Exceed Company Ltd. reported a 24.2 percent decline in second quarter revenue and said it expects revenues to decline by up to 43 percent in the third quarter as demand for its Xidelong branded sports apparel and footwear continues to weaken.
The Chinese company makes running, leisure, basketball, skateboarding and canvas footwear, sports tops, pants, jackets, track suits and coats, and bags, socks, hats and caps.
The company reported that revenue reached RMB562.0 million ($88 million), down 24.2 percent from the second quarter of 2011. Gross profit was RMB162.0 million ($26 million), down 29.6 percent. Gross margin was 28.8 percent, down 220 basis points compared to 31.0 percent percentfor the second quarter of 2011. Operating profit was RMB35.5 million ($6.0 million), representing a 67.7 percent year-over-year decrease. Net profit fell 81.1 percent to RMB30.0 million ($4.7 million).
“As anticipated, results in the second quarter were impacted by weakening consumer demand in China, which was largely attributable to the domestic and global economic slowdown,” said Shuipan Lin, Exceed's founder, Chairman and CEO. “As a result, overall sales volume across main footwear and apparel product lines decreased, resulting in a decline in revenue. In response to the prevailing market conditions, we began in the second quarter to proactively limit production and delivery of products to better manage inventory levels at distributors. Despite the unfavorable operating environment, we managed to outperform revenue guidance for the quarter, supported by ongoing brand building and marketing initiatives which have continued to raise the degree of market recognition of the Xidelong brand name and the average selling prices of products, especially in footwear segment.
“While we expect to continue to operate under unfavorable economic conditions for the remainder of this year,” Lin continued, “we believe we have the right strategy in place to effectively manage our production and inventory levels, maintain a lean operating structure and continue to strengthen brand awareness. Our priorities for the remainder of this year will focus on strengthening brand equity through effective marketing and prudent expansion of our distribution network, and the continued execution of long-term operational plan to align production facilities and sales network to best capture growth opportunities in China's evolving sportswear market. We believe that the continued execution of our strategy and operational plan will strengthen our competitive position over the long-term and allow us to maximize our growth opportunities in anticipation of an improving macroeconomic environment.”
Second Quarter 2012 Financial Results
Revenue breakdown
Three Months Ended | ||||||
Jun 30, 201 2 RMB'000 | % of Revenue | Jun 30, 201 1 RMB'000 | % of Revenue | Second Quarter YoY Growth | ||
Footwear | 273,340 | 48.7% | 364,827 | 49.2% | (25.1)% | |
Apparel | 277,219 | 49.3% | 369,028 | 49.8% | (24.9)% | |
Accessories | 11,408 | 2.0% | 7,644 | 1.0% | 49.2% | |
Total | 561,967 | 100.0% | 741,499 | 100.0% | (24.2)% | |
Six Months Ended | ||||||
Jun 30, 201 2 RMB'000 | % of Revenue | Jun 30, 201 1 RMB'000 | % of Revenue | YTD YoY Growth | ||
Footwear | 704,885 | 48.4% | 641,327 | 43.0% | 9.9% | |
Apparel | 731,133 | 50.2% | 833,693 | 55.8% | (12.3)% | |
Accessories | 20,506 | 1.4% | 17,892 | 1.2% | 14.6% | |
Total | 1,456,524 | 100.0% | 1,492,912 | 100.0% | (2.4)% | |
1) The Company's reporting currency is Renminbi (“RMB”). RMB numbers included in this press release have been translated into U.S. dollars at the rate of USD1.00 = RMB6.3644, the exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board, on June 30, 2012. The translation of amounts from RMB to United States dollars is solely for the convenience of the reader. No representation is made that RMB amounts could have been, or could be, converted into U.S. dollars at that rate or at any other rate on June 30, 2012.
In anticipation of weaker consumer demand for the remainder of fiscal year 2012, and to prevent a buildup of the level of inventory among distributors, the company decided to trim production and reduce deliveries, resulting in a 24.2 percent decrease in revenue from RMB741.5 million for the second quarter ended June 30, 2011 to RMB562.0 million (US$88 million) for the second quarter ended June 30, 2012. The decrease in revenue was primarily due to a decrease in the deliveries of products to distributors. Revenue decreased by 2.4 percent, from RMB1,492.9 million for the first six months in 2011 to RMB1,456.5 million (US$229 million) for the first six months in 2012.
