Text | Little Lou Fish
Edit | Yang Xuran
By removing loss-making brands from the listed company system, Xtep International seems to be using a "meat-cutting" approach to optimize its financial structure and express to the market that the company will take into account the short-term interests of shareholders and the medium- and long-term interests.
On the evening of May 9, Xtep International announced that it would sell its Gasway and Paladin brands to Ding Shuibo, chairman and CEO, and his family at a price of $151 million.
Affected by this news, Xtep International's share price rose 7.59% on the second day of the announcement, but finally closed up at 0.56%. This kind of rise and fall reflects the market's recognition of this operation and a relatively optimistic attitude.
Xtep International share price performance (Nov 2023 to date)
01 Stabilize the situation
After excluding the two brands of Gasway and Paladin, will Xtep International's financial statements look better? The answer is yes, because there are really not many brands in the group that are still losing money.
In 2023, Xtep International will achieve a total operating income of 14.35 billion yuan, a year-on-year increase of 10.9%, of which Xtep brand revenue will be 11.95 billion yuan, a year-on-year increase of 7.4%, and the revenue of professional sports JV (Saucony & Merle) will be 800 million yuan, doubling year-on-year, and Saucony has achieved profitability.
In contrast, the Gasway and Paladin brand businesses have continued to lose money since 2019, with a total amount of more than $100 million, and there is a high probability that they will also record losses this year. This will indeed be a drag on Xtep International's financial report, which has maintained double-digit revenue growth for three years, affecting the confidence of some investors.
Multi-brand is more likely to favor long-term strategic value than short-term performance. For example, Xtep's Saucony, which focuses on running and social elites and sells for about 1,000 yuan, has achieved its first profit after the acquisition in 2023, and its turnover and profit performance in the first quarter of this year are also better than expected. The addition of commuting and classic series will also be expected to achieve better market performance.
Saucony's significance to Xtep may be no less than that of FILA to Anta. Although Saucony's current revenue scale cannot be compared with FILA, at least this path of enriching the product line in the Chinese market through the acquisition of international mid-to-high-end brands has a precedent to prove that it can be followed.
02 Finding a balance
Whether it is channel management or brand management, gaining young recognition can be said to be the strategic focus of all brands at present. The separation of Gasway and Paladin does not mean that Xtep will give up multi-brand, internationalization, and fashion and sports brands.
The capital market has always recognized the logic of the multi-brand strategy of footwear and apparel enterprises. In 2021, when Xtep joined hands with Hillhouse to jointly develop and acquire the global business of Gasway and Paladin, Xtep's share price rose in response, soaring by 30% in early trading, and its market value once exceeded HK$30 billion, a record high.
At that time, Li Ning and Anta in the same industry were also doing long brand strategies, acquiring or self-developing several mid-to-high-end sub-brands, and their stock prices also reached historical highs, and the market had high hopes for them.
Xtep started with running shoes, but running shoes alone are obviously not enough. Starting from the multi-brand strategy, Xtep chose to acquire and cultivate Gaishiwei, which is good at tennis shoes, and Paladin, who is good at military boots, which is the right choice from a strategic point of view.
It's just that the success of a brand always takes time and luck. At present, Xtep must choose to set up stores in first- and second-tier cities in order to promote new brands, and last year alone, it opened 72 new Gasway and 56 Paladin stores in the Asia-Pacific region, with a growth rate of more than 50%.
Large-scale store opening is destined to increase the financial burden, not to mention the investment in publicity and sales expenses. Although the operating income of the two brands increased by 14.3% year-on-year to 1.6 billion yuan last year, and the gross profit margin increased to 44.8%, it still affected the short-term performance of the listed companies.
It can be seen that this privatization is basically a balance between the short-term and long-term interests of shareholders.
03 Write at the end
This privatization will actually help to inject more resources into the two brands in the future, and will no longer affect the short-term performance of Xtep International's listed companies.
Xtep International also paid the transaction consideration of US$151 million as a special shareholder dividend, while retaining the right to regain equity after KP earns profits.
This is to buy more time from the market to prove the value of the two brands, but also to be optimistic about the long-term development trend of the two brands.