Revenue Growth Of 23%, What Does XTEP Need To Prove To The Capital Market?

In mid August 21st, XTEP released its medium-term performance in 2019: in 2019 1-6, the group's revenue was 3 billion 357 million yuan, up 23% over the same period last year. Operating profit amounted to 717 million yuan, an increase of 21% over the same period, and the profit attributable to shareholders was 463 million yuan, an increase of 23% over the same period last year. The basic earnings per share is 20.19 points, and the interim dividend is 12.5 cents per share, with a dividend payout ratio of more than 59%. Gross profit margin increased from 43.7% to 44.6%.

On the whole, the data in all aspects of financial reports are improving, but the overall growth is in line with the rules and has not exceeded market expectations. As a result, XTEP's stock price increased significantly after the noon earnings announcement, followed by a sharp drop of over 7%, with an earthquake of about 12%. The final closing price fell 4%, quoted 5.52 Hong Kong dollars, and its market value was about 13 billion 800 million Hong Kong dollars. So far in 2019, XTEP's stock price has risen by more than 32%.

In fact, XTEP's performance in the first half of this year has been reflected in the stock price rise a few days before its earnings announcement. For the future, whether XTEP itself or the capital market, there will be more expectations for the further development of its existing businesses, as well as the expansion of new businesses and even more brands.

Many brands are still nurturing, testing market patience.

At present, with the steady development of XTEP's main brand, XTEP's core concern is whether it can replicate Anta's success in many brands. In March this year, XTEP had won the development, marketing and distribution rights of two brands of shoes, clothing and accessories in mainland China and Hong Kong and Macau, which were sold by Merrell (MAI LE) and Saucony (Suo Connie). In August 1st, they completed the global acquisition of the two international brands of Gestapo and palatine, with a total price of $260 million.

This half year report shows the stability of XTEP's current retail and brand operation capabilities and efficiency. Next, the biggest expectation for XTEP is whether it can succeed in many brands and expand its business space.

According to the financial report, XTEP's first brand independent store, Suo Conni and Mai Le, will open in the two quarter of 2020 and the second half of the year respectively, while the sale of Suo Conni's e-commerce channel has started in July 2019, and Mai le will open an e-commerce channel in early 2020. Suo Conni store will be located in the first tier cities. Mai le will be located in a second tier city. The former "use our sales network to cater for the more mature customers". The latter "enriches the product categories to catch the outdoor sports market in the mainland of China".

As for the K-Swiss and palatine (Palladium) brand of K-Swiss, which has just been completed in August, XTEP also needs to undergo some adjustment and preparation after the acquisition.

According to official information of XTEP, the sales of main tennis shoes and casual shoes were 98 million US dollars and 109 million US dollars in 2017 and 2018 respectively. At present, there are about 40 self operated stores in the Asia Pacific region, and North America is its largest wholesale market. XTEP said it is launching a re positioning of the brand and new product design, and to increase the variety of clothing products.

Paladin sales in 2017 and 2018 were 71 million US dollars and 78 million US dollars respectively. As shoes and boots brand, we have more than 25 outlets in the world, most of which are wholesale and distribution, and more than 150 stores in wholesale and distribution mode in mainland China. Like XTEP, XTEP plans to increase its clothing products, but XTEP emphasizes that it will open stores in its own and distribution mode.

XTEP said that the two will maintain their respective management teams to continue their independent operation, while using XTEP's sales network, R & D and supply chain resources to seamlessly integrate with XTEP, greatly improving operational efficiency and shifting the focus of its business to the Asia Pacific region.

The process of nurturing new brands requires continuous investment and a certain amount of effective time, which is a test for XTEP in terms of capital. In the first half of 2019, the net cash inflow of XTEP's operating activities was 422 million yuan, an increase of about 200 million yuan over the same period last year. At present, XTEP has 3 billion 618 million yuan of cash and cash equivalents on hand, which has accumulated ample funds for its next multi brand operation.

Apparel business grew rapidly, footwear business growth declined

XTEP said revenue growth in the first half of 2019 was mainly due to sound product mix and good acceptability (especially clothing products of the company), resulting in higher sales rates and increased replenishment orders from total agents, supplementary demand for healthier stock levels, and strong sales performance of downstream retailers due to upgrading of stores and retail network optimization.

