MAKRO: Promising outlook on successful shift in product assortment - Buy (Target Bt167.00)

Accelerating sales growth in 4Q


We trim our 2010F same-store-sales (SSS) growth slightly to 7% (from 8%) to reflect the softer-than-expected SSS growth in 3Q. However, the trend is expected to reverse in 4Q. Management also confirmed that Q-T-D SSS growth has accelerated from 4.5% in 3Q, thanks to surging purchases for flood victims. Seasonal spending should support the uptrend continuing in Dec.

More fresh food sales = higher GM

The outstanding rise in the nine-month gross margin (GM) of 100bps YoY to 7.4% is not only the result of the favorable economy, but also the successful strategic shift towards fresh food, whose GM is 50% higher than dry food. As of 3Q10, the portion of fresh food rose to 18.5% of total sales (from 16.3% in 3Q09), while the portion of dry food sales fell to 68% from 70%. Non-food merchandise has also been changed to focus more on items for food retailers, e.g., kitchen appliances and food preparation utensils. A full range of products for food retailers will help draw traffic from food retailers, who are key customers of fresh food.

We raise our forecasted gross margin by 30bps to 7.4% and 7.5% for 2010F and 2011F, respectively. As a result, our 2010F earnings are raised by 3.5% to Bt2,039m (growth of 33.5%) and by 7% to Bt2,474m for 2011F (growth of 21.4%).