Jack Wolfskin agreed Dec. 24 to buy out its distributor for mainland China, where sales of its products declined 8 percent in the first six months of the year as government austerity policies and a shift away from department stores reduced consumer spending on some premium outdoor brands.
The agreement terminated Hong Kong-based Tri State Holdings Limited's licenses to distribute Jack Wolfskin products in the People's Republic of China (PRC) and manufacture Jack Wolfskin branded T-shirts/Polo shirts. The licenses were set to expire in December and July of next year respectively. The deal comes as Tristate has been investing more to expand its own outdoor brand Haski, which will launch a line of footwear this spring.
Tristate's Shanghai affiliate will provide consulting services to Jack Wolfskin PRC CO (JW PRC) until Dec. 31, 2017 in exchange for a service fee amounting to substantially all of the new company's pre-tax and interest earnings during the period, plus an additional service fee that will be tied to percentages of the gross profits of JW PRC in 2016 and 2017. At the end of the period, JW PRC will acquire relevant inventory from Tristate at landed cost. Tristate will retain distribution rights for Jack Wolfskin in Hong Kong and Macau.
Tristate reported sales of Jack Wolfskin fell 8 percent in the six months ended June 30, after rising 29 percent in all of 2013 to reach HK$962.3 million ($124 mm). Sales of Nautica also fell 8 percent during the period. Gross margins on Jack Wolfskin sales remained stable, but deteriorated at Nautica due to a higher proportion of close-out sales during the period. The sales declines contributed to a loss of HK$27.7 million ($4 mm) at Tristate's Branded Product, Distribution, Retail and Trading segment compared with a profit of HK$19.2 million ($3 mm) in the first half of 2013.
Tristate attributed the declines to softening retail demand and declining sales by department stores in China, where online, shopping-center- and mall-based retailers are gaining market share.
“The outdoor segment of the premium branded retail market in China was one of the last segments impacted by the slowdown due to ongoing economic reforms and austerity measures,” Tristate reported in its interim financial report for the period. “For the first time in over a decade, leading outdoor brands across the board saw negative same-store-sales-growth and high inventory levels. In order to maintain sufficient cash flow for our Jack Wolfskin franchisees as well as create capacity for our franchisees to execute the important Fall/Winter seasons, the Group was not able to achieve its sales plan for first half 2014 with a reduction in follow-up and closeout orders.”
Several luxury brands have attributed lower sales in China this year to the mainland government's efforts to curb lavish spending by state-owned enterprises that critics says is indicative of massive corruption.
While Jack Wolfskin does not sell its products in the United States, it is Germany's largest domestic outdoor brand and competes against U.S. brands in the United Kingdom and across much of Europe and Asia. Tristate derives 63.3 percent of its revenue in the first half of the year manufacturing and sourcing office, casual and athletic apparel for western brands at 10 factories it owns in Mainland China, the Philippines, Thailand and Vietnam. Its shares are listed on the Stock Exchange of Hong Kong Limited.
