Li Ning's net profit plummeted by nearly 85 percent to 44.3 million yuan renminbi (€5.6m-$7.0m) for the first half of this year, as the Chinese sports brand tackled its inventory and sell-through issues by closing down about 1,200 of its franchised stores.
The company's sales fell by 9.5 percent to nearly RMB 3.9 billion (€491.0m-$615.0m) for the period. Its gross margin shrank to 44.2 percent, down by 3.1 percentage points, and its operating profit sank by 58.5 percent to RMB 183.6 million (€23.1m-$29.0m).
Li Ning has been under pressure for the last two years, and the issues have been mounting along with inventories in the Chinese market. It issued a profit warning in June, and its chief executive left in July. Kim Jin-goon, a managing director at TPG Capital, Li Ning's private equity shareholder, was installed as Li Ning's executive vice president to help lead a multi-year turnaround plan.
The cleanup apparently isn't over. The group warned that its gross margin should remain at the same level in the second half of the year, as it invested in marketing and continued to clear inventories. Jin-goon said it should take two to four more quarters for inventories to return to a normal level. The store closures will go on in the second half, albeit at a slower pace.
As an indication, Li Ning's inventory turnaround reached 93 days in the first half of this year, which was 23 more days than during the same time last year. Apparel clearly was worst affected, and its share of Li Ning's sales decreased to 47 percent of the group's sales in the first half of this year, down from 49.3 percent for the same period in 2011.
The company closed down nearly 15 percent of its stores, cutting out unprofitable outlets that contributed to the damaging glut in inventories in the Chinese market. At the same time, Li Ning opened some other stores, but it ended the period with 7,303 doors, 952 fewer than one year ago. Some of the openings related to discount stores and factory outlets, which lifted the percentage of sales through discount channels.
The company confirmed the concentration of the market, since the number of its distributors declined by five to 52. It also adopted a new policy toward sub-distributors, in an effort to keep a tighter grip on its stores.
Li Ning indicated that the troubles were partly caused by the decline in the country's economic expansion. After several years of double-digit growth, Li Ning estimated that the Chinese sports market only expanded at a single-digit rate for the first half of this year.
As part of its turnaround plan, the company wants to focus more on the Li-Ning brand itself, and to make it more distinctive from fashion products by linking it more strongly with sports – not least through the London Olympics, as described in our Olympic marketing story in this issue. Another aspect of the plan is to invest in management, with an almost entirely new layer of executives.
Furthermore, Li Ning has started optimizing its supply chain, particularly to have a tighter grip on the flow of inventories and help improve the efficiency of its stores. The company started trial operations for a new logistics center in Jingmen in April, while exploring new sourcing opportunities in Southeast Asian countries.
