The manufacturers at the origin of most active lifestyle products can’t get a break. Issues from the first half of 2023, notably the overhang of retail inventories and the subsequent de-stocking of those SKUs, gave way in 2024 to concerns over a weakening economy and a slow economic recovery in China. It doesn’t help when your factory in New Mexico also needs help getting started.

“During the first half of 2024, global manufacturers and trading companies faced the challenge of a weaker-than-expected economic recovery, with sales generally under considerable pressure,” Mainland Headwear Holdings Limited (Group) wrote in its 2024 First Half (H1) Interim report. “Amid a relatively sluggish macro environment, the Group leveraged its superior production technologies to stabilize its existing manufacturing and trading businesses while making timely acquisitions and improving plant operations to facilitate the Group’s sustainable development.”

The Group reported that consolidated revenue declined 11.9 percent to HK$687.1 million in the first half, on top of a 17.2 percent decline in the first half of 2023 (HK$780.3 million).

Gross profit fell 19.9 percent in the H1 period to HK$219.5 million, double the decline in the year-ago first-half period. Gross margin decreased by 320 basis points to 31.9 percent of sales after increasing 290 basis points to 35.1 percent in H1 2023.

Profit attributable to shareholders fell 45.8 percent to HK$35.3 million in the first half, further degrading the company’s bottom line from the 23.0 percent decrease experienced in H1 last year when Mainland posted HK$65.1 million in profit.

Manufacturing Business
First-half revenue from the company’s Manufacturing business slid 5.0 percent to HK$445.8 million, accounting for approximately 64.9 percent of the Group’s total revenue. The decline was principally due to weak retail consumer confidence in Europe and the U.S. and slow sales as customers continued to reduce the large inventories they had amassed previously.

For the Group’s factories, production and sales volume at its Bangladesh factory fell year-on-year as two major traditional festivals concentrated in the first half of the year, raising the number of days off for employees during the H1 period.

To capitalize on its production advantages, the Bangladesh factory started to produce accessories such as wallets and belts for the trading business during the period. It also bolstered automation of production, reduced manpower, improved operational processes and enhanced production efficiency, which alleviated the pressure on labor costs caused by the drastic rise in minimum wage in the country, as well as maintained a higher gross profit margin level.

For its Shenzhen factory, combining a lower volume of orders and an existing overhead and expenses led to an increase in average costs.

“The factory in Mexico remains at an early production stage, and the newly recruited local staff are grappling with workflow. With production yet to run smoothly, this has translated into high operating costs, resulting in an operating loss for the [H1] period,” the company noted in its report. “The Mexico factory will require a longer period of time to expand to the expected level.”

The segment’s operating profit amounted to HK$93.2 million, a 27.8 percent decline from HK$129.1 million in the H1 period last year.

As at 30 June 2024, the Bangladesh and Shenzhen factories had approximately 7,200 and 200 employees, respectively. The Mexican plant had approximately 400 employees.

Trading Business
The company’s Trading business was also affected by the weak retail market during the H1 period and achieved lower year-on-year sales, with revenues declining by 22.4 percent to HK$241.3 million, accounting for 35.1 percent of the Group’s total revenue in the half.

In the first half, the Group said the Trading segment actively promoted budget management, streamlined structure and reduced workforce, which resulted in an increase in gross profit margin by 230 basis points year-on-year. However, as distribution costs remained high, the segment reportedly recorded an operating loss of HK$37.7 million, compared to an operating loss of HK$28.0 million in the 2023 H1 period.

To expand market coverage and enrich its product portfolio, the Group acquired a property in Missouri for warehousing during the period. It also acquired a 55 percent interest in a Dutch design company to support subsidiaries engaged in trading and distribution in the UK, help explore the European and other overseas markets and drive greater synergies.

Image courtesy Mainland Headwear