361 Degrees leaves Covid behind in post-pandemic sprint

The sportswear maker’s sales growth accelerated in the first quarter following the end of China’s Covid restrictions in December

Key Takeaways:

• 361 Degrees recorded low double-digit revenue growth for its core branded products in the first quarter, far outpacing the previous quarter
• The sportswear company’s gross margin is expected to rebound this year, after falling last year during some of China’s strictest Covid controls

By Emily Chan

Call it the sportswear rebound.

As the Covid epidemic subsides and life returns to normal in China, sportswear makers like 361 Degrees International Ltd. (1361.HK), Anta Sports (2020.HK) and Xtep International (1368.HK), are all getting a post-pandemic bounce, as their sales start to recover after a tough fourth quarter last year. Within the group, 361 Degrees, which focuses on the middle- to lower-end of the market, is getting a leg up in the race.

Last Monday, 361 Degrees announced that sales for its core branded products grew by a low-teens percentage amount in the first quarter year-on-year, bouncing back from a flat performance in the last year’s fourth quarter. The latest figure beat out the single-digit sales growth recorded by industry leader Anta Sports’ main Anta brand and affiliated Fila brand in the first quarter.

361 Degrees’ kids-branded products, a particular focus for the company in recent years, did especially well with 20% to 25% sales growth for the quarter, while its other focus on e-commerce sales also jumped about 35%. Both figures were up from the low single-digit growth for kids-brands and 25% growth for e-commerce in the previous quarter, reflecting a business pickup with the end of China’s “zero Covid” policy.

The significant growth for the company’s core- and kid-branded products and its e-commerce sales comes as 361 Degrees accelerates efforts to build up its sales channels to consolidate its positioning as a “professional, youthful, and internationalized” brand. The company’s shares dropped 1.2% to HK$4.17 the day of its announcement last week, showing the results were probably largely in line with investor expectations.

Health awareness has significantly increased since the start of the pandemic began in 2020, particularly in China. That has helped sporting goods and apparel makers weather the pandemic better than many of their other retail peers, as more Chinese turn to sports and physical fitness to improve their health.

At the same time, Beijing is also ramping up policy support to promote sports and boost consumption of related products, for example, by detailing a national fitness program in a strategic government plan issued in December 2021. Seizing on that government endorsement and growing health awareness, 361 Degrees has not only deepened its “professional sports” development strategy, but also expanded its “sports trend” sub-line to tap new demand from more serious sports enthusiasts.

As it targets such people, the company has broadened its focuses beyond selling basic sports products for running, basketball and comprehensive training, and now also funds top marathon runners and is signing sports celebrities as brand endorsers. It is also sponsoring several national and professional sports teams, all in hopes of raising its profile and reaching a broader base of both casual and serious sports enthusiasts.

Boosting gross margin

The growing official importance attached to sports among the youth has played well to 361 Degrees’ drive into kids-wear, a focus for the company as early as 2009. The company has sought to develop itself as a “youth sports expert,” seeking to tap a willingness by China’s growing middle class to spend on products and activities that will improve their children’s health.

To improve the appeal of its products, 361 Degrees has also been trying to make its products more fashionable through intellectual property (IP) partnerships, for example by launching co-branded products with the China National Space Administration (CNSA), Kakao Friends and NonoPanda. That strategy helped to power the company’s kids-branded product sales to 30.4% growth last year to 1.44 billion yuan ($209 million), even in the face of the pandemic downturn.

While 361 Degrees was relatively late in digitally transforming its business, only stepping into e-commerce in 2015, it has been making up for lost time by expanding online channels and building an integrated omnichannel. The company has been working to enhance its online-to-offline interactions using self-developed WeChat mini-apps, intelligent retail system empowerment and membership management systems, in addition to its e-commerce platform. Last year, its e-commerce business revenue jumped 37.3% to 1.69 billion yuan, far outpacing the company’s overall 17.3% sales growth.

However, it’s worth noting that 361 Degrees’ gross margin sagged to 40.5% last year from 41.7% in 2021, mainly because its factory in South China’s Fujian province was severely hit by the pandemic. That forced the company to shift more orders to third-party manufacturers, raising production costs. As the epidemic subsides, reliance on such outside manufacturers should ease this year. And as a growing ratio of its sales come from higher-margin e-commerce, the company’s gross margin is expected to rebound.

The company has become a regular sponsor of major sporting events to raise its international profile, including its role as official partner of the last four Asian Games. It is the sportswear sponsor for the 19^th Asian Games, which were originally set for last year but were postponed to this September due to pandemic controls. Investors should be ready for heavy advertising and promotional spending in connection with the games, which could have a negative impact on the company’s profit this year.

Valuation laggard

361 Degrees’ management previously declined to guarantee a full-year dividend due to growing macroeconomic uncertainty, preferring to retain its cash to “better capture growth opportunities in the post-epidemic recovery.”

Despite that, or perhaps because of it, some analysts are optimistic about its prospects. Industrial Securities said in a mid-March report that 361 Degrees’ products are priced at a very cost-effective range, and praised the company for shifting its focus from “quantity to quality,” which was reflected in last year’s strong performance.

The brokerage believes that the Hangzhou Asian Games will give 361 Degrees a platform to project its brand influence in the international arena. It maintains a “hold” rating on the company, but raised its profit forecast, predicting 360 Degrees’ revenue will grow 17% to 8.15 billion yuan this year and its profit will jump 28.5% to 960 million yuan. It has set a price target of HK$5.27 for the stock, representing 25% upside from current levels.

361 Degrees’ modest price-to-earnings (P/E) ratio of just 10 times doesn’t seem to match its strong performance, coming in well behind industry leaders Anta and Li Ning (2331.HK) at 36 times and 34 times, respectively. The company is also well below the 24 times for Xtep, which is similarly focused on a lower segment of the market. That big valuation gap could prove enticing for investors willing to bet that 316 Degrees might be able to make up some ground on its pricier rivals.To subscribe to Bamboo Works weekly free newsletter, click here