BA 141: 4:00 PM Class

RRHI: Robinsons Retail Holdings, Inc.

Submitted by:
Keh, Spencer Shaun S.
2016-00017

September 7, 2018
 I. Corporate Structure
Robinsons Retail Holdings, Inc. (RRHI) is one of the leading multi-format retail groups in the Philippines.
It operates six major business segments, namely supermarkets, department stores, do-it-yourself (DIY)
stores, drugstores, convenience stores, and specialty stores, which includes toy stores, fashion stores,
and others. Among these, its supermarket segment is the primary contributor to its overall sales,
accounting for almost 50% of revenues, followed by its department stores, representing around 15%
(Appendix A). The company has over thirty years of experience with retail business, starting from its first
department store in 1980, then expanding into the supermarket business in 1985, the DIY business in
1994, convenience and specialty stores in 2000, drugstores in 2012, and finally coffee shops in 2015.

Today, RRHI is parent to twelve wholly-owned and seventeen partly-owned subsidiaries (Appendix B).
This parent-subsidiary structure is arranged in a manner where the subsidiaries are grouped according
to the nature of their businesses, so they could be managed more effectively. RRHI is primarily owned
by the Gokongwei family, as the nine shareholders who own the most shares (excluding PCD nominees)
all come from the family (Appendix C). Furthermore, the Gokongweis also occupy seven out of nine
seats among the board of directors. Among them, Chairman of the Board Lance Gokongwei has been
with the JG Summit group since 1993, and has been leading RRHI since 2002. Meanwhile, President and
CEO Robina Gokongwei-Pe has been with the company since 1984, and has also served as COO from
2002 to 2018. The Gokongweis possess invaluable first-hand experience in managing the corporation.

As a multi-format retailer, RRHI aims to increase same-store sales and expand its list of brands to
different potential areas around the country. A primary focus for aggressive expansion would be
unpenetrated areas outside Metro Manila, since traditional retail formats are still common in these
areas, thus offering greater potential for growth. Its key target market would be the broad middle-
income segment, as RRHI aims to capitalize on robust economic growth and increased buying power.
With 35% of its revenues coming from discretionary spending, RRHI could indeed benefit from such
projected increase in consumer income. In order to achieve these, it is crucial for the company to
maintain and improve its financial health, which will be assessed in the analysis below.

II. Financial Health

A. Activity
RRHI has consistently maintained a negative cash conversion cycle, which indicates that working capital
management has been remarkable (Appendix D). Since their operations are retail and are targeted to
the common shopper, sales are normally made on a cash basis, and large sums of credit sales are
unlikely to occur. As such, receivables have accounted for only 2-3% of assets for the past years, and
average collection period remains at around 7 days up until 2017 (Appendix D). For payables,
management mentioned that they have favourable relations with majority of their suppliers. Also, 92%
of department store sales, as well as 63% of DIY store sales are on consignment terms. These
consignment contracts likely contain credit terms in favor of RRHI, giving them longer credit allowances
from suppliers. Trade payables alone actually cover around two-thirds of RRHI’s total liabilities, and
average payment period runs at around 70 days (Appendix D). It could be observed though, that the
number of days to pay has been decreasing over the years, which could be concerning for management.
Nonetheless, having generally long payment periods and short collection periods gives the company an
advantage with regards to its efficiency in handling disbursements and collections.

Management has disclosed that RRHI uses a stock operation system equipped to handle high turnover
and bulk items. These are mostly seen in supermarkets, DIY stores, and toy stores. RRHI takes around
50-60 days to completely sell inventory (Appendix D), which increased every year due to the rapid
expansion of stores. From December 2015 to 2017, 30 new supermarkets, 27 new DIY stores, and 54
new specialty stores have been opened, and the value of merchandise inventories gradually increased
from P9 billion to almost P15 billion. An increasing inventory turnover alongside increasing inventories
from store expansions signifies that the expansions could be more effective, and that customers are not
buying the inventory being stored at the same rate. Management could still improve by aiming for the
two-week average holding period for all their products, just like the top-tier vendors for supermarkets.
For the other segments, management has mentioned efforts in reducing stocking requirements. RRHI
employs a just-in-time system of delivery, as well as a cross-docking system, wherein non-perishable
goods are sorted and delivered to stores around Metro Manila within 1-5 days, while stores in Visayas
and Mindanao are delivered to within 3-10 days, preventing the need to overstock since there is
minimal delay in delivery. These systems being used by RRHI could improve its inventory management.

