Large companies | Increasing income does not increase profits, stock prices are bent, and Li Ning needs a new story

Author: Yang Zhonghua

Number of characters: 3240

Recommended reading time: 11 minutes

"6 or 7 folds of clothes, not long after buying back, depreciated, calculated to lose thousands of the difference, the fracture price is also counted, the problem is still complete." "As a customer who was repeatedly backstabbed by Li Ning's 1990 products, I finally learned the secret of anti-backstabbing - wait for the discount, it won't take long to get 3 discounts." Similar complaints are not uncommon on social platforms.

Since last year, in order to tide over the inventory crisis, Li Ning has had to follow the industry trend to cut prices and promotions in order to clear the backlog of goods as soon as possible. Especially on e-commerce platforms, Li Ning's discount is even greater. Excessive online and offline price differences inevitably lead to fluctuations in consumer sentiment, and there are nearly 300 recent cases of "Li Ning price difference" in the Black Cat complaint APP alone.

However, the actions of consumers are more honest than words, reflected in the company's financial report, Li Ning's revenue in the first half of this year continued to maintain double-digit growth, up 13% year-on-year, reaching 14.019 billion yuan. At the same time, inventory pressure has also been eased, with single-digit reductions from the end of the previous year, and the omni-channel inventory-to-sales ratio was 3.8 months, further optimized from the end of the previous year.

If you look at it from the perspective of scale, this is certainly a good financial report, but in terms of efficiency, this financial report is not very satisfactory. According to the financial report, Li Ning's profit in the first half of the year was 2.1 billion yuan, down more than 3%, which is the group's first profit reduction since 2020; Gross profit margin has been declining year after year, down 1.2% year-on-year to 48.8%, and in the first half of 2021 and the first half of 2022, Li Ning's gross profit margin was 55.9% and 50.0% respectively.

In the financial report, Li Ning attributed the increase in performance and revenue to the increase in discounts, a slight decrease in the proportion of revenue from DTC (direct-to-consumer) channels with higher gross margins year-on-year, and a year-on-year increase in R&D expenses mentioned by inventory provision.

In the face of such a "mixed" annual report, the market is obviously cautious about Li Ning's expectations. After the results were announced, Li Ning's stock price fell sharply, and the stock price has fallen by more than 30% this year.

Bank of America Securities released a research report pointing out that Li Ning's performance in the first half of the year exceeded the market's pessimistic expectations, retail growth may fluctuate, and the visibility of operations in the second half of the year is still limited, and the target price is reduced from HK$61.3 to HK$57. Daiwa analysts also pointed out in the latest report that Li Ning's performance lacked catalysts and was overvalued, and decided to cut the target price of the stock by 25.7% to HK$55. Guosen Securities slightly lowered Li-Ning's profit forecast in consideration of the slow recovery of consumer demand and the pressure of industry competition.

To sum up, the decline in profitability and the cooling of high-end products have combined to be a reason for the capital market to be cautious at the moment. Stretching the timeline, Li Ning's growth fatigue has long been revealed.

Performance entered a period of deceleration

Under the superposition of factors such as the slow recovery of consumer demand in the market, the pressure on the business environment, and increasingly fierce competition, Li Ning's "growth difficulty" has been reflected since last year.

From mid-2021 to mid-2022, Li Ning's revenue and net profit increased sharply from 64.97% and 187.18% year-on-year to 21.69% and 11.57% respectively. By the end of last year, Li Ning's net profit margin and net profit growth rate also fell sharply, to 15.7% and 1.4% respectively.

As one of the first brands to eat dividends when the national tide rose, "Chinese style retro + sports fashion" once drove the overall retail turnover growth of Li Ning. In 2021, Li Ning handed over its "best report card" since its listing in 2004, and its revenue exceeded the 20 billion yuan mark for the first time, a year-on-year increase of 56%, and its net profit increased by 136% year-on-year. Especially after the Xinjiang cotton incident, international first-line brands represented by Nike and Adidas were boycotted in the Chinese market, and a number of domestic brands rose again by riding the east wind of the national tide, and under the national chao brand image of "China Li Ning", Li Ning has almost become the biggest beneficiary.

But Li Ning may not have imagined that this growth story would go from the prologue to the final chapter so quickly. After entering 2022, China's Li Ning, which is labeled as the national tide, has been on the hot search several times because it is "too expensive to buy", and Li Ning's product design has also caused controversy. In September 2022, the products displayed by Li Ning in a campaign called "Chasing Dreams" caused controversy because netizens pointed out that they had a sense of déjà vu of "Japanese military uniforms", and the design of one of the hats was even accused of resembling a "Dazo" hat. Although Li Ning clarified that the inspiration for the design came from ancient Chinese clothing, the impact was irreparable.

In an investor exchange at the beginning of the year, the official head of Li Ning admitted that the "China Li Ning" brand is becoming more difficult than other business lines. China's Li-Ning stores have also been declining in the past year, with 119 self-operated stores and 150 dealers.

As another outlet of Li-Ning's high-end route, the "LI-NING 1990" launched in 2021 has also received a mediocre response in the market. From the perspective of the number of Tmall flagship stores, the overall sales of "Li Ning 1990" are low, and the best-selling products on the e-commerce platform are mainly the same products of the same star, but the monthly sales are only double digits. According to the financial report, in the first half of 2023, the turnover of sports life, including China's Li Ning, fell by 2% year-on-year.

