A rebound at Xingquan International Sports Holdings Limited stalled in the fourth quarter as average sales price of its Gertop casual outdoor apparel fell after climbing for five straight years.

The Hong Kong-based company reported revenue reached RMB260.6 million ($42 mm) in the quarter ended June 30, down 19.9 percent from the same quarter a year earlier and 19.8 percent from the previous quarter. While sales of apparel and footwear both declined from year earlier levels, Xingquan attributed the decline primarily to a drop in average selling price at Gertop.

Xingquan reported strong profit gains on mid-single-digit growth for the full fiscal year and said it foresees further growth in fiscal 2016 despite China's slowing growth.

Xingquan earned about 52 percent of its revenue during the fiscal year from its Apparel and Accessories/Gertop segment, about 30 percent from its Casual Footwear/Addnice footwear segment, and the remainder from selling soles to China's other domestic footwear brands and manufacturers.

Xingquan is among dozens of Chinese companies that began moving up the value chain in recent years by launching domestic brands. It launched the Addnice footwear brand in 2003 and founded Gertop as an outdoor sportswear brand in 2010. It has since repositioned Gertop as an outdoor casualwear brand and opened a chain of more than 100 retail outlets in a bid to raise average sales price (ASP) and margins.

Higher spending on stores negates margin improvements

Xingquan reported that while gross profit dropped 13.2 percent in the fiscal fourth quarter, gross margin improved 260 basis points to 33.9 percent. SG&A expenses, however, increased 8.2 percent to RMB$70.1 million ($11 mm), or 26.9 percent of revenues, up from 19.9 percent a year earlier as the company continued to invest in point-of-sale displays for its sales outlets and incur other incremental expenses across its sales network. 

The surge in spending and decline in sales dragged profit before taxes down 29 percent to RMB26.2 million ($4 mm), compared with a year earlier. Profit after tax reached RMB18.7 million ($3 mm), or RMB.06 per share, down 21.4 percent and 25 percent respectively from a year earlier.

The company ended the quarter and the year with inventories valued at RMB$42.1 million, down 0.4 percent from a year earlier and cash and cash equivalents of RMB$1.74 billion, up 12.7 percent from a year earlier.

FY15 Apparel unit sales off 17.5 percent

For the fiscal year ended June 30, Xingquan's revenue reached RMB$1.29 billion, up 5.2 percent from fiscal 2014, but still well below its peak. The company's sales peaked at RMB$1.69 billion in fiscal 2012 before it and many other domestic sporting goods companies began trimming their retail networks to rein in a major inventory glut.

In fiscal 2015, the growth was driven primarily by an increase in OEM sales by its Soles segment and a 16.9 percent increase in average selling price, which the company attributed primarily to its success repositioning Gertop.

Xingquan now sells Gertop through 120 owned stores and more than 1,400 other retail outlets operated by 25 distributors in 26 provinces in China, and has began selling the brand in Europe through a subsidiary in Hungary.

Apparel revenues, including sales of Gertop, declined 2.5 percent to RMB640.5 million ($104 mm) compared with fiscal 2014, due mainly to a decrease in sales volume from 4.0 million to 3.3 million pieces. Gross margin, however, increased 200 basis points to 37.2 percent.

Shoe revenues, which reflect Addnice's athletic, outdoor and other footwear sales, grew 17.0 percent to RMB391.5 million ($64 mm) mainly due to an 8.2 percent increase in average selling price, which reached RMB$175.0 ($28) per pair. Gross margins rose 30 basis points to 30.0 percent.

Shoe Sole revenues increased 11.8 percent to RMB$234.0 million ($38 mm) mainly due to increase in sales volume from 12.9 million pairs to 15.1 million pairs. Gross margin reached 26.5 percent, up 290 basis points. The company's soles are sold to other Chinese shoe manufacturers including Xtep, Peak, 361 Degrees and Qiaodan.

Store investments squeeze profits
Consolidated gross margin was 36.1 percent, up 210 basis points from fiscal 2014. SG&A was 14.6 percent of revenue, down 20 basis points from a year earlier.

Profit before taxes grew 34.6 percent to RMB$326.3 million ($53 mm) due to the growth in sales and an unrealized gain from shifting foreign exchange rates. Net profit reached RMB250.9 million ($41 mm), or RMB$0.74 per share (12 cents), up 42.1 and 29.8 percent respectively from fiscal 2014.

While Xingquan declined to provide a forecast for fiscal 2015, it said it anticipates another year of growth.

“We are aware that the Chinese economic uncertainties may impact the spending pattern of the Chinese consumers which may then impact our business,” the company said. “As such, we will continue to be wary of the changes in the economic conditions. Nevertheless, our board of directors believes that the Group’s prospects for the financial year ending June 30, 2016 should remain positive due to the success of the Gertop brand which is in the outdoor casual wear segment as well as the market recognition of our shoe sole business.”