B. Liquidity and Solvency

RRHI has maintained a current ratio of around 1.3 (Appendix E), which shows that it generally has
enough assets to meet short-term obligations. Since RRHI has a relatively liquid inventory and sales
transactions are performed on a cash-basis, the current ratio is preferred over the quick ratio. Having
enough liquid assets to cover for liabilities poses healthy liquidity for RRHI. In addition, RRHI also
possesses over P14 billion in cash and P20 billion in AFS financial assets, which make up over 40% of its
total assets. This sizeable amount is indicative of RRHI’s potential to boost expansion by either
increasing store presence, increasing acquisitions of other smaller retailers to penetrate untapped
markets, or even to import more compelling brands to further benefit from the rising income of the
middle class.

Another significant item would be RRHI’s short-term loans, which has sharply increased from P55 million
in 2014 to over P6 billion in 2016 and 2017. This spike is heavily attributable to the company’s relatively
large-scale acquisitions over the past three years. In 2016, South Star Drug obtained a P2 billion loan
with interest rate of 2.5% per annum to fund the P2.26 billion acquisition of The Generics Pharmacy.
Meanwhile, Robinsons Inc. acquired Savers Electronic World Inc. in 2015 for a total consideration of
P990 million, prompting them to secure loans worth P1.2 billion with a 2.5% per annum interest rate.
Robinsons Supermarket Inc. also began obtaining loans worth P1 billion since 2015 to meet working
capital requirements, perhaps to satisfy increasing urgency of demands from its myriad of suppliers. The
ballooning of RRHI’s short-term loans also caused the sharp drop in its times interest earned ratio from
over 300x to just near 50x (Appendix F). However, this should not give rise to too much concern. In fact,
RRHI does not have long-term debts, and its P6 billion short-term loans could be considered minimal. As
a reference, SM has long term debts of almost P300 billion. RRHI’s debt ratio remains at around 0.3,
while its debt-to-equity ratio nears 0.5 levels (Appendix F), denoting that the company is still solvent and
financial risk and liabilities are manageable. Banks even granted RSC the option to renew their loans
every three months, and they have been consistently repaying significant amounts of the loans annually.

C. Profitability
RRHI’s operations are clearly profitable, with 12-digit sales and 10-digit earnings realized every year.
Positive revenue growth and net income growth can also be observed from the income statement since
2014. However, though RRHI continues to expand its stores and its business, revenue growth has been
declining over the past four years (Appendix G). This may be indicative of the tightening competition in
the market for the retailing industry, brought about by the ongoing expansion of competitor stores
around the country. The segments that were most affected were department stores and convenience
stores, both having only less than 2% sales growth for the year ended 2017. Nonetheless, this was offset
by other segments like drug stores, which contributed a 47.9% and 21.7% sales growth in 2016 and 2017
respectively due to RRHI’s acquisition of a 51% stake in The Generics Pharmacy in 2016.
Gross profit margin remains constant at 0.22, while operating and net profit margins are maintained at
0.05 (Appendix G). Despite having low margins, retailers like RRHI are characterized with high volume
sales. Hence, the ability to keep cost of sales and operating expenses stable every year is a feat for
management. They were even able to keep these margins constant up to the first half of 2018 (from
RRHI 17-Q) despite rising Philippine inflation. This represents management’s effective cost and expense
management. Overall, annual earnings per share continues to rise year after year (Appendix G), which
displays management’s success in increasing shareholder value for RRHI owners and investors.

