Is It A Result Of An Unprecedented Increase In Inventory Pressure?

In 2019, it was the second year that the brand reconstruction plan was launched at 31st degree (01361), but the market was obviously not satisfied with the performance of this year. 17 noon, 31st degree announced 2019 fiscal year results, afternoon opening stock price plummeted nearly 7%, the same day fell 4.65%, 18 days share price continues downward.

According to the financial report, the revenue reached 5 billion 632 million yuan (the same below) in 2019, an increase of 8.6% compared with the same period last year, and the growth rate was obviously faster than the past two years. The profit attributable to shareholders was 432 million yuan, up 42.4% from the same period last year, and the growth rate was the highest in the past five years. At the same time, the gross profit margin was 40.3%, a slight decrease of 0.3 percentage points compared with the same period last year, and the operating overflow rate was 15.8%, an increase of 0.7 percentage points compared to the same period last year.

During the period, net cash flow from operating activities was 630 million yuan, an increase of more than 1 times compared with the same period last year. At the end of 2019, the cash and cash equivalents of the company were 3 billion 422 million yuan, a net increase of 1 billion 766 million yuan compared with the end of 2018. The asset liability ratio was 21.3%, a decrease of 2.3 percentage points compared with 2018.

Why does this seemingly inferior financial report lead to a loss of funds?

Industry policy is good, but the stock pressure is increasing.

Inventory turnover is an important indicator of consumer companies. It has been noted that in 2019, the turnover period of 331 days was 120 days, an increase of 10 days compared with 2018, which has been increasing for fourth consecutive years and has reached a record high.

It is understood that about 96.1% of the inventory is finished products, mainly in the winter of 2019 and spring products in 2020. Inventory of raw materials decreased by 63.1% compared with the same period last year, accounting for about 2% of the total inventory. Despite the lengthening of the inventory turnover period, there were no confirmed unsold inventories during the year, and 12 million 100 thousand yuan of unsalable stock was confirmed in 2018.

In terms of advertising, it seems to be cautious. Advertising and publicity expenses amounted to 508 million yuan during the year, accounting for about 9% of the revenue, which was the lowest since 2012. The company has carefully controlled and terminated some advertising contracts over the past year, replacing it with a number of overseas athletes and sponsoring marathon events.

In 2019, the state promulgated relevant policies and vigorously supported the development of sports industry. The State Council has issued "action plan for further promoting sports consumption (2019-2020 years)", "sports power construction program", "opinions on promoting national fitness and sports consumption to promote the high quality development of sports industry" and so on. It has not only implemented the national fitness campaign as one of the fifteen special campaigns, but also proposed to develop the sports industry into a pillar industry of the national economy.

Behind the support of a series of policies, the sporting goods market is also very hot. Anta (02020), Lining (02331) and XTEP (01368) have greatly increased their income and net profit, and overseas mergers and acquisitions are also active. In the two tier market, the stock price of Anta and Lining also gained a good increase in 2019. There are signs that the sports industry is ushering in a new round of gold development.

Sports shoes and clothing market in China's sports industry accounted for up to 80%, and the most profitable, still maintain the status of the basic industry. But in this super 200 billion market competition, 331 degrees have been lagging behind Anta, Lining, or even overtaken by XTEP, and the gap with local leading brands is also gradually widening.

Close shop, lay off staff, focus on three line and below cities

Just released results show that XTEP's revenue in 2019 was 8 billion 183 million yuan, 2 billion 550 million yuan more than 331 degrees, while XTEP's revenue last year was more than 1 billion 200 million yuan. From the perspective of profitability, XTEP's gross margin is also ahead of 360 degrees.

As of December 31, 2019, there were 5519 core brand stores, down 20 from the same period last year. This is the fifth consecutive year that the company has reduced the number of stores and the number of overseas sales outlets has also decreased by 667. On the contrary, last year, XTEP added 149 retail stores at home and abroad. XTEP's stores are mainly located in shopping centers, where they can tap into the shopping center's traffic as much as possible, and more than seven of them become independent street shops.

From the regional distribution, the core brand stores of 360 75.3% are located in China's three line and three tier cities, and 6.6% and 18.1% stores are located in China's first tier and second tier cities respectively. By comparison with 2018, we can see that the 31st degree is shrinking from a second tier city to further focus on the three line and below cities.

The company plans to encourage distributors and authorized retailers to close down smaller stores in the future, and to set up larger stores in shopping malls and department stores.

In addition to reducing the number of stores, a massive layoff was also conducted. In December 31, 2019, the number of full-time employees in the group was 7353, representing a decrease of 639 compared with the end of 2018. According to Zhitong finance and economics APP, from 2015, the number of layoffs was reduced from 31st to 1st. Last year, the intensity of layoffs was greater than that in 2018, but administrative remuneration increased significantly.

Children's wear increased rapidly, and sales of footwear and clothing declined.

In the income structure of 31st degree, children's clothing business and other businesses classified as other sales (sole sales) contribute 17.7% and 1.5% of the total revenue respectively. The remaining 80.8% income is mainly contributed by 361 core brand products, 361 degree international and e-commerce business.

According to the product classification, the growth rate of children's clothing at 361 degrees was 22.4%, the growth rate was significantly higher than that in 2018, mainly because the sales volume increased by 22% and the average wholesale price increased by 0.3%, but the gross profit margin decreased by 0.7 percentage points. Since 2010, 361 degree children's wear has been operated as an independent business department, and its products are mainly for children aged 3-12. In 2019, the 361 degree children's wear brand further extended the span of product age coverage and extended the shoes and clothing products suitable for children under 3 years old.

According to the 2018 earnings report, the children's clothing business of 316 degrees is located in the low and medium price range, but the earnings report in 2019 has not been described so. Perhaps 31 may want to get rid of the low end label and pave the way for product upgrading, but this needs to be verified from the research and development, the new positioning of consumer groups and so on.

Footwear products are still the most important source of revenue for 360 degrees. In 2019, they recorded an income of 2 billion 387 million yuan, an increase of 7.9% over the same period last year. The income of adult clothing products was 2 billion 59 million yuan, an increase of 3% over the same period last year. It is worth mentioning that the increase in the income of footwear and clothing is mainly driven by price increases. Sales of these two products all declined last year.

The gross profit margin of footwear products was 40.4%, down 1 percentage points from the same period last year, mainly due to the introduction of new products in the year to affect the pricing power of the company. The company has not yet fully passed the cost to customers. The gross profit margin of clothing increased slightly by 1.3 percentage points to 41.3%, thanks to the launch of logo and joint product in the second half of the year, plus products with higher profit margins.

361 degree international is the fastest growing segment, with a growth rate of 41.4% and a contribution of about 2.3% to the company. During the year, the company entered new markets such as Morocco, Kyrgyzstan, Philippines and Australia. In December 31, 2019, the company had 1549, 225, 827 and 75 361 degree international sales outlets in Brazil, the United States, Europe and Taiwan, China respectively. Compared with 2018, sales outlets in Brazil and Europe increased by 103 and 208 respectively, while the sales outlets in the US and Taiwan in China decreased by 906 and 72 respectively.

In the second half of 2018, the brand remolding plan was launched at 31st to start improving the brand image from the series of basketball products. Zhu Minjie, senior vice president and chief marketing officer of the company, has said that in 2020, the growth rate of performance will be revived in 2021. But this year's public health events have disrupted the pace plan of many industries, and the sporting goods industry has been hit hard.

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