To continue the development of the Xidelong brand and to support advertising and promotional initiatives, the company continued the sponsorship of the “Fitness for All” Campaign in 2012, engaged By2, a Singapore-born, Taiwan-centric female pop music group as spokespersons, and launched several new series of apparel and footwear products. The company has also continued to prudently expand its distribution network. The number of Xidelong retail stores, which are operated by distributors and authorized third party retail store operators, increased by 342 from approximately 4,640 as of June 30, 2011 to approximately 4,982 as of June 30, 2011. During the second quarter of 2012, 60 retail selling locations were added. Our retail selling locations are operated either by distributors or by authorized third party retailers.
Segment breakdown
- Footwear. Footwear accounted for 48.7 percent of revenue for the second quarter ended June 30, 2012. Footwear principally includes nine categories of products: running footwear, leisure footwear, basketball footwear, skateboarding footwear, canvas footwear, tennis footwear, outdoor footwear, vintage footwear and cross-training footwear. A portion of footwear production is outsourced. We have a plan to increase annual production capacity for footwear products to approximately 30.0 million pairs by the end of 2013 from the current level of approximately 9.0 million pairs. Revenue from footwear decreased by 25.1 percent, from RMB364.8 million for the second quarter ended June 30, 2011 to RMB273.3 million (US$42.9 million) for the second quarter ended June 30, 2012, primarily due to a decrease in sales volume, which was partially offset by an increase in footwear Average Selling Price (“ASP”). As a result of increased consumer recognition of the Xidelong brand resulting from marketing and brand promotion efforts over the years, the ASP of footwear increased by 7.0 percent year-over-year for the second quarter ended June 30, 2012. The sales volume in the second quarter decreased by 29.9 percent compared with the same period in 2011. Moreover, revenue from footwear increased by 9.9 percent, from RMB641.3 million for the first six months in 2011 to RMB704.9 million (US$110.8 million) for the first six months in 2012.
- Apparel. Sports apparel accounted for 49.3 percent of revenue for the second quarter ended June 30, 2012. Sport apparel principally includes sports tops, sports pants, jackets and track suits. Our apparel production is entirely outsourced. Revenue from apparel decreased by 24.9 percent, from RMB369.0 million for the second quarter ended June 30, 2011 to RMB277.2 million (US$43.6 million) for the second quarter ended June 30, 2012. This decrease was primarily due to a 24.5 percent decrease in sales volume. The ASP of apparel remained stable, as a result of continuous marketing and brand promotion efforts, which enhanced consumer recognition of Xidelong brand. Revenue from apparel decreased by 12.3 percent, from RMB833.7 million for the first six months in 2011 to RMB731.1 million (US$114.9 million) for the first six months in 2012.
- Accessories. Revenue from accessories increased by 49.2 percent, from RMB7.6 million for the second quarter ended June 30, 2011 to RMB11.4 million (US$1.8 million) for the second quarter ended June 30, 2012. This increase was primarily driven by an expansion of product varieties. Sport accessories principally include sports caps, sports socks, bags and backpacks. Our accessories production is entirely outs ced. Gross profit decreased by 29.6 percent from RMB230.0 million for the second quarter ended June 30, 2011 to RMB162.0 million (US$25.5 million) for the second quarter ended June 30, 2012. Gross margin decreased by 2.2 percentage points, from 31.0 percent for the second quarter ended June 30, 2011 to 28.8 percent for the second quarter ended June 30, 2012. The decrease in gross margin was primarily due to the increase in outs cing cost, which was largely attributable to the increasing costs of raw materials and labor of upstream outs ced manufacturers. Exceed has formulated a new operational plan in response to these production capacity restraints. In addition, company introduced several new series of apparel products using more sophisticated raw materials to enhance product quality, which has led to a slight decrease in gross profit margin for apparel for the second quarter of 2012 as compared to the same period in 2011. We will continue efforts to maintain gross margin by balancing product pricing and material cost moving forward.
Balance Sheet
- Inventory. The average inventory turnover days for the second quarters ended June 30, 2012 and 2011 were 7 days and 9 days, respectively. Inventory turnover days decreased mainly due to effective production planning and effective procurement control and logistics management, which res
