Belle International, the mighty Chinese sports and footwear retailer, enjoyed growth in sales and profits last year on the back of acquisitions as well as heightened support from leading international sports brands.
The group's turnover jumped by 10.3 percent to just over 36,249 million yuan renmimbi (€4,328.2m-$5,918.5m) in 2013. This included a jump of 5.9 percent to nearly RMB 22,278 million (€2,660.3m-$3,637.4m) for Belle's footwear business, while its sportswear sales surged by 18.3 percent to RMB 13,971.4 million (€1,668.3m-$2,281.0m).
However, the company said the acquisition of Big Step in March 2013 accounted for more than 10 percentage points of the growth in the sportswear business. This retailer, which has more than 500 stores was integrated from the second quarter, boosting sales, but proved a drag on profit margins for the year.
Comparable store sales in the sportswear business advanced by 5.5 percent in 2013, with average selling prices up by about 2 percent and volumes increasing by more than 3 percent. Apparel and footwear both performed along the same lines.
Belle boasted 5,894 sports stores at the end of the year, amounting to a net addition of 420 stores. They included 4,840 stores for Adidas and Nike, and another 1,054 for what Belle describes as second-tier brands, from Puma to Converse and Mizuno, among others (no mention of Chinese brands is made in the company's written statements). Sales with the first-tier sports brands jumped by 18.8 percent to RMB 12,393 million (€1,479.8m-$2,023.3m), while the second-tier brands delivered a sales rise of 10.7 percent to nearly RMB 1,441 million (€172.1m-$235.2m).
Excluding the integration of more than 500 stores from the Big Step operation, the number of stores was actually slightly down on the previous year. This was partly due to the discontinuation of a brand for which Belle previously ran more than 200 stores. The integration of Big Step also called for some rationalization of the existing network in the second and third quarters. Regular store openings resumed in the fourth quarter.
The gross profit margin of the sportswear business increased by 2.6 percentage points to 39.7 percent for the year. The group explained that discounting had diminished, and that the brands had been providing more subsidies and support to their retail partners, resulting in a reduction in purchasing costs.
The profit margin of the sportswear retail business reached 4.8 percent for the year, slightly better than the previous year. The margin for the first half reached more than 5 percent of sales but declined thereafter due to the integration of Big Step.
Belle was eager to point out that it did not regard inventories as the most significant issue in the Chinese market. Instead, it pointed to the historic development of the sector: Belle explained that distributors had started off with comfortable margins, at a time when competition was weak and retail staff wages and rents were low. That all changed in the last years, meaning that the last link in the supply chain was often squeezed.
However, Belle praised companies like Nike and Adidas for addressing the issue and making concessions to improve the margins of the retailers. Not only did they help distributors to regain a reasonable profit margin – they also introduced methods to evaluate performance through brand-centric metrics such as retail sell-through, and they started working with careful planning and improved coordination to avoid unhealthy competition.
Belle said these brands were well-positioned to take advantage of the development of under-penetrated areas in the Chinese market - and that should strongly benefit Belle, which makes about 90 percent of its sports retail turnover with Nike and Adidas.
The sales increase of 5.9 percent for Belle's footwear business was significantly lower than in previous years. The company attributed this to weak comparable-store sales growth, a slowdown in new store openings and the discontinuation of a particular brand that could not be entirely offset by a new brand.
Belle had 13,183 footwear stores at the end of last year, which was a net increase of 1,093 stores, amounting to a rise of 9 percent. Comparable sales were up by nearly 2 percent and average selling prices advanced by a little more than 2 percent. Same store volumes were slightly down. The gross margin of the footwear business moved up by 1.2 percentage points to 68.7 percent.
On the whole, Belle pointed to uncertainties about economic prospects that weighed on consumers, and the deterioration of the business environment with rising costs and expenses.
The group is particularly affected by the proliferation of shopping malls and the rise of online retailing, which dilute foot traffic in department stores. Belle said that the over-expansion in this channel had led to weaker productivity, and this would take years to digest.
The lower traffic in department stores could not be compensated with growing online sales or shopping malls. However, the company described all of this as short-term pain and remained confident of longer-term prospects.
Apart from Big Step, Belle acquired about 31.96 percent of the shares in Baroque Japan for nearly $94 million in August. The next month it announced its intention to entirely buy Longhao, a shoe distributor and retailer, for no more than RMB 700 million (€83.6m-$114.3m). The acquisition is expected to be completed in the first quarter of this year.
The group's gross profit margin expanded by 0.9 percentage points to 57.5 percent. The operating profit margin declined by 0.8 percentage points to 15.6 percent. The company ended the year with net profit of RMB 4,464.7 million (€533.0m-$728.7), up 3.2 percent.
To make up for the relative weakness of the Chinese retail market, Belle wants to improve its own infrastructure and offering. It has started to centralize its distribution, with the construction of large-scale distribution centers in key regional hubs.
The company is also continuing to explore alternative retail formats, such as online retailing and multi-brand retailing, particularly in the footwear market. It has already expanded its offering to make inroads in the mass market segment, and Baroque will serve as a pilot project to move into women's fashion apparel.
