Li Ning Company said that the first stage of its wide-ranging reforms had been nearly completed and the efforts were starting to pay off. However, the Chinese supplier added that market uncertainty could affect the improvements this year.
The group's sales slumped by 12.8 percent to 5,824 million yuan renmimbi (€679.8m-$936.8m) last year, as it downsized its store network and reduced the sell-in of its merchandise to help clean up inventories. The group's gross profit margin jumped by 6.8 percentage points to 44.5 percent, aided by the opening of more own stores as the group sought to tighten its grip on its distribution.
Its operating profit (Ebitda) recovered from a loss of nearly RMB 1,378 million in 2012 to a tiny profit of RMB 26 million (€3.03m-$4.18m) last year. The Li-Ning brand still suffered negative Ebitda, but the loss was much reduced at RMB 114 million (€13.3m-$18.3m) and could be compensated for by the profits of the Double Happiness brand.
The company ended the year with a much reduced net loss, down to RMB 392 million (€45.7m-$63.1m) compared with RMB 1,979 million for 2012.
The group's restructuring measures will be pursued by Jin-Goon Kim, who was appointed interim chief executive from March 21. A partner of TPG, the Chinese company's private equity shareholder, he has been a director of Li Ning since 2012. He is also a board member at Daphne International Holdings, a leading Chinese shoe retailer. He was previously at companies from McKinsey to Dell.
Li Ning said that its reforms had brought about significant improvements on many fronts. Trade fair orders have started to pick up, the retail sales network has become much healthier and the group's profitability has advanced, as well as its cash flow situation. Its capital structure was also strengthened, with a reduction of RMB 1 billion (€116.7m-$160.8m) in debt.
As part of the multi-faceted transformation plan, Li Ning exited unprofitable markets, product groups and sales channels. It started working more intensely with distributors who run productive stores, have a sound financial position and support the company's reforms.
At the same time, Li-Ning adjusted its assortment to have clearly distinct product groups with an expanded price structure and mostly covering five fast-growing categories: basketball, running, badminton, training and sports life. It still focuses on the middle price points, between the international brands at the upper end and the commodity Chinese brands at the lower end, but also offers Li-Ning ranges at entry price points and at top prices.
The company opened more of its own stores, so that direct retail sales accounted for about one third of the Li-Ning brand's turnover last year. The Li-Ning brand ended the year with 5,915 stores, down by 8.1 percent, but the number of directly operated stores increased by 46.8 percent to 926 stores, while the number of franchised stores shrank by 14.0 percent. The biggest reductions came in the eastern region.
Investments in own retailing were paired with the building-up of more efficient operations, with faster product creation enabling Li Ning to operate with what it described as a fast fashion model.
About 90 percent of Li Ning's distributors were involved in the changes. With more own stores and more efficient partner stores, the company was able to raise its average profitability and its cost structure.
On the back of the changes, inventories have been cleared up: the group said that new products in channel inventory as a proportion of total channel inventory recovered to the level of 2011. The retail sales of new products increased at a mid-single digit rate in the second half of the year, compared with the same period the previous year.
The Li-Ning brand's sales still contracted by 14.2 percent to nearly RMB 5,083 million (€592.9m-$817.6m) last year. Footwear sales were off by 7.1 percent to just under RMB 2,449 million (€285.7m-$393.9m) while apparel sales fell by 22 percent to less than RMB 2,269 million (€264.7m-$365.0m).
The brand's turnover dropped in all three of its Chinese regional markets, with the sharpest decline coming from the northern region. Even international sales contracted, down by 4.1 percent for the year but their share of the brand's turnover has increased by 3 percentage points to 2.7 percent.
Li Ning, the company's founder and executive chairman, said the Li-Ning brand was moving towards more functional sports products, which are increasingly resonating among middle-class consumers.
The brand is getting particularly involved with basketball. It already snatched the endorsement of the Chinese Basketball Association (CBA) last year and went on to set up large-scale grassroots initiatives. These include the sponsorship of the Chinese University Basketball Association and the Chinese Middle School League, enabling Li-Ning to reach millions of youngsters.
Li Ning has also started selling more functional basketball apparel and footwear, which gave the brand more exposure on the courts. The group said that its shoes were worn by 30 percent of the foreign players in the CBA League this season. While Li-Ning is still building up its assortment in running and training products for the last quarter of this year, basketball products are displayed in category-focused stores.
The gross profit margin for the Li-Ning brand alone reached 45.3 percent, which was an improvement of 6.6 percentage points. This is mostly owed to the higher discounts offered by the brand to get rid of unsold inventories, leading to the reversal of provision due to clearance. It was also helped by the larger proportion of sales through own stores.
The turnover of the Double Happiness brand, which focuses on table tennis, advanced by 13.1 percent to more than RMB 612 million (€71.4m-$98.4m). Among its latest moves, the brand obtained a deal with the International Table Tennis Federation, from 2013 until 2016, to become official table tennis equipment supplier at the Rio Olympics. The brand's gross profit margin improved by 1.5 percentage points to 39.3 percent.
Meanwhile the sales of other brands sank by 38.2 percent to less than RMB 129 million (€15.0m-$20.8m). The turnover of Kason, a badminton equipment brand, remained stable and Chinese sales of the Aigle outdoor brand expanded steadily, with a network of 100 stores. On the other hand, the group discontinued the Z-Do brand and it has been downsizing its sales of Lotto to focus on online retailing.
The company indicated that it would take time for the investments in its structure and marketing to fully impact its financial performance. But the group said it was confident that the moves started about 18 months ago were taking it in the right direction, and Chinese sportswear consumption should remain robust.
