Sportswear retailer Li Ning faces harsh winter

Excessive inventory, management reshuffle and founder's plan to sell stake mean a harsh winter is in store for the mainland sportswear retailer

PUBLISHED : Monday, 22 October, 2012, 12:00am
UPDATED : Monday, 22 October, 2012, 4:47am

On a weekday this month at Huawei Centre, a popular shopping spot in Beijing's Xidan shopping district, sales assistants at a Li Ning shop are removing cotton-padded overcoats and down-filled garments from cartons and arranging them for sale. The range is not from the new winter collection, but is goods left over from last year.

A salesgirl said the shop had been selling the new collections at full price, but about a week ago, the retailer turned it into "a discount store" to dump off-season products marked down by as much as 70 per cent. Some items were produced two years ago.

In another Li Ning shop in Joy City, another popular centre in Xidan, the retailer is trying to offload off-season inventory by mixing coats and shoes from last winter with the new arrivals. Two of the four fitting rooms are filled with boxes containing old and new sport shoes.

By contrast, the two global sportswear brands, Nike and Adidas, are not offering discounts and most goods are from the latest collections.

Excessive inventory is a major problem for mainland sportswear, which cooled quickly following an overexpansion before the Olympics in 2008. The problem has worsened in the past two years because of weak consumption and cutthroat competition.

However, the crisis at Li Ning is even harsher than for others.

The Beijing-based company, established by former Olympic gymnast Li Ning, announced on Wednesday that Li and his brother planned to sell a stake equivalent to 25 per cent of the company to a sports talent management firm that is also under Li's control. The deal triggered investor concern that the founder may give up direct control of a company grappling with falling sales and a recent management reshuffle.

Li Ning shares fell 4.8 per cent to HK$4.60 in reaction to the announcement. They dropped further to close at HK$4.50 on Friday. The stock is down 27 per cent this year.

In July, Li Ning's chief executive Zhang Zhiyong resigned after serving the company for 18 years. On October 12, the retailer announced the departure of its chief financial officer, Chong Yik Kay. Neither position has been filled.

US-based private equity firm TPG Capital, a major shareholder in Li Ning, plays a key role in the internal operations of the retailer, while Li is in charge of external affairs.

"At this stage, it's hard to make any forecast about Li Ning's performance for 2013 and 2014," said Zhao Xiao, an analyst at China Merchants Securities. "I think even the company itself has no idea about what its future will be like. There are too many uncertainties."

In July, Li Ning launched a three-stage transformation blueprint, saying the company would focus on clearing inventory in the short term, improve cost structures and put more emphasis on core products. In the long run, it aims to transform its business model to get closer to consumer demand and raise profitability.

Retail analysts are split over the company's future as well as the recovery pace of the entire sportswear industry.

Spencer Leung, an analyst at UBS, said Li Ning's plan addressed most issues faced by the company, and was aligned largely with the correct retail-distribution model.

He expects sportswear to be among the first consumer discretionary segments to emerge from the economic downturn, and reckons the consolidation of the sector is close to completion.

"We anticipate Anta, Xtep, and to some extent Li Ning, are more likely to emerge as domestic winners," Leung said in a research note.

Raymond Ching, an analyst at Merrill Lynch, is also optimistic about the industry, saying the excess inventory levels had been improved and the profitability of some domestic retailers was getting better.

But Ching maintains an underperform rating on Li Ning, believing it will lose money next year, given its heavy investment in brand-building and inventory clearance. He thinks Anta Sports Products, the largest mainland sportswear brand by sales, will outperform in the long run.

Others are worried about the outlook for the sector as a whole.

It will be a long time before "the dawn of recovery in this market", said Jerry Peng, an analyst at Guotai Junan International.

Although the share prices of sportswear retailers rallied between 5 per cent and 10 per cent over the past month, Peng said the real improvements were still to come.

For instance, at the most recent trade fair, all the listed sportswear retailers except Li Ning posted declines in order value for the first quarter of next year of between 10 per cent and more than 20 per cent.

Li Ning did not release its order figures because it has adopted a new system to encourage distributors to place smaller orders that could quickly be filled. That is considered an efficient way to reduce inventory levels.

"TPG has the experience in building Daphne (a Shanghai-based footwear company) into one of the most successful footwear chain retailers in China," Peng said.

"But that does not mean that it can apply the same model to Li Ning because the latter has many more shops than Daphne and most of Li Ning's shops have been opened by franchisees instead of being directly managed."