Business news :Li Ning Profits Plunge Amid Glut in Chinese Sporting Goods

Li Ning Company Ltd., owner of China’s most popular domestic sporting goods brand, reported profits plummeted in the first half ended June 30 on a 9.5 percent decline in sales as sporting goods continued to back up in retail channels amid declining demand and rising discounts.

Li Ning reports results under four segments which correspond to its brands. They include Ni-Ling, the Double Happiness brand, the Lotto brand and all other brands segments. The Li Ning brand, which generated 88.5 percent of sales in the period, is among a handful of national domestic sporting goods brands that also include Anta and Xidelong. Those three companies compete direct with Adidas and Nike in the Chinese market. 

Li Ning reported revenues fell 9.5 percent to RMB3.88 billion ($613mm). Earnings before interest, tax, depreciation and amortization (EBITDA) fell 46.3 percent to RMB305 million ($48.2mm), while profit attributable to equity holders fell 84.9 percent to RMB44 million ($7mm). The number of Li-Ning stores reached 7,303, down 952.

The company said it anticipates full year revenue for 2012 will further decline and the it may post a loss attributable to equity holders for the year. Trade receivables aged 91 days or older swelled by nearly 79 percent to RMB947.5 million ($150mm). 

Competition intensifying

“China’s economic growth showed a downward trend in the first half of 2012 as a result of weakening demand both internationally and domestically," the company reported. "The consumer price index (CPI) began to fall in the first half of 2012, and yet retail sales for consumer goods declined as compared to 2011,” the company reported. The Group’s analysis shows that the growth rate of China’s sporting goods industry decelerated to a single-digit pace in the first half of 2012. Meanwhile, critical inventory pressure still exists at the retail end and industry competition continues to intensify. In addition, as China’s per capita income rises and the concept of consumption gradually matures, consumer demand towards branding and product value has elevated markedly.

“Although the Group has been implementing a series of strategic business reforms since 2011, the effects of these have yet to become apparent due to the unfavourable market environment as well as the challenges brought about by the current phase of the Group’s development,” the report continued. “The Group’s business performance and key financial indicators have been affected significantly; nonetheless, throughout the reform process, the Board and the management have been analyzing and reviewing the situation on an ongoing basis and implementing the reforms actively.Li-Ning consists of four segments, or brands: Li-Ning, Double Happiness, Lotto and Other brands.”

Clearance discounts weight on margins

For the six months ended 30 June 2012, overall cost of sales of the Group amounted to RMB2.16 billion ($342mm), compared to RMB2.26 billion a year earlier. Overall gross profit margin declined 310 basis points to 44.2 percent from a year earlier mainly due to the higher overall discount rates in the retail end, the clearance of obsolete inventory as well as the higher weight of other brands, which have lower gross profit margins than Li-Ning brand, in the Group’s total revenue.

Cost of sales of Li-Ning brand amounted to RMB1.88 billion ($297mm), compared with RMB2.03 billion in 2011, with sales of Li Ning-braded footwear, apparel and equipment/accessories falling 2.9, 19.0 and 14.3 percent respectively. Gross profit margin fell 270 basis points to 45.2 percent as higher overall discounts at retail, intensified market competition, higher percentages of sales through factory outlets and discount stores, a slight mark-down of prices for apparel products and the clearance of obsolete inventory pushed down margins.

Meanwhile, the increasingly intensified competitions in retail market and higher retail discounts, coupled with rising labor costs and rentals, led to further shrinking profit margins at retail.
The company attributed decreased EBITDA mainly attributable to the decrease in sales revenue and gross profit as well as the increase in rental costs, a larger provision for impairment of assets due to slower asset turnover rate and the considerable impairment provision for Lotto brand license, though partially offset by the decreases in advertising and marketing expenses, sundry expenses and labor costs during the period.