China Dongxiang performed even worse than Li Ning Company in terms of revenues. It recorded a 35.4 percent decline in group sales to 1,772 million yuan renminbi (€222m-$285m) for the year ended last Dec. 31. Sales in Japan were down by only about 4 percent in yen. Instead, sales in China fell by 45.1 percent to RMB1,165 million (€20.7m-$26.5m), with wholesale revenues from the Kappa brand slashed down almost in half to RMB1,058 million (€132.5m-$170.1m). Out of these, 69.9 percent were generated from apparel, down from 71.9 percent the year before.
The group, which is listed on the Hong Kong Stock Exchange, holds all the rights to the Kappa and Robe Di Kappa brands in China, Macau and Japan. It also owns Phenix, the skiwear brand with the largest market share in Japan.
The company said that last year's strong sales decline was due to the macroeconomic downturn in China and to intensified competition in the Chinese sportswear market, which led to reduced store efficiencies and store closures. This forced China Dongxiang to control distributors' pre-orders, offering them stock replenishment and higher discounts. It also led it to increase the proportion of revenues from directly operated Kappa stores from 1.7 to 6.3 percent of the turnover under the brand.
Gross margins declined by 7.5 percentage points to 47.5 percent, but the operating margin improved by 0.3 percentage points to 3.9 percent and the group reported a net profit of RMB177 million (€22.2m-$28.4 m), representing a 73.5 percent increase on the previous year. Still, excluding investment impairment provisions, net profit was actually down by 23.8 percent to RMB259 million (€32.4m-$41.6 m).
The group said it continued to adopt “smart marketing” throughout 2012, using social networks, online drama series, micro-movies and talk-of-the-town topics. Kappa sponsored various major sports events and launched various popular lines, including Kappa Essential, Kappa Polka Dots, Kappa Graphic Tee, and the Kappa trail running footwear series, inviting new designers to adjust the styles. Phenix underwent stable development in both the Chinese and Japanese markets, says the company, noting that its Levec, Epic Extreme and Down Apparel series were well received by the market.
In the year under review, the group cleared inventories priced at a total of RMB1.3 billion (€163m-$209m) through e-commerce, factory outlets and distribution channel. As of Dec. 31, the group had a total of 2,009 Kappa retail stores operated directly or indirectly by 33 distributors in the China segment.
Looking forward, the group intends to continue to clear excessive inventories to a reasonable level. The stock clearance experienced since 2011 has enabled the group to establish an effective routine on clearance channels. Meanwhile, the group will also lay out a prudent order strategy and ensure the sell-out rate of retail outlets by replenishing the channels with prop orders, in order to cope with the demand for new products. In terms of product innovation and branding, the group will emphasize product details and product differentiation. It will also continue to deepen its “brand + retail” operating philosophy to improve the penetration of retail outlets, and it will continue to optimize the supply chain by improving its flexibility, establishing a supply chain platform with swift response. In addition, the group will strengthen the positioning of its Taicang R&D center and increase its ratio of new product development.
As of Dec. 31, China Dongxiang's net financial position had risen to RMB4,974 million (€623m-$799 m), and the company says that this will allow it great flexibility in the implementation of longterm development strategies. Based on the group's dividend policy, shareholders would receive 30 percent of the group's net profit for the year, but taking into consideration the relatively high cash flow, the board has recommended raising the ratio to 70 percent.
