Shrinking margins at Jarir worry investors

Saudi group strong sales growth in low-yield electronics.

Investors have been selling shares of Jarir Marketing, a Saudi office supplies and electronics retailer, after the company said its margins were continuing to shrink.

Jarir declined 0.8 per cent to 153.25 riyals on the Tadawul All-Share Index yesterday after it announced a 0.2 per cent fourth-quarter increase in net income to 104 million riyals compared with the same period a year earlier.

Gross marginshrank by more than 2.5 per cent to 16.4 per cent compared with the previous year's fourth quarter. Net margincontracted by 1.5 per cent to 12.8 per cent.

"The fall in gross margins continued the declining trend seen during the first three quarters and remains our key concern on the stock," Farouk Miah, an analyst at NCB Capital in Riyadh, said yesterday. Mr Miah has a "neutral" rating on the stock with a price target of 170 riyals.

The company showed strong sales growth in its electronics segment, but that is one of its lower-margin divisions compared with its office supplies unit.

"We believe the increased percentage of sales coming from the lower-margin electronics segment continues to be the primary reason for the year-on-year decline in margins seen at Jarir," Mr Miah said. The company said the fourth quarter in 2009 included the high-margin school sales period, which shifted to the third quarter last year.

Sales in the fourth quarter came in at 812m riyals, an increase of 12.1 per cent on the same period the previous year, while gross profit came in at 133m riyals, a decrease of 2.9 per cent.

"On the whole, the results are in line with our expectations, although lower than consensus estimates," Mr Miah said. "The company attributed the impressive 12 per cent sales growth to continued strong growth in sales of electronics, and specifically in smartphones, accessories and laptops."

Jarir said last year it planned to expand to between 40 and 45 stores by the end of 2013, with a goal of increasing sales to close to 1 billion riyals next year.