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Summary of Broker’s Recommendation
| Stock Code | PGOLD |
| Company Name | Puregold Price Club, Inc. |
| Broker | AP Securities |
| Opinion Issued on | 5 Jan 2024 |
| Recommendation | Hold |
| 1-Year Target Price | PHP 45.00 |
Given the two-pronged headwind to Puregold’s profitability, we therefore advise against picking up more PGOLD shares. We would recommend investors to HOLD for now and barring any news of significant market share advantages or improved margin prospects for PGOLD, we would use future price run-ups as an opportunity to take some profits seeing as the competition with Dali may provide an overhang to price appreciation.
Analysis and Opinion
Consumers still bogged by difficulties
According to the recent expectations survey, consumers remain wary of the future. Index readings taken last 4Q 2023, which were based on consumers’ 12-month outlook regarding their families’ income and financial situations, continued to register at relatively lower levels versus the same period in previous years. This shows that despite projections of easing inflation, many amongst the population remain hampered and this could very well impact their willingness to shell out money to spend.
Challenger to the throne
Amidst this backdrop, a new retailer known as Dali has been aggressively stepping up its expansion efforts to cater to a large section of price-conscious consumers, a space already inhabited by the well-known PGOLD. The former adheres to the hard discounting business model which emphasizes carrying a limited number of common everyday goods and then selling them for as low as possible, even to the point of going below the SRP. While this would lead to low gross margins, hard discounters make up for this through their high frequency of repeat sales as well as by running lean and efficient operations. Because of this, Dali has essentially become a direct competitor to PGOLD, most notably its Puregold segment which accounts for around 68% of total revenues.
PGOLD’s response to Dali
Management in the Co-led retailer has already taken notice of this potential threat, with reports of increased promotional and discounted pricing activities taking place within Puregold stores. While this would undoubtedly make Dali’s expansion more challenging moving forward, this is also a double-edged sword on Puregold’s part.
Lower selling prices would also make margins harder to come by for Puregold. During the high inflationary quarters of 1Q 2023 and 2Q 2023, EBITDA margins really tapered off, and although easing inflation should once again provide upside to margins, this could be tempered down by the deliberate lowering of selling prices. As such, it may be difficult for Puregold to return to the low 8% EBITDA margin range that was commonly seen prior to the pandemic.
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