361 Degrees International Limited, which sells sporting goods through more than 7,400 franchised retail outlets in China, reported sales reached RMB2.2 billion in the six months ended 30 June, up grew 5.7 percent compared with the first half of 2014 and 22.0 percent over the previous six months.
The company reported gross margin grew 160 basis points to 41.3 percent on the back of lower material costs. With a tight control over below-the-line costs, operating profit amounted to RMB485.5 million (2014: RMB361.1 million), an encouraging improvement of 34.4 percent, underlining a better time for the industry.
Profit attributable to equity shareholders for the period was RMB269.6 million, increased by 22.3 percent against a comparative of RMB220.4 million (adjusted for a one- time and unrealized gain relating to convertible bonds) in the previous period, despite higher finance costs and taxation charges.
“This promises to be a very good year for the Group as we see steady recovery in the industry and our brand gaining further acceptance in the market place,” said Mr. Ding Wuhao, President and Executive Director for the company.
Footwear revenue rose 16.0 percent, driven by both volume and ASP, as a new portfolio of performance products gained very positive reception with the retailers. Apparel revenue fell 3.5 percent because of a higher comparative base which was boosted by late deliveries in the fourth quarter of 2013. 361Kids continued to show growth momentum as it differentiated itself from the regional brands.
Higher price points targeted to offset labor costs
Lower cost of raw materials, particularly cotton and oil-based derivative products, helped to cushion against higher labor costs, as the Group continued to balance its production between its own factories and third party manufacturers," the company reported.
"The glut of manufacturing capacity in this sportswear industry will probably ensure such a production mix is maintainable whilst the Group endeavors to move up a notch in its retail pricing strategy, in the wake of better spending power among the middle income group of consumers seeking higher quality products."
The company, which collects POS data from 70 percent of its franchised retail locations, said that discounting tapered and retailer profits stabilized during the period.
The Group continued offering non-cash fittings subsidies to its franchised stores to establish a united, harmonious and high-level visibility throughout its network. For this first half, the charge of RMB147.4 million (2014: RMB125.6 million) is now regarded as an integral part of the Group’s overall advertising and promotion strategies.
Other below-the-line costs are generally under control, except for staff costs which rose 20 percent due to the recruitment of senior executives in the overseas business unit, who only joined in the second half of 2014.
Account receivables improve
There has been a significant improvement in accounts receivable, with over 75 percent of the debts within 90 days old. Coupled with a reliable positive cash flow from its business operations and sound cash management, the net cash position of the Group continued to edge upwards, with balances now at RMB2.7 billion at the end of 30 June 2015.
Store productivity continued to be a central theme in future profitability. The current store count of 7,404 outlets is not likely to increase substantially in the foreseeable future as the retail landscape is fast changing with a new generation of consumers adopting different buying habits. The Group is very much attuned to these developments and has intensified efforts to promote various initiatives in Internet and mobile sales.
"However, the days for the traditional brick-and-mortar store are far from over and particularly in our case, where over 70 percent of our outlets are in the Tier-3 and smaller cities, strong local connections with schools and sports clubs are an inherent advantage, especially as increasing numbers turn to sport as a form of recreation and lifestyle," the company reported.
Considerable full-year gains expected
With a strong order book in hand for deliveries in the second half, the Group is very confident of achieving a result for the full year of 2015 that is considerably higher than that of the previous year. In the meantime, the Board of Directors has declared the same level of interim dividend of RMB5.0 cents per share and reaffirmed that the dividend policy of distributing not less than 40 percent of earnings for the full year will remain unchanged.
361 Degrees International Limited is one of the leading sports brand enterprises in China, possessing brand marketing, research and development, design, manufacturing, distribution and retail capabilities. The Group’s products include footwear, apparel, accessories and equipment for sport and leisure uses. The Group has established an extensive supply chain management system through proprietary and sub-contracted manufacturing operations; and an exclusive distribution and retail network in China through distribution via authorized distributors.
