Investments in sports and functional product ranges were among the measures taken by Xtep to overcome sluggish demand last year, along with tighter management of orders and inventories.
Xtep saw its sales decline by 21.7 percent to 4,343.1 million yuan renmimbi (€507.2m-$698.7m) for the year. Although the average wholesale discount rate increased to 62 percent, up from 60 percent the previous year, Xtep's gross profit margin declined by just 0.5 percentage points to 40.2 percent. With stringent cost controls, it actually increased its operating profit margin by 0.2 percentage points to 20.6 percent. It ended the year with net profit of RMB 606 million (€70.8m-$97.5m), down by 25.2 percent.
Xtep is striving to be distinguished from some other affordable Chinese brands by being associated more closely with sports. The brand was appointed again by the government as the official sportswear partner of the National Games last year. It sponsored ten international marathons and two national campus football leagues – the China University Football League and the Chinese College Futsal League, along with Chinese and foreign football clubs.
Xtep renewed its five-year sponsorship of the Xiamen International Marathon for the second time, lasting until 2018, and obtained a three-year sponsorship agreement for the Standard Chartered Hong Kong Marathon from 2014 to 2016, along with the new sponsorship of the Chongqing International Marathon, for four years until 2018.
The group has continued to invest in its product range, with a rise of 16.6 percent to RMB 111.4 million (€13.0m-$17.9m) in spending on research and development, amounting to 2.6 percent of the company's sales.
Xtep diversified its offering and split it into two major categories, sports performance and sports lifestyle, with about 45 percent of the products in the performance range and 55 percent in lifestyle.
The wider assortment comprises more specific products for running, outdoor and children. About 300 stores sold the Xtep Kids range at the end of the year, and the company has set a target to have about 350 such outlets for the range in second to fourth tier cities by the end of this year.
Footwear performed more strongly than apparel in terms of sales, so that its share of the turnover amplified by 3 percentage points to 51.8 percent last year. Footwear by Xtep returned an unchanged gross profit margin of 41.5 percent, compared with 40.2 percent for apparel, which was a drop of 0.3 percentage points. The gross margin for all Xtep products slipped by 0.1 percentage points to 40.8 percent.
Another measure taken by Xtep to support its profit margin was to source more products from its own factories. The production capacity at its plant in Quanzhou and at its new factory in Anhui reached 17.0 million pairs of footwear and 8.5 million pieces of apparel. This amounted to about 64 percent of the footwear sold by Xtep and 28 percent of apparel. The group manufactured about 51 percent of Xtep branded footwear and 15 percent of its apparel in 2012.
Unlike many other Chinese brands, Xtep refrained from supporting the closure of hundreds of stores. There were still 7,360 Xtep stores at the end of last year, a decline of just 150 stores, which is less than 2 percent of the store network. It intends to end the year with about 7,300 to 7,400 stores, with the strongest presence in the northern and northeast regions.
The group stresses that such wide coverage is important to uphold its market position. It has implemented a direct replenishment system in about 80 percent of the stores. Furthermore, the brand received several awards for its investments in online retailing last year.
Xtep is encouraged by current trends and will therefore continue along the same lines this year. Its chairman said that the reduced level of retail channel inventories, retail discounts, product sell-through rates and sales orders for the first three quarters of this year revealed a recovery in the making.