D. Industry and Competition

With modern grocery retailers only present in 30% of the Philippine market, the industry is far from
saturation and is still growing, especially with rising disposable incomes of the middle class. RRHI is the
second largest retail player in the country next to SM, and its ride with this economic growth has given it
a decent market share in all segments. As of 2017, its 10.9% market share for supermarkets falls behind
SM, who has a 21.6% share. It still outperforms competitors like Metro, who had a higher share in 2015,
and Puregold, who focuses on hypermarkets. For department stores, its 8.6% market share also placed
second behind SM, who has a commanding 42.6% share, but topped other rivals like Metro, Landmark,
and Rustan’s. For convenience stores it has a 16.1% market share, only behind 7-Eleven, but remains
ahead of new entrants like Lawson and Family Mart. For drug stores, the business is very competitive,
with SSDI’s 6.1% share lagging behind Mercury Drug and Watsons. DIY stores on the other hand are
expected to see a boost in sales, with a booming construction industry in the country. RRHI competes
favorably in this segment with an 11.6% market share. Meanwhile, RRHI is slightly leading in its toy store
segment, with an 11.6% share compared to SM’s 11.3%. SM is seen to dominate its competitors due to
its innovative partnerships with multiple international brands. For instance, it has brought in Alfamart, a
new convenience store - grocery hybrid, but none of its competitors have followed suit.

III. Recommendations
The ratio analysis above clearly reflects RRHI’s effective operations and growth. Its cash conversion
cycle, liquidity, and solvency, are all relatively healthy. The company is also profitable overall, though
there are some segments that exhibited issues with revenues, such as the same-store-sales growth of
department stores which fell by 2.6% in 2017. Management is recommended to adapt specific measures
to resolve this. Since department stores are still vital in accumulating foot traffic in malls, it would be
advisable to decrease the sizes of stores that are not as profitable, rather than decrease the number of
stores itself. Management may also consider tapering the rapid expansion of convenience stores
especially in Metro Manila, as various brands continue to penetrate the market and steal market share.
Management should also continue their strategic acquisitions like that of The Generics Pharmacy, which
boosted drugstore revenues by 21.7% from having an SSSG of only 1.6%. Recently, RRHI acquired full
ownership of Rustan’s Supercenters, Inc. by offering a share swap deal valued at P18 billion. Though this
may dilute RRHI’s near term earnings, as RSCI is currently incurring losses, the deal still looks favorable
for RRHI in the long run. Store count is expected to double and gross profits are expected to increase
with RSCI’s higher margins.

It is the chief goal of management to maximize shareholder wealth, which is achieved by increasing the
company’s share price. With a stable yearly return on equity of 11% (Appendix H) for RRHI, owners are
invested in a relatively secure company. However, maintaining stable finances is only the first step. In
order to successfully drive a stock’s price up, the company should be able to create sustainable demand
and pose an upside for investors, especially major players in the industry. This can be done through the
realization of the effects of growth initiatives like the acquisition of RSCI, as well as turnaround efforts
for mediocre segments, which will lead to further sustainable surges in earnings. Only then will investors
be convinced of the greater possibility of higher returns, and thus be willing to accumulate shares of
RRHI.
Appendix

A. RRHI Business Segments (% contribution to total revenues)

B. Subsidiary Structure

C. RRHI Shareholdings Structure

* JE Holdings Inc. is a Gokongwei company.
*James L. Go is the brother of John Gokongwei Jr.

D. Activity Ratios

*The ending balances of inventory, accounts payable, and accounts receivable were used to compute.

E. Liquidity Ratios

*Quick ratio uses the formula (cash + short-term investments + receivables) / total liabilities.

F. Solvency and Coverage Ratios

*The unit for times interest earned ratio is number of times.

G. Profitability Ratios

*Only the net income attributable to the holders of the parent company was used in computing for EPS.

