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Here’s Why Courts Asia Ltd Is Down 8% Now

Nothing seems to be going right for Courts Asia Ltd (SGX: RE2) in 2014. The company just announced its second quarter results yesterday night and saw big drops in both its top- and bottom-line.

This is very likely to be driver behind the company’s share price drop today. As of the time of writing (1:45pm, 13 November 2014), Courts Asia is down by some 8.05% to S$0.40.

Courts Asia operates its namesake retail stores in Singapore, Malaysia, and Indonesia, selling furniture, electronics, and electrical appliances. The first two countries are Courts Asia’s key geographical markets with the company opening its first Indonesian store only last month. With that as a backdrop, let’s dig into Courts Asia’s latest earnings release.

Financial highlights

For the quarter ended 30 September 2014, Courts Asia’s revenue fell by 20% year-on-year to S$178.6 million with its net profit suffering an even steeper decline of 76% to S$1.71 million.

The fall in revenue was due to a realignment of the company’s strategy to focus on higher margin products. The shift in strategy had led to lower bulk sales of digital products and while a shrinking top-line can be discomforting, positive effects can already be felt – the company’s quarterly gross profit margin had improved from 28.5% a year ago to 32.7%.

But while gross profit margins had ticked up, Courts Asia still incurred much high operating expenses, thus leading to the net profit decline.

Operational highlights

During the quarter, Courts Asia saw huge declines in like-for-like sales growth. In Singapore, there was a 24.4% decline in like-for-like sales while the figure was a similarly dismal minus 20.9% in Malaysia. Like-for-like sales measure the revenue from stores which had been operating for the entire quarter over the corresponding period a year ago. It gives investors a measure of how well a retailer’s existing stores are doing and as you can see, the figures aren’t pretty.

Earned service charge income, an important revenue segment for the group, was stable for the quarter as it came in at S$34 million as compared to S$35 million a year ago.

The company currently has S$515.7 million worth of trade receivables on its balance sheet, up 11% from a year ago. Theoretically, Courts Asia’s trade receivables should change at more or less the same pace as revenue. This is because as the company sells products, its credit-based sales are captured in the trade receivables line item. 

When there’s a divergence, like it is now – Courts Asia’s sales for the first half of FY2015 had declined compared to the first half of FY2014 – it might be an indication that the company has not been able to collect its receivables quickly enough. The development of this situation will be an area for investors to watch.

Coming to Courts Asia’s balance sheet, the company’s net debt to equity ratio as of 30 September 2014 stands at 72%. The company’s balance sheet has weakened somewhat since the ratio was at 64.6% as of the end of FY2014.

Looking ahead

Going forward, there are a few areas of concern investors need to watch (besides those already mentioned).

If the economy slows down, Courts Asia might be facing higher credit risks as the company has a high dependence on credit sales for its business (this is especially so in Malaysia where the sale of goods on credit makes up more than 70% of total revenue from the country).

With most of its credit-based sales financed by borrowings, Courts Asia will still have to repay the debt even if its customers default on their instalment-payments due to a decline in spending power as a result of a softer economy.

The next thing to watch would be shoppers’ buying decisions as online retailing grows. One benefit of online retail for shoppers is that prices becomes more transparent – this in turn makes pricing more significant in a buyer’s decision-making process. This is an issue because that means Courts Asia can only compete with other online retailers in terms of price and such competition would hardly benefit the company.

As mentioned earlier, Courts Asia had just opened its first Indonesia outlet in October – the Big-Box Megastore in Bekasi – and management is very optimistic about this venture. The company’s plans to open a second and third store in Indonesia by 2015 are also “on track.” At this current point in time, Courts Asia’s potential expansion in Indonesia seems to be the only bright spot amid all that doom and gloom.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.