopping malls, but it also has a key one at the KLIA2 airport.

Contrary to perception, InNature has not been a direct beneficiary of “revenge spending”, Cheah-Foong says, referring to a phrase that describes heavier-than-usual spending by consumers emerging from prolonged lockdowns. She explains that this is because its products had been available — through multiple online or remote sales channels — even during the movement restrictions.

“We did not really experience revenge spending because our customers were not deprived of the products [during the lockdowns]. Having said that, with people returning to the malls, we actually experience a big [sales] uptick,” she tells The Edge in an interview.

According to her, January was a particularly good month for InNature because of the pre-Chinese New Year shopper traffic at malls. Traffic fell in February and March, however, given rising Omicron variant cases in Malaysia.

“But, coming back to April and May — it was fantastic. Traditionally, Ramadan [the fasting period for Muslims] has always been a very poor month for retail sales, but we were up 27% versus last year. And, this Hari Raya versus the last one, we were up 100%,” she says.

This should, therefore, translate into better earnings for InNature in the second quarter of the financial year ending Dec 31, 2022 (2QFY2022). Its first quarter earnings, which it reported on May 26, fell below analysts’ expectations.

“We are expecting better profitability with better turnover, from the second quarter onwards,” Cheah-Foong says, adding that this is provided there are no more unexpected movement restrictions to be had.

She says the company’s progressive price hikes — an average of 15% across roughly 120 product lines — aimed at offsetting rising input costs, remain on track. The price increases started with TBS’s body butter product range late last year.

“The price increases are over a period of time. It could be another nine months before you see that 15% [hike] overall in the shop because not every product is going up; some will remain at the same price. Clearly, there will be some impact [on our sales volume], but it will even out,” she says.

Cheah-Foong points out that although TBS toiletries and cosmetic products are considered discretionary rather than essential items, demand for the core products is somewhat inelastic.

TBS’s target customers are those aged between 18 and 45 in the middle-40% income group, and upwards.

“Customers are unlikely to stop using the products that they like and have been using for years, for example, tea tree oil or shower gels. Instead of buying two shower gels like they would before, they now buy one and then come back to buy another when it finishes,” she says.

InNature lost the bottom-40% customer segment, who would aspire to buy TBS products, early on in the pandemic as they downtraded to cheaper products, Cheah-Foong says. “These are the people who would aspire to buy our products as birthday treats, for example. However, in mitigation, we found that people who used to buy more expensive products have now switched to us.”

InNature has 77 stores in Malaysia, 40 in Vietnam and two in Cambodia. Going forward, Cheah-Foong says the company hopes to open at least two stores a year in Malaysia, six a year in Vietnam, and four within three years in Cambodia, depending on the availability of suitable locations.

“We are going back on track as per what we said during our initial public offering [in February 2020]. The only caveat being that we are dependent on our landlords [and] developers to continue with their development plans,” she says.

Upcoming outlets in Malaysia will be fashioned after two new concept stores that InNature launched in the Sunway Pyramid (Selangor) and Mid Valley Southkey (Johor) malls this year, which Cheah-Foong says are the company’s “most sustainable stores thus far”.

With malls having reopened, sales through InNature’s remote selling channels — e-commerce, conversational commerce and social selling — have tapered off. “This is to be expected, now that people are going back to malls. Month on month, we are not growing [through remote channels], but compared to where we were in 2019, we have grown multiple times. We still have healthy and profitable remote-selling channels,” she says. Almost 30% of the company’s revenue last year came from remote selling channels.

InNature registered a net profit of RM4.53 million in 1QFY2022 — down 11.1% year on year and 41.6% quarter on quarter — which accounted for just 16% of a consensus estimate for the full year. It should be noted that the q-o-q drop was drastic, as the preceding quarter was a seasonally strong one, given the Christmas and year-end holiday period.

InNature’s share price fell sharply after the 1QFY2022 results, sinking to a 16-month low of 49 sen on May 30 before gaining ground to close at 53.5 sen last Thursday, giving the company a market capitalisation of RM377.65 million.

Stock exchange filings show that Cheah-Foong bought 300,000 InNature shares – or a 0.0425% stake – at 52.97 sen each on May 27, via the family private vehicle Pelagos Sdn Bhd, raising her indirect interest in the company to 74.8%. Her son Daryl Foong, a non-independent, non-executive director at InNature, is also a shareholder of Pelagos.

“InNature’s 1QFY2022 results undershot expectations on lower-than-expected sales volume. That said, we believe that sales growth should pick up in 2QFY2022 resulting from strong sales momentum during the Hari Raya Aidilfitri celebrations and reopening of international borders. As such, we make no changes to our earnings estimates, ‘buy’ call and target price of 80 sen,” Maybank Investment Bank Research says in a May 27 report.

CGS-CIMB Research has a “hold” call and target price of 62 sen on the stock, citing concerns of possible tepid volume growth in the second half of this year. “However, we expect the share price to be supported by the strong brand equity of TBS and decent dividend yield of 3.7% to 4.2% in FY2022 to FY2024,” it says in a May 27 report.

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