Li Ning Company enjoyed a sizeable sales hike last year, with much faster growth in the second half of the year, but it remained loss-making for the third year in a row – as the company already warned in January.
The group has yet to find a permanent chief executive after the departure last October of Jin-Goon Kim, who was installed two years earlier by TPG Capital, one of the Chinese group's private equity backers. The company announced together with the annual results that Li Ning himself was appointed as interim chief executive from March, 18.
The group's turnover was on the rise for the first time since 2011. For the full year it advanced by 15.5 percent to 6,278 million yuan renminbi (€933.4m-$1,011.6m), with an increase of 23 percent in the second half. The Li-Ning brand alone saw its sales climb by 16.7 percent to RMB 5,932 million (€881.8m-$955.8m), up by 11.9 percent for footwear and by 23.9 percent for apparel.
The brand's international sales jumped by 28.1 percent but they still amounted to about 3.0 percent of Li-Ning's entire turnover. The sales rise in China was driven by the eastern and northern regions, while sales only improved by 3.9 percent in the more competitive southern region.
Li-Ning is apparently starting to reap the benefits of large-scale restructuring measures and investments started three years ago, to improve its product range and the productivity of its stores. Comparable store sales became positive in the second half, reaching mid-single digit growth in the last quarter.
Li Ning began to work more closely together with its retail partners in the last two years. It became more directive with “prescriptive” product packages that have come to represent more than half of the forward orders. Apart from these packages, it started offering quick replenishment and implementing “quick strike” programs, in which products are tested in select locations for two or three weeks – and if the sell-through is satisfactory, these products are sent automatically to other retailers taking part in the program (and may be returned if unsold).
The brand's store productivity has also been aided by assortment planning programs for specific store groups. The improvements were partly enabled by abundant investments in technology to rapidly obtain detailed information about store performance. Sales of current season products climbed by 18 percent in regular stores, with over 80 percent of the sales driven by current and previous season products.
The company said its bloated inventories have been reduced. The share of inventories that is more than a year old in the sales channels fell to about 25 percent last year, compared with 40 percent two years earlier. Orders inflated at a high-teens rate at the group's trade fair for third quarter orders.
Li-Ning had 5,626 stores at the end of the year. This was a decline of 289 stores, far less than the previous years, and the network has continued to shift. The number of directly operated stores expanded by nearly 30 percent to 1,202 while the number of franchised stores declined by 11.3 percent for the year.
While Li-Ning's wholesale turnover jumped by 10 percent, sales in the brand's own stores climbed by 28 percent, with an increase of 12 percent in sales per square meters. The company's online sales soared by 48 percent, with a rise of 85 percent in its own online retail business.
The Li-Ning brand's gross margin was supported by the larger share of new product sales but this was mitigated by increases in sourcing costs and discounts to clear inventories. The brand's gross margin reached 45.0 percent, down by 0.3 percentage points.
When it comes to the group's other brands, Double Happiness raised its turnover by 11.3 percent to RMB 681.7 million (€101.3m-$109.8m) for the year. Owned by Li Ning at 57.5 percent, Double Happiness sealed a partnership with the International Table Tennis Federation last year for the years 2017 to 2020, to become a sponsor at the table tennis World Championships and at the 2020 Olympics, among other events.
Double Happiness also launched balls made of a new material to gradually phase out the celluloid material that has been used for many years. Such balls are to be used at the 2016 Olympics in Rio de Janeiro and the World Team Table Tennis Championships in Kuala Lumpur.
Other group brands, from Kason to Lotto and Aigle, saw their sales dip by 11.7 percent to RMB 113.8 million (€16.9m-$18.3m). The group said it focused on direct retail sales for Lotto last year and Aigle managed nearly double-digit comparable store sales growth, in spite of the shaky situation in the Chinese outdoor market.
The entire group's gross margin remained nearly steady at 44.6 percent, compared with 44.5 percent in 2013. It suffered an operating loss of RMB 528.9 million (€78.6m-$85.2m), which was much worse than the operating loss of RMB 169.4 million (€25.2m-$27.3m) in 2013. The Li-Ning brand alone suffered an operating loss of RMB 679.5 million (€100.9m-$109.5m), which was partly compensated for by the growing operating profit of Double Happiness and other brands.
The operating result was hit by growing costs as the Li-Ning brand opened more own retail stores, hired seasoned staff and made provisions for impairment of trade receivables. Then again, the performance improved markedly in the second half. Li Ning warned in January that it would suffer a net loss of up to RMB 820 million for 2014 and ended up with a loss of RMB 781.5 million – after a loss of RMB 391.5 million in 2013.
As its recovery dragged on, the company decided to raise capital through an open offer, which was completed in January. The proceeds are to be used to strengthen the company's capital structure and to support investments. Li Ning was rather circumspect in its forecast for this year, saying that it marked “a step in its growth phase” and that a breakthrough was expected in the next three years.
Apart from continued improvements in products and retailing, an important aspect of its strategy is to seal cross-industry partnerships with technology companies. Earlier this month Li Ning inked a partnership with Huami Technology, the wearable fitness company behind the Mi Band. Huami is a start-up backed by Xiaomi, the Chinese smartphone maker. The partners are to make “smart” running shoes with a chip inserted in the sole that connects to a Xiaomi mobile app, allowing runners to keep track of their progress and performance. Other products stemming from Li Ning's partnership with Marvel are to hit the stores in April.
The partnership with Xiaomi, which is highly popular in China, should help to raise Li-Ning's profile as an innovative brand, but the company emphasized that it wanted to offer such products at affordable prices – aligned with its strategy to offer premium products and cheaper alternatives.