H. Return on Investment

*These values use average balances over ending balances in computing the returns. The numbers were
taken from 17-A.
References
- Cheng, J. (January 5, 2017). Raising estimates on stronger than expected 9M16 results and
steady growth outlook; upgrading to a BUY. Retrieved September 1 from
https://ph10.colfinancial.com/ape/FINAL2_STARTER/ResearchCompUpdates/Downloads/2017-
01-05-PH-S-RRHI.pdf
- Cheng, J. (July 27, 2017). Positive outlook remains intact. Retrieved September 1 from
https://ph10.colfinancial.com/ape/FINAL2_STARTER/ResearchCompUpdates/Downloads/2017-
07-27-PH-S-RRHI.pdf
- Cheng, J. (January 3, 2018). Decreasing estimates on weak 9M17 results, maintaining BUY.
Retrieved September 1 from
https://ph10.colfinancial.com/ape/FINAL2_STARTER/ResearchCompUpdates/Downloads/2018-
01-03-PH-S-RRHI.pdf
- Cheng, J. (April 3, 2018). Earnings slightly miss; Rustan’s acquisition dilutive in the near term.
Retrieved September 1 from
https://ph10.colfinancial.com/ape/FINAL2_STARTER/Researchcompupdates/Downloads/2018-
04-03-PH-E-RRHI.pdf
- Cheng, J. (August 1, 2018). Growth outlook remains robust. Retrieved September 1, from
https://ph10.colfinancial.com/ape/FINAL2_STARTER/Researchcompupdates/Downloads/2018-
08-01-PH-S-RRHI.pdf
- Euromonitor International. (January 2017). Mixed Retailers in the Philippines. Retrieved
September 6, from http://www.portal.euromonitor.com/portal/
- Euromonitor International. (January 2016). Puregold Price Club in Retailing (Philippines).
Retrieved September 6, from http://www.portal.euromonitor.com/portal/
- Euromonitor International. (January 2018). Retailing in the Philippines. Retrieved September 6,
from http://www.portal.euromonitor.com/portal/
- Euromonitor International. (January 2017). Robinsons Retail Group in Retailing (Philippines).
Retrieved September 6, from http://www.portal.euromonitor.com/portal/
- Euromonitor International. (January 2017). SM Retailing Inc. in Retailing (Philippines). Retrieved
September 6, from http://www.portal.euromonitor.com/portal/
- Fajardo, B., Lim, R., Narvaez, H. (November 17, 2016). RRHI: Earnings On Track. Retrieved
September 1 from
https://bpitrade.com/research/viewpdf.asp?name=Comp%20RRHI%20111716.pdf&type=Comp
any%20Report
- Fajardo, B., Lim, R., Narvaez, H. (March 23, 2017). RRHI: Sustained Expansion. Retrieved
September 1 from
https://bpitrade.com/research/viewpdf.asp?name=Comp%20RRHI%20032317.pdf&type=Comp
any%20Report
- Fajardo, B., Lim, R., Narvaez, H. (August 8, 2018). Robinsons Retail Holdings On Track For Robust
Growth. Retrieved September 1 from
https://bpitrade.com/research/viewpdf.asp?name=Othr%20RRHI%20Company%20Report%200
80718.pdf&type=Company%20Report
- Gitman, L., Zutter, C. (2012). Principle of Managerial Finance. Boston, MA: Pearson.
- Metro Retail Stores Group Inc. (2017). Annual Report. Retrieved September 1, from
http://edge.pse.com.ph/financialReports/form.do
- (n.d.). (n.d.). Alfamart - a game changer for Philippines retail? Retrieved September 6, from
https://www.planetretailrng.com/news-and-events/alfamart-game-changer-philippines-retail
- (n.a.). (n.d.). Executive Profile: Lance Yu Gokongwei. Retrieved September 1, from
https://www.bloomberg.com/research/stocks/people/person.asp?personId=8362475&privcapI
d=878735
- (n.a.) (n.d.). Executive Profile: Robina Y. Gokongwei-Pe. Retrieved September 1, from
https://www.bloomberg.com/research/stocks/people/person.asp?personId=26120021&privcap
Id=51829569
- Philippine Seven Corporation. (2017). Annual Report. Retrieved September 1, from
http://edge.pse.com.ph/financialReports/form.do
- Puregold Price Club, Inc. (2017). Annual Report. Retrieved September 1, from
http://edge.pse.com.ph/financialReports/form.do
- Robinsons Retail Holdings, Inc. (n.d.). Board of Directors and Officers. Retrieved September 1,
2018, from http://www.robinsonsretailholdings.com.ph/our-company/board
- Robinsons Retail Holdings, Inc. (2015) Annual Report. Retrieved September 1, from
http://edge.pse.com.ph/financialReports/form.do
- Robinsons Retail Holdings, Inc. (2016) Annual Report. Retrieved September 1, from
http://edge.pse.com.ph/financialReports/form.do
- Robinsons Retail Holdings, Inc. (2017) Annual Report. Retrieved September 1, from
http://edge.pse.com.ph/financialReports/form.do
- Robinsons Retail Holdings, Inc. (2018) Quarterly Report. Retrieved September 1, from
http://edge.pse.com.ph/financialReports/form.do
- SM Investments Corporation. (2017). Annual Report. Retrieved September 1, from
http://edge.pse.com.ph/financialReports/form.do