We visited Le Saunda recently for an update on the footwear company’srestructuring plan. The company has bucked the segment’s SSSg downtrendwith 10.1% SSSg for the three-month period 1 Dec 2013 to 28 Feb 2014,resulting in SSSg of 13.8% for the full FY ended 28 Feb.

Le Saunda was set up in 1977 listed on the Hong Kong Stock Exchange Mainboard in 1992. The company has three footwear brands: Le Saunda (ASPRMB639 for women’s shoes, RMB838 for men’s shoes); CNE (ASP RMB4320– women’s shoes only), and Linea Rosa (ASP RMB1,324 – women’s shoesonly). Based on 28 Feb data, the company had 928 in HK, Macau and China, ofwhich 761 are self-owned and 167 are franchised stores.

Bearing the fruit of restructuring.

Management reshuffle in 2012 for restructuring initiatives. The founder,Mr. Marces Lee, retired in 2012 and hired a professional manager, JamesNgai, as Chairman. Since then, the company has undertaken a detailedrestructuring plan, leading to SSSg rebounding to mid-teen levels. It shutdown inefficient stores (mainly CNE-branded) and launched high-end brandLinea Rosa in 2011. It also changed its marketing strategy by hiring brandambassadors and revamped its supply chain management.

Supply chain management conducive to SSSg rebound. The companystarted implementing an ERP system in 2012 for manufacturing plants. Itincreased trade-fair frequency from four times per year to six times per year,ahead of its competitors, to test-launch new products to assess consumerpreferences. The improvement in supply chain management led to anincrease in the replenishment order ratio from 25% to 40%, according to thecompany. The company said improved supply-chain management accountedfor more than 50% of SSSg recovery, as growth in ASP outpaced than involume. Management highlighted that January registered the strongest SSSgin three years, but it retreated to negative in February due to an early CNY.

SSSg has rebounded to positive territory in March, according to the company.

It targets double-digit SSSg for FY15.

Scaled back store expansion plan, reposition CNE as O2O model. Themanagement plans to keep the total store count at 900-1,000 stores, giventhat the macro outlook is still challenging, while it continues to shut downinefficient CNE stores. It plans to close 95% of CNE stores and repositionCNE as an online brand. The company started its e-commerce business in2011 through a third-party platform. This business accounted for only lowsingle-digit proportion of revenue and the company targets over 10% this year.

The CNE business was around break-even in 2013 and management isconfident it is close to a turnaround.

Financials.

Le Saunda reported top-line growth of 17.6% to HK$874.1m and net profitgrowth of 25.2% to HK$76.4m in 1H14 on margin expansion.

The company maintained net cash position at HK$475.7m as at end-August2013.

Le Saunda pays out ~ 40-50% of its earnings.

The stock is trading at a PER of 9.4x and P/BV of 1.5x on FY15E consensus(over 4 analysts).

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