6110.HK
Topsports earnings disappoint

Shares of the seller of Nike and Adidas shoes in China fell by 9% after it reported a weak second half in its latest fiscal year

Key Takeaways:

  • Topsports reported its revenue and profit rose 6.9% and 22%, respectively, in its latest fiscal year through February
  • Despite the full-year growth, the seller of Nike and Adidas sportswear in China’s profit was below analyst expectations

  

By Edith Terry

Last week when Topsports International Holdings Ltd. (6110.HK) unveiled its financial report for its latest fiscal year through February, its shares tumbled 9% over the next two trading days. Investors may have been spooked by slowing revenue growth in the second half of the year, even as profit growth accelerated slightly for the company, which sells Nike and Adidas sportswear in China. On a sequential basis, the second-half revenue was roughly flat compared with the first half, while its profit fell about 30% on that basis.

Investors were also likely put off by a shortfall in the company’s profit compared with market expectation. Topsports reported earnings per share of 0.3569 yuan for its fiscal year through Feb. 29, which was below analyst estimates of between 0.37 to 0.47 yuan.

Investors were more upbeat after the company announced its interim results last October, bidding up its shares about 10% at that time before the stock began trailing down again. In all, the company’s shares have lost 17% so far this year, and have lost about half their value since its $1 billion IPO in October 2020. Shares of peers like Anta (2020.HK) and Li Ning (2331.HK) are doing much better, up 18% and 12.2% year-to-date, respectively.

Topsports is a bellwether of sorts not only for China’s sportswear market, but also for foreign brands in China, since it derives 85% of its sales from Nike and Adidas products. By comparison, Anta and Li Ning derive most of their sales from their own domestic brands, though Anta also gets significant revenue from its Fila products, which it sells in China under a licensing agreement with the brand’s South Korean owner.

Topsport’s fiscal full-year numbers looked generally good in terms of growth. Revenue was up 6.9% to 28.9 billion yuan ($3.9 billion), with net profit up 22% to 2.2 billion yuan. Its net profit margin also improved by 0.8 percentage points to 7.6%, and its dividend was slightly higher. Its core retail business revenue rose a robust 8.9% to 24.7 billion yuan.

The good news continued with higher revenue from both of Topsports brand categories. Revenue for the company’s principal Nike and Adidas brands was up by 6.5% to 24.8 billion yuan, while “other brands” rose 10.5% to 3.8 billion yuan.

On a half-year basis, the company’s revenue growth slowed to 6.5% in the second half of the year on a year-on-year basis. Its second-half profit rose 17% year-on-year to about 876 million yuan, though the figure was down substantially from the 1.33 billion yuan profit in the first half of its fiscal year.

Nike has been one of Topsports’ major clients since 1999, and Adidas since 2004, both long pre-dating the company’s 2019 spinoff from Belle International, China’s largest retailer of women’s footwear. Its “other brands” are also mostly foreign, including Puma, Converse, Vans, North Face, Timberland, Asics and Skechers.

Subsiding controversy

Nike was immersed in controversy in 2021 after it refused to use products from China’s Xinjiang region, leading Chinese consumers to boycott the company as well as some other Western brands. The boycotts have since subsided, though an industry trend has seen consumers increasingly flock to domestic brands like Anta and Li Ning after years of showing a strong preference for foreign brands.

A bigger problem for Topsports, beyond U.S.-China trade tensions, is the broader recent struggles for its two key customers globally.

Nike’s shares lost 11% when it announced last December that it was cutting its sales forecast for the year and would seek $2 billion in savings over the next three years. Adidas also reported weak earnings for 2023, with a 4.8% decline in revenue to 21 billion euro ($23 billion) and its first annual loss in three decades. Here, we should also note that Adidas bounced back in the first quarter of 2024, and its shares have risen by 22% year to date.

Still, the recent weakness from its two big-name clients may be partly to blame for a 9.2% rise in Topsports’ inventory levels in the second half of the fiscal year compared with the first half.

Topsports says that it has responded to an “uneven” macro-economic environment by focusing on quality rather than quantity. It has continued to close more stores than it opened, with a net decrease of 421 stores over its latest fiscal year, to 6,144 stores. At the same time, it increased its overall selling area of the remaining stores by 6% as it focused on larger-format stores.

Government support is expected to drive expansion of China’s outdoor sports industry to 3 trillion yuan by 2025, according to Topsports, and it is paying more attention to brands beyond Nike and Adidas. It said it is partnering with high-performance footwear and apparel brand Hoka and Guangzhou-based mountaineering brand Kailas to expand its product range.

Topsports’ price-to-earnings (P/E) ratio of 15 and HK$33 billion ($4.2 billion) market cap are well below Anta’s P/E ratio of 22 and HK$247 billion market cap, though it’s almost on par with Li Ning’s 16 and HK$56.9 billion market value. Brokerage Jefferies Financial kept its “buy” rating after the results came out but cut its price target to HK$7.90 from HK$9.30 based on the weaker second half. Citigroup also kept its “buy” on the stock because of its high dividend payout, which it said was better than its peers.

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