MIDF Amanah Investment Bank Bhd (MIDF Research) has downgraded Padini Holdings Bhd to a NEUTRAL rating from BUY, with a revised target price of RM3.28, down from RM4.30. The downgrade reflects limited growth potential following weaker-than-expected financial results. In contrast, Maybank Investment Bank Bhd (Maybank IB) maintained its BUY call with an unchanged target price of RM3.80, anticipating earnings momentum to accelerate in the coming quarters.

Padini's revenue for the first quarter of the financial year 2025 (1QFY25) saw a modest 1.3% increase year-on-year (YoY) to RM393.1 million. However, the quarter-on-quarter (QoQ) performance showed a decline of 13.6%, mainly due to the absence of major festive events which typically drive consumer spending. Core net profit for the quarter stood at RM21 million, reflecting a 21% drop YoY and a 20% decline QoQ, excluding a foreign exchange loss of RM9.5 million.

MIDF Research attributed the earnings decline to higher selling, distribution and administrative expenses, including salary increments and additional promotional spending. As a result, the group's gross profit margin contracted by 0.5 percentage points (ppt) to 35.6%, while operating profit margin fell by 4.7ppt to 5.7%. MIDF Research revised its earnings forecasts for FY25 to FY27, reducing projections by 23%, 27% and 28%, respectively, due to the rising cost environment and subdued revenue growth.

Despite the challenges, Padini declared a second interim dividend of 2.5 sen per share, maintaining its commitment to shareholder returns.

On the other hand, Maybank IB remains optimistic about Padini's long-term prospects. The research house anticipates that earnings will improve in the upcoming quarters, driven by festive spending, civil service salary hikes, and minimum wage increases. Padini's focus on affordable fashion positions it well to benefit from rising disposable income, especially with government initiatives such as EPF Account 3 withdrawals. Maybank IB expects these factors to bolster demand and contribute to a recovery in the second quarter of FY25.

Padini's ability to navigate the current cost pressures while maintaining its market appeal will be key to its future growth, with both analysts highlighting the group's long-term potential in the value-for-money retail segment.