China Dongxiang's investments in its own retail business have helped to raise the turnover of the Chinese sportswear company by 14.4 percent to 772 million yuan renminbi (€98.4m-$112.2m) for the first half of this year, but increased costs and an inventory clean-up have led to a slump in profits.
The sales increase was widely spread, driven in absolute terms by a rise of 14.5 percent to RMB 649 million (€82.7m-$94.4m) in China, while Japanese sales moved up by 13.9 percent to RMB 123 million (€15.7m-$17.9m).
Apparel was the key driver of the increased demand for the Kappa brand in China, with a rise of 17.7 percent to RMB 426 million (€54.3m-$61.9m), while the brand's footwear sales in China were off by 6.4 percent to RMB132 million (€16.8m-$19.2m). China Dongxiang said that it has been capitalizing on the momentum of the Paris Fashion Week to promote its Banda series with classic Omini designs, and its women's products met outstanding demand.
Adding flat sales of accessories, the Kappa brand in China accounted for sales of RMB 569 million (€72.5m-$82.7m), up by 10.7 percent. Separately, its kids' business brought in sales of RMB 50 million (€6.4m-$7.3m), up by 16.3 percent, with marketing activities such as youth football training and the Kappa Kids Cup National Tour, and its international sales almost exactly tripled to RMB 30 million (€3.8m-$4.4m).
The rise of Kappa sales in China came entirely from its own retail business, which raised its turnover by 26.1 percent to RMB 358 million (€45.6m-$52.0m), while the brand's wholesale business in China was down by 8.3 percent to RMB 211 million (€26.9m-$30.7m) for the six months. That marked a significant shift, as retail sales made up 62.9 percent of the brand's Chinese turnover for the half-year, up from 55.3 percent.
Kappa had 514 stores operated by its subsidiaries in China at the end of June and 1,104 stores in all, along with 335 Kappa Kids stores. This represents a decrease of 48 stores, mostly under-performing shops. The company said it recorded middle to low double-digit growth in comparable store sales, despite a decline of 20 percent to 25 percent in forward orders.
The Japanese sales hike came entirely from the Phenix brand. Its turnover was up by 55.0 percent to RMB 62 million (€7.9m-$9.0m), while the Kappa brand's sales in Japan dwindled by 10.3 percent to RMB 61 million. China Dongxiang said the sales increase in the Japanese division was chiefly due to product optimization and fewer returns. It has been striving to take advantage of growing interest in winter sports with the Phenix brand in China as well.
The Chinese group's gross profit margin declined by 2.8 percentage points to 58.4 percent before the reversal of impairment losses on inventories. The gross margin was down by 4.4 percentage points to 61.5 percent in China and up by 5.3 percentage points to 42.3 percent in the Japan division.
China Dongxiang explained that it cleaned up products aged three years or older, at a price of about RMB 140 million (€17.8m-$20.4m), which caused a one-off negative impact of 2.3 percentage points in its gross margin. The group's operating profit was down by 12.0 percent to RMB 552 million (€70.4m-$80.3m) and it ended the half-year with a 10.3 percent dip in profit attributable to shareholders, down to RMB 481 million (€61.3m-$69.9m).