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Archies: Disappointing quarter - Views on News from Equitymaster
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  • Sep 26, 2006

    Archies: Disappointing quarter

    Performance summary
    Greeting cards and gifts major, Archies, reported disappointing 1QFY07 (June quarter) numbers. The company reported a strong topline growth of 26% YoY. However, operating margins crashed by 580 basis points (5.8%), due to an increase in all the cost overheads (as a % of sales). Despite the lower margins, net profits up by 14% YoY, due to higher other income and a lower tax outgo.

    (Rs m) 1QFY05 1QFY06 Change
    Net Sales 141 178 26.2%
    Expenditure 123 166 34.6%
    Operating Profit (EBDIT) 18 12 -31.1%
    Operating Profit Margin (%) 12.8% 7.0%
    Other Income 2 9 411.8%
    Interest 1 1 9.1%
    Depreciation 5 6 19.6%
    Profit before Tax 14 14 2.9%
    Tax 4 3 -25.0%
    Profit after Tax 10 11 14.0%
    Net profit margin (%) 7.1% 6.4%
    No. of Shares (m) 6.5 6.5
    Diluted earnings per share* (x) 1.5 10.5
    P/E ratio (x) 13.0
    * 12 month trailing earnings

    What is the company's business?
    Archies is the market leader in the greeting cards space. It also has other social expression products like gifts and posters. The company has a market share of over 50% currently. It set up a music division recently and has been expanding the range of products sold at its outlets. Its competitors are players like Hallmark, Wilson, Ambassador and ITC. Archies' greatest strength is its retail reach, as the company has around 430 retail outlets spread across over 100 cities in 6 countries.

    What has driven he performance in 1QF07?
    Topline powers ahead: Archies reported an impressive 26% YoY increase in its topline for 1QFY07. The Gifts segment, which has been the main contributor to the revenues, reported a growth of as much as 47% YoY. It's share to total revenues also increased to 56% in this quarter as compared to 48% in 1QFY05.

    (Rs m) 1QFY05 1QFY06 Change
    Greeting Cards 51 53 3.9%
    PBIT margin (%) 31.4% 22.6%
    % of segment revenue 36.2% 29.8%
    Stationery Items 18 21 16.7%
    PBIT margin (%) 22.2% 19.0%
    % of segment revenue 12.8% 11.8%
    Gifts 68 100 47.1%
    PBIT margin (%) 7.4% 6.0%
    % of segment revenue 48.2% 56.2%
    Others 4 4 -
    PBIT margin (%) 5.0% 5.0%
    % of segment revenue 2.8% 2.2%
    Total revenue 141 178 26.2%

    Greeting cards and stationery: These segments together contributed nearly 41% to Archies' total revenues in 1QFY07. While the cards segment grew by just 4% YoY, the stationery segment grew by nearly 17% YoY. Greeting cards is largely an urban phenomenon. With increasing availability of the internet, sending greetings via the net has become a cost-effective alternative when compared to printed cards. There are many websites that offer free greeting cards, which can be accessed by anyone who has an internet connection. Though Archies too has an online offering, most of it is paid.

    Margins crash: Operating expenses increased at a much faster pace than revenues, leading to a decline in the operating profits, even on an absolute basis. During the quarter, operating margins fell by as many as 580 basis points (5.8%). All the major cost heads (raw materials, staff, power and fuel) have witnessed an increase as a percent of sales, leading to the poor operational performance.

    as a % of net sales 1QFY05 1QFY06
    Total Cost of goods 31.9% 33.4%
    Staff Cost 12.1% 15.2%
    Other Expenditure 42.6% 43.8%
    Total expenditure 86.5% 92.4%

    Higher other income, lower taxes save the day: Higher other income and lower taxes paid helped the net profits grow by 14% YoY for the quarter, despite the considerably lower margins.

    What to expect?
    At Rs 137, the stock trades at a price to earnings multiple of 13 times its trailing 12-month earnings. With the arrival of e-cards, the company has to depend on its gifts segment for growth in future. The company has opened 16 new company-owned stores during the period July 2005 to March 2006 and 8 new stores during the period April to June 2006. This will help the company expand its reach. At the current juncture, valuations look stretched and growth sustainability remains a concern.



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