The only way to make an economy richer per capita is by increasing per capita productivity, which means investing in productivity-enhancing research and technology and in needed infrastructure. Surging asset prices increase the wealth of individuals, but not of the system—Michael Pettis
In this issue:
Robinsons Retail and Robinsons Land 2023 Performance: Assessing the Health of the Philippine Consumer
I. Robinsons Retail’s 2023 Record Sales and Profit Margins Anchored on Negative Real Growth as Net Income Fell
II. RRHI’s Topline Performance in the Lens of the Consumer’s Health
III. RRHI Expands Leverage to Finance Increased Exposure to Banks as Liquidity Issues Emerge
IV. Robinsons Land’s 2023 Rental Revenues Soar to Historic Levels (Diverging from RRHI’s Performance)!
V. Record RLC’s Net Income Levels Despite Consumer Health in Question
VI. Robinsons Land’s Real Estate Sales Under Pressure; Increasing Leverage Means Escalating Fragility
Robinsons Retail and Robinsons Land 2023 Performance: Assessing the Health of the Philippine Consumer
Underneath the bullish headlines, the 2023 performances of Robinsons Retail and Robinsons Land unveil substantial signs of fragility.
I. Robinsons Retail’s 2023 Record Sales and Profit Margins Anchored on Negative Real Growth as Net Income Fell
Figure 1
In 2023, one of the leading retail chains, Robinsons Retail Holdings [PSE: RRHI], reported an increase of 7.44% in revenues to a record PHP 192.13 billion, which was driven by a 3.71% store expansion. (Figure 1, topmost chart)
The 2023 revenue growth was less than half the pace of the 16.6% in 2022.
In 2023, its blended same-store sales registered at 3.91%, which was about a third of the 11.8% in 2022.
The thing is, with the annual CPI at 6%, the real revenue growth of 1.44% mainly came from new stores, as identical store sales registered a contraction. (Figure 1, middle window)
Interestingly, boosted by inflation, RRHI's profit margins reached a record high in 2023, which increased its buffers.
Nonetheless, its net income plunged by 28% in 2023 to Php 4.7 billion, or net income attributable to equity holders plummeted 29.9% to Php 4.1 billion "weighed down by foreign exchange losses, equitized losses from investment in associates and interest expense on loans," according to its annual report. (p.38) (Figure 1, lowest image)
II. RRHI’s Topline Performance in the Lens of the Consumer’s Health
Figure 2
In the context of the GDP, aside from benefiting from rising inflation through higher margins, the deceleration in household GDP resonated with the firm's sales per store and overall revenue growth. (Figure 2, topmost and second to the highest graphs)
However, the slowdown in RRHI's revenue growth was broad-based, with only the drug segment, the company's second-largest contributor after the supermarket, showing improvements in growth rates, i.e., from 10.6% in 2022 to 13.4% in 2023. (Figure 2, second to the lowest window)
Interestingly, the fluctuations in the CPI mirrored the fluctuations in RRHI's quarterly revenues. (Figure 2, lowest chart)
Said differently, the consistency of the relationship depicts causality.
Figure 3
And the brisk but peaking household credit boom (23.97% in 2023) appears to have contributed significantly to the slowing of its sales growth or the "law of diminishing returns".
Unsurprisingly, consumers increased their use of credit to offset the decline in their purchasing power, which allowed RRHI to boost its margins.
III. RRHI Expands Leverage to Finance Increased Exposure to Banks as Liquidity Issues Emerge
Curiously, RRHI increased its equity exposure in BPI to 4.4%, funded with a long-term Php 15.5 billion (Php 10.65 billion and Php 4.84 billion) loan (p.48). (Figure 3, topmost diagram)
In January 2023, the Bank of the Philippine Islands merged the company's bank, Robinsons Bank, into its fold. (p.5)
RRHI increased its exposure to BPI to 6.5% with the recent share acquisition, which comprised about a tenth of the firm's Php 155 billion assets in 2023.
