Mainland Headwear Holdings Limited (the Group) reported sharply higher profits in the first half as growing productivity at a new factory in Bangladesh began offsetting a decline in sales caused by manpower shortages at its factory in China.
The Hong Kong-based Group, which supplies hats to New Era Cap Co. and owns San Diego Hat Co. (SDHC) and 85 percent of H3 Sportgear LLC in the United States, reported sales decreased by 1.6 percent to HK$443.3 million ($57 mm) in the six months ended June 30 from the same period last year.
Mainland reported increasing orders at its Manufacturing Business drove most of the growth along with a return to profitability at SDHC and improving margins at its Retail Business, which sells NOP and New Era hats and other licensed and owned products at through stores in Hong Kong and the People's Republic of China (PRC).
Group gross profit rose 3.3 percent to HK$131.6 million ($17 mm), pushing gross margin up 140 basis points to 29.7 percent. Profit attributable to shareholders surged by 49.4 percent to HK$25.8 million ($3 mm) as increasing efficiencies and lower manufacturing costs at its Bangladesh factory minimized the impact of a labor shortage at its Chinese factory.
Bangladesh factory ramps up
“The Bangladesh factory that had been at the investment stage has started to generate a contribution to our business and thus the Group has achieved satisfactory results during the period,” said Ngan Hei Keung, Chairman of Mainland Headwear. “This performance has demonstrated the wisdom of the Group’s overall strategic direction a base rooted in the PRC while proactively advancing the “Going out” strategy. ”
Sales at the Manufacturing Business, which accounted for 63.9 percent of the Group’s total sales during the period, dropped 5.6 percent to HK$307.8 million ($40 mm) because manpower shortages at its Shenzhen factory made it impossible to meet increased order volume from New Era and other OEM customers.
However, growing capacity at the Bangladesh factory mitigated the potential impact on sales, while continuing efficiency and cost control initiatives boosted margins. As a result, the segment's operating profit t jumped 22.7 percent to HK$25.8 million ($3 mm).
Despite $38 million in orders from New Era last year, Manufacturing sales fell 3 percent to approximately $106 million in 2014 due primarily to labor shortages at the Shenzhen factory.
San Diego Hat Co. turns around
Sales at the Trading Business, which focuses on marketing and selling the company's brands overseas, grew 12.7 percent to HK$ 118.0 million ($15 mm), principally as a result of “the outstanding performance” of U.S. e-tailer San Diego Hat Co. (SDHC) and DPI, a European sales and marketing subsidiary.
Segmental gross profit climbed 19.8 percent to HK$41.4 million ($5 mm), thanks largely to fewer clearance sales and markdowns. Mainland attributed the improvement to increasing market penetration and consumer acceptance in the United States and Europe. Segment operating profit grew more than ten-fold to HK$7.60 million ($1 mm), reflecting a turnaround at SDHC, which turned in an operating profit.
SDHC continued to enrich its product mix by offering a wide range of accessories such as handbags and scarves, while DPI secured new headwear license rights of well-known cartoon characters, which are expected to fuel growth.
Headwear revenues plunge as company trims Chinese retail network
Mainland reported sales of headwear through its retail network in China and Hong Kong plunged 31.6 percent to HK$11.0 million ($1 mm) in the first half amid deteriorating retail conditions. Still, the segment was able to reduce its operating loss by 48.5 percent to HK$768,000 ($100,000) by closing underperforming, self-owned stores in the PRC where it sells NOP and New Era headwear.
As of June 30, 2015, the Group owned and operated nine NOP stores and franchised 13 others, compared with 12 and 20 a year ago. It also operated 1 New Era store, the same as a year ago.
Shift to Bangladesh, franchised retailers to continue
Executives said the Group will continue to expand the Bangladesh factory to meet robust demand for its products.
Executives noted that the Bangladesh factory has entered “the harvest stage.”
“With the greater production capacity and the maturing production skills of the workers, the Bangladesh factory is now capable of handling the orders of customers for mid-range to high-end products,” the company reported.
Mainland expects production capacity at the factory to increase to 2 million pieces of headwear each month by year's end and said it is shifting resources to Bangladesh to maximize performance.
At the Trading Business, SDHC, U.S. based H3 Sportgear and DPI are expected to continue to see steady growth. H3 and DPI will strive to explore wider license rights of headwear, while SDHC will continue to add accessory collections such as apparel, handbags and scarves and capitalize on DPI’s platform to enlarge its market share in Europe.
As for the Retail Business, the Group will continue to reduce the number of its self-owned stores and focus on shifting to a franchise model, particularly in the PRC, where it sells products under licensed or imported directly from Sanrio, the Japanese company that owns Hello Kitty and other trademarks. In the second half of the year, Sanrio will launch promotions at shopping malls in the PRC to build its brand and drive more traffic to those stores.