In the three major business components of footwear, clothing and accessories, the growth rate of clothing business as high as 50.4% is the most powerful and obvious. The growth rate is far more than 24.1% of the same period last year, contributing 1 billion 356 million yuan in revenue and rising from 33% to 40.4% in group revenue. At the same time, the gross profit margin of garment business has increased by 2.7 percentage points to 44.7%, pushing the gross profit margin of the whole business up 0.9 percentage points to 44.6%. XTEP also said that the growth of gross profit margin came mainly from the sale of functional clothing products.

Regardless of the rapid growth of apparel business, or the growth rate of 15.3% in the same period in 2018, XTEP's footwear business in the first half of this year has been relatively dull, with an increase of 8.3% in revenue and 44.8% in gross margin. Footwear is still the core business of XTEP, accounting for up to 57%.

It is worth mentioning that nearly 40% of XTEP's footwear business is self-produced, about 60% of which are outsourced, and in apparel business, the proportion of self production and outsourcing is 10% and 90% respectively.

In addition to XTEP, most of the domestic brands, clothing and footwear business accounted for the overall revenue are relatively close, such as Lining's clothing business this year is 48.9% gross margin, from this point of view, XTEP's clothing business still has a lot of room for improvement.

　 The main brand tapping the potential, signing Jeremy Lin to develop the basketball market.

Although signing Jeremy Lin's action took place in the second half of this year, XTEP still mentioned the first professional basketball spokesman in the history of the brand.

In the 2019, sports and fashion oriented professional sports, as the symbol of entertainment spokesperson, are still the two main business directions of XTEP. However, in the increasingly fierce market competition, it is equally essential to expand the scope of their own businesses and seek new profit directions. XTEP has also cast its eyes on the basketball field which has rarely been mentioned before.

In early August 2019, XTEP announced the signing of Chinese basketball star Jeremy Lin as the brand spokesperson. Compared with running and comprehensive training, the audience of basketball is younger, and its consumption demand is strong and its brand loyalty is high. Ding Shuibo, chairman and CEO of the board of directors of XTEP group, said in an interview with the media: "China's sporting goods market is the largest number of participants, followed by basketball, and China is the second largest basketball market in the world. Basketball is becoming more and more popular in China, whether on campus or among young people. Young people are actively watching and participating in basketball topics.

XTEP announced that it will launch Jeremy Lin's signature basketball shoes in July 2020. In the next half a year, they plan to introduce color matching including Chinese dragon, learning tyrant, Christmas and Spring Festival Red, combining Jeremy Lin's personal story and elements with Chinese culture. Behind this signing is a reflection of XTEP's need for new footwear growth momentum after its success in running.

Stable growth of electricity providers, children's business is still "minimal".

The same store sales are more and more important data in the market in recent years. XTEP reported in the earnings report that the same store sales in the first half of 2019 showed a low double-digit growth. In the first and second quarter of 2018, XTEP's same store sales showed double-digit and double-digit growth. Compared with the same period, the same store sales growth rate remained stable, while the number of stores increased by 82.

XTEP keeps the total number of exclusive agents stable in 40 stores, and about 60% of all 6312 stores are directly run by them. XTEP said the group's newly opened shops are mainly located in the shopping mall, which is expected to continue in the next few years.

In the first half of 2019, XTEP's e-commerce business grew steadily, accounting for more than 20% of the group's revenue, and its revenue scale exceeded 670 million. The overall proportion was basically the same as last year.

As for children's business, as of June 30th this year, the number of sales outlets in XTEP's children's Department reached 650, double that of 300 in the same period last year. XTEP said that the child business was "strong growth momentum in the first half of 2019", but they still used the statement "little contribution to the group" and "prudent expansion of the children's Department". In the future, children's business will become one of the important growth points of XTEP.

In terms of cash turnover, the average stock turnover days of XTEP decreased from 104 days to 81 days in the first half of the year. The average number of days of receivable trade turnover decreased from 113 days to 107 days. The average turnover days of payable trade funds decreased from 134 days to 90 days, and the total working capital turnover days increased 15 days to 98 days. The last data is at a higher level in the industry and needs further improvement.

XTEP said, "the growth in the second half of 2019 will be milder due to the high base number and macroeconomic uncertainty caused by the Sino US trade war".

On the whole, the current development of XTEP is steadily higher than that of last year. The next big test is how to effectively develop multi brand business while maintaining the development of the main brand. This will test XTEP's comprehensive ability in product, brand, channel, marketing, supply chain, and more importantly, talent reserve and synergy.