The Motley Fool

How Did Dairy Farm International Holdings Limited Perform in 2017?

Dairy Farm International Holdings Limited (SGX:D01) is a retail company that operates a network of supermarkets, convenience stores, health and beauty stores, home furnishing shops and restaurants. Its brands include 7-Eleven, Cold Storage, Marketplace, Guardian, IKEA and others.

As a quick primer, Dairy Farm operates under five main segments. Below is the breakdown of revenue and sales from the segments for 2017:

Source: Dairy Farm 2017 Annual Report

Even though Diary Farm has some of the most recognisable retail brands in Singapore and regionally, it posted a disappointing set of results in 2017. Despite a 7% increase in sales, underlying profit and profit attributable to shareholders plunged 13% and 14% respectively. Here’s a quick review of its 2017 financial performance.

Supermarket and hypermarket segment underwhelms

Dairy Farm increased its supermarket and hypermarket store count by 309 to 1,917 stores in 2017. However, the large increase in the number of stores did not prevent sales from dropping 3% year-on-year. Operating profit plunged a staggering 30% to US$135 million. Management said that same-store sales were generally weak or negative, except for the Philippines where Dairy Farm saw growth.

Intensifying competition from both online and offline competition and changes in consumer behaviour have put downward pressure on Southeast Asian nations. In both Singapore and Malaysia, sales were down, while profit was significantly below the prior year’s. Management has reiterated that it is looking to review the supermarket operations to suit the changing needs of customers. However, only time will tell, if the company can reposition its core supermarket business to ensure it remains relevant and adapts to the changing needs of the market.

Convenience stores continue to grow

The company operates convenience stores in Singapore, Hong Kong, Macau and Mainland China. This segment has performed very well in general, with sales increasing 4% and operating profit jumping 16%.

As the number of stores only increased by 3%, the higher increase in total sales from this business segment suggests that same-store sales have also improved this year.

Healthy and beauty segment a bright light

The health and beauty segment, which Dairy Farm operates through its Guardian, Mannings and Rose Pharmacy brands, performed well over the year. Revenue from this segment increased 7% in constant currency terms, while operating profit spiked 20% with better performance across most markets.

This segment contributed to 19% of group sales and 32% of the group’s total profit. Hong Kong and Mainland China performed exceptionally well with same-store sales growth and continued expansion of its network of stores which added to the top-line growth. Improved tourism in Hong Kong and Macau also contributed to the sales improvement.

Home Furnishings had a relatively strong performance

Dairy Farm, through its partnership with IKEA, operates home furnishing stores in Indonesia, Macau, Hong Kong and Taiwan. The group recorded a 9% increase in revenue in this segment.

However, operating profit fell slightly, and this was largely due to one-off pre-opening cost. Also, it has now fully-launched an e-commerce platform and can deliver nationwide across all its markets. Dairy Farm is also actively pursuing expansion of its network of stores this year.

Restaurant openings boost sales

225 restaurants were added this year, increasing the total to 1,210 restaurants. This helped boost total sales in this segment by 11% to US$2.2 billion. Through its associate, Maxim, the group has also positioned itself for further growth in this segment by acquiring the Starbucks franchise in Singapore and the Genki Sushi franchise in Singapore and Malaysia.

The Foolish bottom line

2017 was a disappointing year for Dairy Farm. Despite improvements in four of the five segments, its core business – supermarket and hypermarkets – which contributed more than 50% of total sales, performed poorly. Moreover, a permanent shift in consumer behaviour and the rise of e-commerce might have a lasting impact on the company’s business.

Management has reiterated multiple times that it is re-positioning itself and reviewing its operations. However, it has not come up with a concrete plan to tackle its declining same-store sales in its core business. Only time will tell if it can truly succeed in turning its business fortunes around.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Diary Farm International Holdings Limited and Starbucks. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.