Li Ning Company Limited, the eponymous sportswear brand by China's best-known Olympic gymnast, posted a smaller-than-expected drop in first-half net income, as its shift to online sales more than offset dwindling in-store sales during the country's lockdown to combat the coronavirus outbreak.
Net income fell 14 per cent to 683.3 million yuan (US$98 million) in the first six months, outperforming the 28 per cent decline expected in Bloomberg's analyst poll. Sales fell 1.2 per cent to 6.18 billion yuan, performing better than the 5 per cent drop expected by analysts.
Li Ning's strong performance was due to "a very strong gross margin (flat year-on-year) and expense controls," wrote Jefferies' analyst John Chou, who maintained a "buy" recommendation on the stock. "Financial impact from the intensified markdown activities in 1H20 proved to be well under control. This suggests the sharp disappointment in offline retail in June didn't have much impact on Li Ning's channel health."
Get the latest insights and analysis from our Global Impact newsletter on the big stories originating in China.
Li Ning tweaked its sales strategy to eke out small gains amid the across-the-board slump in consumer activity during the coronavirus outbreak, as consumers were homebound or constrained by social distancing from visiting stores. Revenue from online sales of its athletic wear and footwear via its e-commerce channel rose 23 per cent during the period, said chief financial officer Terence Tsang Wah-fung during an earnings teleconference.
Li Ning's shares rose as much as 10 per cent in Hong Kong to an all-time high of HK$32.30 after the announcement on Friday. The shares eventually closed 8.4 per cent higher at HK$31.55.
"The impact of the current epidemic persists in the market, and there remains a great deal of uncertainty" said Takeshi Kosaka, the former Uniqlo executive who is now joint-CEO at Li Ning along with the founder, during a conference call. "The company will continue to hold a very cautious attitude to make preparations for the future. Finding new income sources and controlling expenses to increase operating efficiency will be part of our focus for the second half of the year."
Li Ning's revenue from direct operation dropped 24 per cent, because of a drop in traffic at its offline retail stores, which were mostly situated in metro and high-tier cities, the company said.
For the whole of 2020, the company expects "flat to mid-single digit growth in top line, and a baseline net profit margin of 10.5 per cent, which represents at least a 140 basis point improvement over 2019," according to chief financial officer Terence Tsang Wah-fung.
"Due to the Covid-19 impact in the first half, we have accelerated store closings, and delayed store openings," said Tsang, adding that the total number of stores decreased by 311 compared to June 2019.
"The recovery has been slower than most people expected, and there are still lots of uncertainty because of the recent sporadic [coronavirus] outbreaks in various cities in China, as well as the rest of the world. Hence, we are taking a very cautious approach for the full year," said Tsang.
Thirty-two of the 36 analysts surveyed by Bloomberg rated Li Ning a "buy", with four recommending "hold".
Earlier in May, Viva China, a sports talent agency founded by Li Ning, said it would buy a 66.6 per cent stake in clothes retailer Bossini International Holdings founded by the late textile tycoon Law Ting-pong in 1987.
Purchase the 120+ page China Internet Report 2020 Pro Edition, brought to you by SCMP Research, and enjoy a 30% discount (original price US$400). The report includes deep-dive analysis, trends, and case studies on the 10 most important internet sectors. Now in its 3rd year, this go-to source for understanding China tech also comes with exclusive access to 6+ webinars with C-level executives, including Charles Li, CEO of HKEX, James Peng, CEO/founder of Pony.ai, and senior executives from Alibaba, Huawei, Kuaishou, Pinduoduo, and more. Offer valid until 31 August 2020. To purchase, please click here.
More from South China Morning Post:
- Iconic Hong Kong clothing brand Bossini's share price doubles as investors back gymnastics star Li Ning to revive its flagging fortunes
- Olympic gymnast Li Ning's Viva China buys Hong Kong's iconic clothing chain Bossini at massive discount
- Chinese sportswear maker Li Ning's shares jump to nine-year high as former Uniqlo executive Kosaka Takeshi appointed joint CEO
- Chinese Estates sells no property in the first-half, sees net profit hit by Covid-19 as it cuts into rental income