Li-Ning Company Limited swung to a profit on double-digit sales growth in the first half ended June 30 thanks to 17.0 percent growth at its flagship Li Ning brand and a big reversal in impairment charges to it accounts receivables.
The Group reported revenues grew 16.1 percent to RMB3.64 billion during the period led by its flagship Li-Ning brand, which is the largest domestic athletic brand in the People's Republic of China. Sales of Li-Ning brand grew 17.0 percent to RMB3.13 billion, or 85.9 percent of the Group’s total revenue. Sales of Li-Ning branded Footwear, Apparel and Equipment grew 21.4, 12.5 and 13.9 percent respectively compared with the first half of 2014.
"Since the second half of 2014, the business of the Group has entered into a phase of stable growth," the company reported. "Both the tag price of trade fair orders from distributors and same-store sales of self-operated stores registered a year-on-year growth."
Li-Ning sales to franchised distributors dropped to 51.3 from 55.7 percent of the brand's revenue, while sales from Li-Ning owned retail locations increased 130 basis points to 39.6 percent of sales and direct e-commerce sales grew from 3.9 to 7.0 percent of sales.
Gross margin on Li-Ning brand sales inched up 20 basis points to 45.3 percent as increased proportion of high-margin operations such as retail and E-commerce, and the reversal of inventory provision along with the clearance of obsolete inventory, offset higher labor and input cost.
Distribution expenses, which include advertising and marketing costs, reached 39.6 percent of net sales, down sharply from 48.9 percent a year earlier.
As the Group invested its resources mainly in product development and channel construction, the number of self-operated stores significantly increased year-on-year, leading to a corresponding increase in rental and staff costs for stores. However, at the same time, the Group controlled other distribution expenses, such as substantially reducing investment in advertising. Taking into account all the above factors, Li-Ning brand’s distribution expenses decreased year-on-year.
Administrative expenses as a percentage of net sales also dropped sharply, reaching 4.9 percent or 1190 basis points below the 16.8 percent for the same period of 2014. These expenses mainly comprised of staff costs, management consulting fees, office rental, depreciation and amortization charges, taxes, provision for impairment of trade receivables and other miscellaneous expenses. The notable decrease in administrative expenses during the period was mainly due to the impact of provision for impairment of trade receivables and staff costs.
In the first half of 2014, provisions for impairment of trade receivables increased due to the increase in long-aged trade receivables. As the business of most of the distributors demonstrated a stable trend of growth in the period, collection of receivables improved and provisions for impairment of trade receivables were reversed accordingly.
At the same time, the company adjusted its staff structure and reduced the options granted to senior management personnel, and controlled expenses such as consulting fees. Also no extraordinary and non-recurring expense was recorded during the period. Taking into account all the above factors, Li-Ning brand’s administrative expenses decreased substantially year-on-year.
EBITDA for the Li-Ning brand amounted to RMB139.9 million compared with a loss of RMB449.8 million a year earlier.. This was mainly attributable to the increase in revenue and gross profit and decrease in expense ratio due to control of various expenses.
Outlook
The company said trade fair orders for the first quarter of 2016 all its brands grew in the mid-teens growth on a year-on-year basis and that it would continue to invest in the Internet as Chinese consumers continue to shift their spending online.
The company will also focusing on a more differentiated market positioning for its products, the company will implement a market segmentation strategy targeting sports enthusiasts and Sports Life consumers respectively.
Finally, Li-Ning will continuously improve its operating efficiency, step up its control over operating costs and strengthen cash flow management in a bid to drive its annual results for 2015 back to profitability.