According to financial report data, Li Ning's low-single-digit sales of all platforms in the first half of the year declined. In terms of channels, the retail (direct) channel recorded a mid-single-digit growth, the wholesale (franchised) channel recorded a low-single-digit decline, and the e-commerce virtual store business recorded a low-single-digit decline of 10%-20%. It is worth noting that in the first half of this year, in order to increase sales, Li Ning increased the discount of online channels, and the financial report showed that Li Ning's six-month sell-out rate in the first half of the year was flat year-on-year, down 2 percentage points in three months. This means that Li Ning's sales in the terminal are not clear, and the growth vitality that can be given is still weak.

Zhao Dongsheng, vice president and chief financial officer of Li Ning Group, said that he currently maintains the goal of maintaining a mid-range revenue growth of 10% to 20% and a net profit margin of 10% to 20% in the mid-range of 2023, and remains optimistic about the company's long-term development.

It seems that Li Ning is more focused on playing the conservative card, but the question is, how to maintain its own characteristics and advantages in the competitive market when the national tide is gradually cooling and the sports fashion style is difficult to sustain?

Focus on professional sports

The answer given by Li Ning is: return to sports.

At the 2023 interim report performance briefing, the company emphasized its positioning as a "fashionable international first-class professional sports brand", and proposed for the first time to "continue to increase the proportion of professional products" to bring consumers more professional, functional and integrated fashion elements of sports products.

As a result, the outside world can see that in recent years, Li Ning's strategic focus has gradually returned to professional sports categories, such as basketball, running, fitness and so on. And the purpose of this is also self-evident: to try to compensate for the impact of China's Li-Ning by increasing the level of specialization of sports products. Judging from the results, Li Ning's investment and layout in professional sports categories have indeed achieved certain results.

According to the financial report, in the first half of this year, Li Ning's footwear business achieved good results, with revenue reaching 7.515 billion yuan, an increase of 11.2% year-on-year, accounting for 53.6% of the total revenue, exceeding clothing revenue. Among them, the growth of running products was the most eye-catching, with retail turnover increasing by 33% year-on-year in the first half of the year, surpassing the two core categories of fitness (12%) and basketball (6%). Qian Wei, executive director and co-CEO of Li Ning Group, said that in the first quarter, the total retail turnover of Li Ning's three core professional sports categories reached 65%, a four-year high since the same period in 2020.

As a more professional category, shoes are more stable than clothing, and they are also an important indicator to measure the professional sports strength of brands. Last year, Li Ning's footwear business surged 41.8% year-on-year to 13.479 billion yuan, accounting for about 52%. Qian Wei said at the time that Li Ning is a professional sports brand, and it is necessary to sell shoes well, hoping that shoe products can account for 50% or more of revenue in the future.

In the first half of 2023, Li Ning's single brand R&D investment increased by 21.6% to 291 million, showing Li Ning's emphasis and investment in professional sports products.

However, from the perspective of the market pattern, the sports shoe market structure is stable, and international first-line brands such as Nike and Adidas are difficult to surpass. In the past year, Nike's running shoe business has grown by about 10% and has launched a number of innovative running shoes, covering different types such as racing, off-road, cushioning and so on. According to the Enagawa Research Institute, in 2022, the Nike family will eat nearly 30% of the global sports shoe market.

On the professional sports track, major brands are fiercely competing for market share and consumer recognition. For example, the ANTA brand put forward the slogan of "professional-oriented, brand upward". After "China Li Ning" faced the adjustment of the terminal, the burden of the Li Ning brand has become heavier, and the relay growth of professional sports products has also become a big challenge.

Another "shortcut" to growth

With Li Ning single brand as the core and focusing on the strategy of "single brand, multi-category, and multi-channel", Li Ning Group is not satisfied with doing only one thing. Another major event related to Li Ning this quarter was that Li Ning's largest holding company, "Extraordinary Lingyue", was officially listed on the Hong Kong stock market in June.

The actual controller of Viva Lingyue is Li Ning and his family members, and Li Ning himself is the executive director, chairman of the board and chief executive officer of the company. As of the end of 2022, Viva Lingyue held 10.29% of the issued share capital of Li Ning Company, making it the largest shareholder of Li Ning Company. It can be said that Extraordinary Lingyue can be regarded as another listed company of Li Ning.

But unlike the familiar Li Ning brand company, in recent years, "Extraordinary Lingyue" has broken new ground in the field of consumer fashion through acquisitions, the most important of which is the British century-old footwear brand Clarks, which was acquired in 2022, accounting for 78% of the company's revenue.

Through a series of acquisitions and investments, Viva achieved significant revenue and profit growth. Between FY2019 and FY2022, the company's revenue more than tenfold increased from HK$625 million to HK$6.9 billion, and its net profit soared from HK$826 million to HK$4,474 million in FY2021.

Some insiders said that this is a new growth curve found by Li Ning, which has always chosen to take a "unilateral strategy", that is, to make up for the shortcomings with the acquisition of brands, providing Li Ning with a broader development space and a more diversified brand image. It can be said that Extraordinary Lingyue is an important chess piece for Li Ning in the expansion of the international market.

However, the "buy, buy, buy" strategy is not a panacea. Just as Anta found it difficult to replicate the success of FILA after buying it, Viva Lingyue now faces some challenges and risks, such as how to improve its hematopoietic capacity, how to maintain the core competitiveness of each brand, how to respond to market changes and consumer tastes, etc.

The future of Li Ning and Extraordinary Lingyue is still imaginative, but the two chess games of growth and profitability are not good, and Li Ning still has a long way to go to further enhance brand power and strengthen the moat.

The picture of this article comes from the Internet