China Outfitters Holdings Limited (HKG:1146): Does The -33.65% Earnings Decline Make It An Underperformer?

Assessing China Outfitters Holdings Limited’s (SEHK:1146) past track record of performance is a valuable exercise for investors. It enables us to reflect on whether the company has met or exceed expectations, which is a great indicator for future performance. Today I will assess 1146’s recent performance announced on 30 June 2017 and evaluate these figures to its longer term trend and industry movements. See our latest analysis for China Outfitters Holdings

Was 1146’s weak performance lately a part of a long-term decline?

I prefer to use data from the most recent 12 months, which either annualizes the most recent 6-month earnings update, or in some cases, the most recent annual report is already the latest available financial data. This technique allows me to examine different companies on a similar basis, using new information. For China Outfitters Holdings, its most recent trailing-twelve-month earnings is CN¥41.4M, which, against the prior year’s figure, has dropped by a substantial -33.65%. Since these figures may be somewhat short-term, I have calculated an annualized five-year figure for China Outfitters Holdings’s net income, which stands at CN¥266.9M. This doesn’t seem to paint a better picture, as earnings seem to have gradually been deteriorating over time.

SEHK:1146 Income Statement Feb 6th 18
SEHK:1146 Income Statement Feb 6th 18
Why could this be happening? Well, let’s take a look at what’s occurring with margins and if the entire industry is experiencing the hit as well. Although revenue growth in the last few years, has been negative, earnings growth has been declining by even more, implying that China Outfitters Holdings has been growing its expenses. This hurts margins and earnings, and is not a sustainable practice. Looking at growth from a sector-level, the HK luxury industry has been enduring some headwinds over the past few years, leading to an average earnings drop of -5.09% in the most recent year. This suggests that any headwind the industry is enduring, it’s hitting China Outfitters Holdings harder than its peers.

What does this mean?

Though China Outfitters Holdings’s past data is helpful, it is only one aspect of my investment thesis. Typically companies that experience an extended period of decline in earnings are going through some sort of reinvestment phase . However, if the whole industry is struggling to grow over time, it may be a signal of a structural shift, which makes China Outfitters Holdings and its peers a higher risk investment. I suggest you continue to research China Outfitters Holdings to get a more holistic view of the stock by looking at:

  • 1. Financial Health: Is 1146’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  • 2. Valuation: What is 1146 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 1146 is currently mispriced by the market.
  • 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2017. This may not be consistent with full year annual report figures.