Gucci’s Retailer in Philippines Profits as IPO Nears

By Ian Sayson and Clarissa Batino  

SSI Group Inc., the Philippine retailer of Hermes shoes and Gucci handbags, said rising incomes will accelerate profit growth this year as it prepares for an initial public offering.
SSI, which retails more than 100 brands through 655 stores, expects to post record earnings this year amid record overseas remittances and a booming outsourcing industry, President Anthony T. Huang said in an interview. SSI, based in Manila, plans to open as many as 188 outlets this year and 115 more in 2015. The company and its stockholders target to sell as much as 12.4 billion pesos ($284 million) of shares in an IPO in October,
“We’re at this incredible point in our economic life cycle where consumerism is really going strong,” Huang, 43, said on Aug. 20. “Our historical target market has
always been the upper market segment that continues to thrive as the economy continues to improve.”
Huang is betting demand for luxury products will climb further in a nation projected to remain among the world’s fastest-growing economies through 2016. SSI’s first-half profit jumped 65 percent, spurred by consumer spending that expanded more than 5 percent for an 11th quarter in the January-March period.
“It’s in a segment that is expected to do well in a growing economy and when incomes are rising,” said Allan Yu, first vice president at Metropolitan Bank & Trust Co. in Manila with $7.5 billion in assets under management. “The luxury sector is said to be able to hold on its own even when the economy isn’t good because high-end consumers have high discretionary income.”

Per-Capita Income

The Philippines’ per-capita income increased to $2,765 last year from $1,832 in 2009, according to World Bank data.
The $272 billion economy probably expanded 6.1 percent in the second quarter, according to the median estimate of 22 economists surveyed by Bloomberg. The government is due to announce the data at 10 a.m. tomorrow. Gross domestic product growth unexpectedly slowed to 5.7 percent in the first quarter, the weakest pace since 2011.
Consumer spending in the Philippines rose 5.8 percent in the quarter ended March. Consumption accounts for 84 percent of the Asian economy, exceeding Indonesia’s 68 percent and Thailand’s 67 percent, according to World Bank data.
The number of rich is also rising. The country will have 272 people with $30 million or more in assets excluding their principal residence by 2023, a 59 percent jump from last year, according to a Knight Frank LLP report in March.

High-End Brands

Huang’s family started SSI in 1987 to market high-end international brands through specialty standalone stores, using experience at Rustan’s, a department store that some refer to as the local Neiman Marcus. SSI opened its first United Colors of Benetton standalone store in 1988.
It has since expanded to also offer brands such as Old Navy to cater to rising middle-income shoppers.
Last year, SSI formed joint ventures with Ayala Land Inc. (ALI) and Japan’s FamilyMart Co. (8028) to open minimarts, which are becoming more popular in the Philippines with the spread of call centers that operate 24 hours a day. It has separately formed another venture with Ayala Land, a builder known for high-end residential and commercial projects, to open department stores.
“Our heritage has always been luxury,” Huang said. Four years ago, he decided SSI also needed to broaden its market in terms of age and income. “Let’s start with them when they’re young. And grow up with them, provide them a choice.”
Sustainable?
Still, the company will find it difficult to sustain its pace of profit growth, according to James Lago, head of research at PCCI Securities Brokers Corp.
“SSI can’t keep on putting outlets in every shopping mall that opens since its brands don’t cater to the broadest segment of the consumer market,” said Lago. “Its growth will also be capped by rising competition from local rivals who are bringing their own brands and international labels that are setting up their own stores.”
SSI, which filed an application for an IPO with the regulator this month, will use the proceeds to add more luxury outlets, convenience stores and department stores, according to preliminary terms. The company sold eight of the top 10 luxury brands in the country as of 2013, the filing said, citing research firm Euromonitor International Ltd.
The IPO will value the company at about 41 billion pesos ($939 million).
The benchmark Philippine Stock Exchange Index (PCOMP) rose 0.2 percent to its highest level since May 2013 at the close in Manila trading. The gauge has risen 22 percent this year.

Profit

Over the past few years, consumer demand in the Philippines has been driven by remittances and call-center workers. Cash transfers from overseas Filipinos surged to almost $23 billion last year, a record.
SSI’s first-half net income jumped to 486 million pesos as sales rose 14 percent to 6.67 billion pesos, according to the company’s regulatory filing. Profit climbed 33 percent to 614 million pesos last year, while sales increased 10 percent to 12.79 billion pesos.
SSI’s store sales were better in the second quarter than the first three months when retailers experienced a lingering effect of Super Typhoon Haiyan, which hit the country in November, Huang said.
“The magic in all this is that the middle-income segment is also growing as well,” Huang said.