The Chinese sports company's sales inched up in 2018, thanks to the strong contribution from the kids segment; but margins and profits were down. The group's turnover increased by 0.6 percent to 5,187.4 million yuan renminbi (€682.5m-$774.2m) for the full year. 361 Degrees blamed this slow growth on fewer replenishment orders resulting from a conservative consumer sentiment toward non-essential commodities in the country, amid the uncertainty arising from the Sino-U.S. trade negotiations in the second half of the year.
The gross margin declined by 1.2 percentage points to 40.6 percent, partly because of the expansion of lower-margin internet sales. The operating margin fell by 4.0 percentage points to 15.1 percent, due in part to an increase in advertising and promotional expenses to 10.7 percent of sales from 9.8 percent in the prior year.
361 Degrees ended the year with an adjusted net profit of RMB 303.7 million (€40.0m-$45.3m), or 35.8 percent below the level of the previous year. Including foreign exchange and other extraordinary items, net income was off by 60 percent to RMB 222.4 million (€29.3m-$33.2m).
Still, the management highlighted the good performance of the kids' business and online sales, along with the group's collaboration with the 2018 Asian Games – which helped raise brand awareness.
These games, which took place in Jakarta and Palembang up to Sept. 2, had e-sports as an exhibition sport, and formed a major platform for 361 Degrees to continue developing its e-sports strategy. It started by supporting the Belt and Road e-sports Festival, which brought together player representatives of the Asian Games from China and Hong Kong. 361 Degrees said that the next step of this strategy is to explore partnerships to drive sales growth of e-sports apparel and other related products. E-sports are planned for full inclusion in the next Asian Games, taking place in the Chinese city of Hangzhou in 2022. In 2018, the company also partnered with the European Curling Championships.
The children's business has come to account for about 15.7 percent of the brand's turnover, with a sales jump of 14.7 percent to RMB 816.0 million (€107.4m-$121.8m), despite an increase in units of only 2 percent. The segment's gross margin expanded by 1.8 percentage points to 42.8 percent.
The remainder is split between footwear at 42.7 percent and apparel at 38.5 percent. 361 Degrees said that its children's range had become clearly established but that it saw “huge potential” for further growth. It has struck a partnership with Universal Studios to make children's apparel, footwear and school bags inspired by movies such as Kung Fu Panda, Madagascar, Shrek and Jurassic World.
Sales of footwear declined by 4.1 percent in spite of a 6.0 percent gain in units, leading to a drop in the gross margin of 2.6 percentage points to 41.4 percent. Apparel sales grew by 0.6 percent in value and by 8.2 percent in volume, generating a slightly reduced gross margin of 40.0 percent.
A major growth driver was e-commerce, with sales of exclusive products for this channel amounting to about 14.3 percent of the brand's turnover for the year. They shot up by 85.3 percent to RMB 739.2 million (€97.3m-$110.3m). On the other hand, the number of stores in China was trimmed down to 5,539 locations from 5,808, but with an increase in 361 Degrees Kids doors to 1,837 from 1,797.
The brand further expanded its international business last year. After moving into Brazil, the U.S. and Europe in recent years, it formed a partnership with Matahari, a leading Indonesian retailer, to expand into the country's sports market. 361 Degrees said that Matahari has 155 stores in 74 cities across Indonesia.
The 361 Degrees products sold in Europe and other international markets are developed separately from the Chinese range, featuring a stronger technical component and focusing on performance running and cross-training, and some of them will also be offered in China from now on. The Spire 3 running shoe, which is meant to provide stability with performance cushioning, won the Ispo Global Design Award in Munich last month. The Strata 2 was recommended in June as the best stable running shoe by Runner's World, the U.S. magazine, among other media distinctions. But international sales have yet to take off, making up just around 1.5 percent of the Chinese brand's sales for the year.
The products are sold in more than 20 countries and regions across the world. The R&D team for the international product lines is located in Taiwan, and the production is outsourced to Vietnam. The group has established wholly-owned subsidiaries in the U.S., Brazil and Europe, selling 361 Degrees products outright to multi-brand sports stores in those regions through local sales teams. In other regions such as Middle East, South America and Southeast Asia, the group opened local 361 Degrees boutiques and sold products through local distributors.
As of last June 30, there were 1,446 and 1,131 points of sales in multi-brand sports specialty stores carrying 361 Degrees products in Brazil and the U.S., respectively, according to the annual report. The number of POS carrying its products in Europe nearly doubled last year to 619, the report says, with a focus on the U.K., Germany, France, Austria and Switzerland. The company also had 147 locations in Taiwan and 41 in Indonesia.
Confirming that the European business doubled last year, a manager at the company's European office in the Netherlands indicated that the brand is currently sold in around 400 running specialty and top-tier sporting goods stores all over Western Europe and South Africa through sales employees, agents and distributors. While exploring new territories, the company is looking for another doubling in the size of the European business in 2019. 361 Degrees is a sponsor of the Hamburg Marathon.
This year, the company will launch a rebranding initiative. The management said it will focus on mapping out the brand's development strategy in the long run, rather than just exploring short-term revenue streams. While moving toward internationalization, the group hopes to create a new brand image. Looking at the rapid growth of the kids' segment, it expects this business to become a core brand in five to ten years.
The group will at the same time promote the remodeling of the One Way brand in China to seize opportunities arising from the winter sports market. It will be repositioned as a premium and professional sportswear brand for Chinese consumers originating in Northern Europe.