Consequently, the firm's interest expense soared to an all-time high of Php 3.122 billion, as the company's debt load also spiked to an unprecedented Php 21.4 billion. (Figure 3, middle chart)
Additionally, as the firm's cash reserves plunged from Php 17.8 billion to Php 13.2 billion, the gap between the short-term debt continues to narrow. (Figure 3, lowest chart)
The increasing burden of the firm's debt levels, supporting its non-retail expansion, coincides with mounting strains in credit-financed consumer spending. This suggests increasing uncertainty and risks.
Moreover, the retail industry appears to be undergoing an "investment boom" despite a slowdown in consumer spending, as evidenced by retail sales and income.
Such divergence or developing mismatches exemplify "malinvestments" resulting from the mispricing caused by inflation.
IV. Robinsons Land’s 2023 Rental Revenues Soar to Historic Levels (Diverging from RRHI’s Performance)!
Figure 4
RRHI's sister firm, Robinsons Land Corp [PSE: RLC], posted a 19.1% surge in rental income, the percentage share of the total soaring to 44.5%. (Figure 4, topmost graph)
However, due to the 51% plunge in real estate (RE) sales, RLC's total sales growth contracted by 7.7%. (Figure 4, middle pane)
Moreover, mall rental margins exploded to a record 70.5%, which powered its % share of the total significantly higher. (Figure 4, lowest two images)
These advances occurred even as the company's shopping mall occupancy rate was reported at 92% (or an elevated vacancy rate of 8%).
Once again, the soaring margins amidst rising CPI benefited big property firms like RLC, which have relied extensively on credit expansion for operations.
The lending growth rates of Universal Commercial Bank (UC) to the trade and real estate industry have paralleled RLC's debt growth. UC bank lending to these industries grew by 9% in 2023, while RLC’s debt expanded by 5.5%. (Figure 5, topmost image)
Additionally, the spike in credit card growth (30.1% YoY) has had a significant impact on RRHI and RLC's sales growth. (Figure 5, second to the highest diagram)
More pointedly, demand for the retail and real estate industries has been heavily reliant on bank credit.
V. Record RLC’s Net Income Levels Despite Consumer Health in Question
The substantial improvements in margins from the shopping mall rental and hotel businesses contributed the most to RLC's record net income levels (Php 13.4 billion) in 2023—on the back of easing growth rates. (Figure 5, second to the lowest and lowest graphs)
In any case, consumer conditions ultimately determine the feasibility of the retail industry and, subsequently, the leasing operations business of shopping mall operators, as well as real estate sales.
Unless supported by productivity growth or increases in real savings (production less consumption), credit-financed spending only draws from the future and is therefore unsustainable.
Worst, the crowding-out effect of the unproductive colossal government deficit spending only weakens private-sector consumption.
That is to say, if the retail industry struggles to increase or maintain its profit rates, this race-to-build supply or "build and they will come" precept, anchored in the assumption of unfettered consumer spending, will likely result in considerable vacancy rates and rising accounts of "white elephants."
VI. Robinsons Land’s Real Estate Sales Under Pressure; Increasing Leverage Means Escalating Fragility
Figure 6
Moving into the RLC's real estate operations, while their operations in China (Chengdu Xin Yao project) bore the brunt of the plunge in real estate sales, the slump also includes local operations, particularly the 38% cascade in the firm's horizontal projects (Robinsons Homes). (p.264) (Figure 6: highest and second to the top windows)
Although real estate margins soared in 2023, the decrease in sales led to a decline in its share contribution. (Figure 6: second to the lowest diagram)
Consistent with our earlier theme of credit-driven demand, RLC reported historic debt levels of Php 46.96 billion.
With a rising debt stock and higher-for-longer rates, the firm's financing costs, like its retail counterpart, also hit an all-time high at Php 1.91 billion. (Figure 6, lowest graph)
All of these factors have evidently been overlooked by the consensus. Essentially, increased reliance on leverage translates to weaker future demand and greater credit risks.
And given the interconnectedness of everything, mounting sectoral fragility translates to escalating systemic risks
___
References:
Robinsons Retail Holdings, 17-A Annual Report, PSE.com.ph, March 27,2024
Robinsons Land Corporation 17-A Annual Report, PSE.com.ph, March 25, 2024
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