Alhokair reported strong set of Q1 FY23 results with net income increasing by 26.3% yoy to SAR57.7mn, vs a net loss of SAR44.6mn in Q4 FY22. This compares to the SNB Capital and consensus estimate of SAR50.2mn and SAR68.5mn, respectively. We believe the positive variance is mainly driven by higher than expected revenue, which stood at SAR1.71bn (+0.3% yoy, +23.0% qoq) vs our estimate of SAR1.50bn. Gross margins contracted by 325bps yoy to 16.3% vs our estimate of 18.0% due to increased sale of discounted products. The impact of weaker gross margins was mitigated by the lower opex due to cost rationalization efforts.
Revenue increased by 0.3% yoy (+23.0% qoq) to SAR1.71bn and came higher than our estimates of SAR1.50bn. We believe the variance is mainly driven by higher than expected revenue from Saudi and International retail operations supported by Ramadan season and early start of Hokair’s discount period. Retail sales in Saudi decreased by 4.0% yoy to SAR1.3bn. International sales increased by 22% yoy to SAR267mn, while F&B segment revenue stood at SAR116mn, up 8% yoy. Overall LFL decreased by 2.7% yoy.
Alhokair opened a net of 12 retail stores (16 closed vs 28 opened) in Q1 FY23. For the F&B segment, it closed a net of 4 stores (15 closed vs 11 opened).
Gross margins contracted by 325bps yoy to 16.3%, and came lower than our estimate of 18.0%. We believe the contraction and variance in margins are due to increased sale of discounted products as the company brought forward its discount period by 10 days to this quarter.
Operating expenses decreased by 34.3% yoy to SAR134mn, and came lower than our estimate of SAR150mn. Opex-to-sales stood at 7.9% vs 12.0% of Q1 FY22 and our estimates of 10.0%. We believe the yoy decline and variance are mainly driven by cost rationalization efforts.
Non-operating expenses increased 4.3% yoy to SAR86.0mn and came higher than our estimates of SAR69.6mn due to higher losses from associates and increased zakat expenses.
Following the reduction of capital by 45.3% by cancelling 95.2mn shares, the company’s capital stood at SAR1.15bn.
Based on our last update, we are Neutral on Alhokair with an adjusted PT of SAR44.8. We believe the recovery in retail segment, expansion in F&B space and investment in its omni-channel strategy will support the future growth. The stock is trading at a FY23f P/E of 8.7x vs the peer group average of 13.8x.