It appears that many of the conversations the U.S. and European active lifestyle brands are having are the same conversations happening at the manufacturing level further up the supply chain.

“Despite the global footwear industry expecting to see some signs of emerging from the current inventory de-stocking cycle, conservative ordering activity and low season effects resulted in below-average order fill rates that continued to impact the short-term performance of the Group’s manufacturing business,” wrote Lu Chin Chu, chairman, Yue Yuen Industrial (Holdings) Limited, in the company’s third-quarter report. “Nevertheless, the various cost-reduction and efficiency-improvement measures carried out by the Group year-to-date have helped to partially offset the effects of operating deleverage, and its manufacturing business proved its ongoing resilience with a sequential improvement in profitability in the third quarter.”

The Chinese manufacturer of athletic and outdoor footwear for the biggest U.S. and European footwear brands said the global demand for footwear remained subdued in the third quarter of 2023 amid the concerning macroeconomic environment.

The company said despite the ongoing uncertainties in the economy, the fundamental strengths of its manufacturing business remain intact. To combat the short-term pressures, Yue Yuen continued to implement its highly agile capacity allocation strategy and flexibly adjusted its manpower to match demand. It also implemented strict cost control measures while enhancing productivity where possible to safeguard the profitability of its manufacturing business.

Sales momentum at the company’s retail subsidiary, Pou Sheng International (Holdings) Limited reportedly “softened sequentially” during the third quarter of 2023 due to volatile store traffic in several parts of mainland China, with the base from the corresponding period of last year also turning higher. Nevertheless, omni-channel sales, particularly those transacted through private domain channels, remained resilient as Pou Sheng pressed ahead with its digital transformation alongside its ongoing retail refinement strategy.

For the nine months ended September 30, 2023 (YTD, year-to-date), the Yue Yuen recorded revenue of US$5.99 billion, representing a decline of 14.1 percent compared to revenue of US$6.97 billion in the corresponding period of 2022, mostly due to the weak performance of its manufacturing business resulting from “soft global demand for footwear amid the ongoing industry-wide inventory digestion cycle,” offsetting the recovery of Pou Sheng.

The company reported that October revenues to start the fourth quarter period were down 14.6 percent to US$645.6 million.

Year-to-date revenue attributable to footwear manufacturing activity (including athletic/outdoor shoes, casual shoes and sports sandals) decreased by 20.4 percent to US$3.50 billion, compared with the corresponding period of last year. The volume of shoes shipped during the period decreased by 24.5 percent to 160.9 million pairs due to soft global demand and a high base effect. The average selling price increased 5.3 percent to US$21.71 per pair as compared with the corresponding period of last year, with relatively resilient demand for the company’s high-end footwear helping offset the impact of a volatile base period.

October manufacturing revenues were down 17.3 percent, the best year-over-year monthly performance since May 2023.

Athletic/Outdoor shoes accounted for 86.7 percent of footwear manufacturing revenue in the YTD period. Casual shoes and sports sandals accounted for 13.3 percent of footwear manufacturing revenue. When considering the company’s consolidated revenue, athletic/outdoor shoes represented the principal category, accounting for 50.6 percent of total revenue, followed by casual shoes and sports sandals, which accounted for 7.8 percent of total revenue.

Yue Yuen’s total manufacturing YTD business revenue through September (including footwear, as well as soles, components and others) was US$3.79 billion, representing a decrease of 20.9 percent as compared with the corresponding period of last year.

Year-to-date revenue attributable to Pou Sheng increased by 0.7 percent to US$2.19 billion, compared to US$2.18 billion in the corresponding period of last year. In RMB terms (Pou Sheng’s reporting currency), revenue increased by 7.3 percent to RMB 15.44 billion, compared to RMB 14.39 billion in the corresponding period of last year, supported by an overall recovery of the sales environment and foot traffic at its retail stores across mainland China, the resilient performance of its omni-channels,
particularly its Pan-WeChat Ecosphere, as well as a low base effect.

October Pou Sheng retail revenues were down 3.8 percent, a disappointment after a high-single-digit increase in September.

Consolidated gross profit margin of the manufacturing business remained largely stable, decreasing by 20 basis points to 18.0 percent of sales as compared to the corresponding period of 2022, which was said to be mainly attributed to the effectiveness of the company’s cost-reduction and efficiency-improvement efforts, flexible production scheduling, and the dynamic optimization of manpower versus demand, all of which reportedly helped to offset most of the negative impact of the reduced capacity utilization rate resulting from weaker demand.

Despite well-managed discount control, the gross profit margin for Pou Sheng decreased by 2.9 percentage points to 33.1 percent in the Period under review, as compared to the corresponding period of 2022, due to a negative channel mix.

Consolidated selling and distribution expenses amounted to US$680.4 million (11.4 percent of revenue), compared to US$773.0 million (11.1 percent) in the 2022 period.

Administrative expenses were US$421.2 million (7.0 percent of revenue) in 2023, compared to US$447.2 million (6.4 percent) in the 2002 comparable period.

Other income increased by 10.8 percent to US$99.1 million (1.7 percent) for the YTD period from US$89.4 million (1.3 percent) in the 2022 YTD period. Other expenses decreased by 7.5 percent to US$175.1 million. Yue Yuen reportedly made necessary adjustments to its manufacturing business to combat volatile capacity utilization and as part of its long-term capacity allocation plan. The related severance expenses amounted to approximately US$30.5 million.

For the YTD period, the share of results of associates and joint ventures was a combined profit of US$47.4 million, compared to a combined profit of US$54.2 million recorded in the corresponding period of last year.

Profit attributable to owners of the company amounted to US$137.7 million in the nine-month YTD period, representing a decrease of 49.0 percent as compared with that of US$270.1 million recorded in the corresponding period of last year.

The company recognized a non-recurring profit attributable to owners of the company of US$3.6 million, representing a decrease of 52.0 percent as compared to the US$7.6 million recognized in the same period of 2022. The decrease was mainly due to the decline in gains on fair value changes on financial instruments at fair value through profit or loss and no gain on disposal during the Period under review, unlike in the corresponding period of last year. As a result, excluding all items non-recurring in nature, the recurring profit attributable to owners of the company for the YTD period was US$134.0 million, representing a decrease of 49.0 percent as compared with US$262.5 million for the corresponding period of last year.