Li Ning Company Limited (2331) Earnings Call Transcript & Summary

[Interpreted] Investors, good morning. Welcome to Li Ning's 2020 Interim Results Presentation. This meeting is conducted in the form of webcast and conference call, and you will be able to read the PPTs or the webcast as well. And we offer simultaneous interpretation as well as the floor channel for your choice. And the information will be uploaded to the Investor Relations section of Li Ning's website. Let me introduce to you our management. Mr. Li Ning, Chairman and Executive Director; and joint CFO, Mr. Tsang. First of all, Mr. Tsang, CFO, will go through a financial overview. After that, Mr. Li Ning will talk about the strategic direction. And then our joint CEO will go through the growth in profits. After that, there will be Q&A. Now may I pass the floor to management.

Welcome, everyone. First off, I want to highlight the fact that all discussions we're going to have in this presentation exclude the impact of the one-off nonoperating income in the amount of CNY 234 million recorded during first half of 2019. Financially, while we are not exempted from the negative impact COVID-19 has been created to the business, but as set in our last earnings release in March, we are confident of achieving net profit margin improvement even under the impact of COVID-19 because of our scalable cost structure, our continued elevated brand positioning and what we have done in advance of the COVID-19. Consequently, we were able to achieve a net profit margin improvement of 210 basis points to reach 11.1%, even with our revenues down 1.2%. Such improvement was mainly driven by 1.5 points in expense ratio reduction as well as increase in government grant and interest income while holding our gross margin relatively flat under a very promotional retail environment. As expected, our operating cash flow declined 65%. But the key is we were able to achieve positive operating cash flow in the amount of CNY 479 million even with COVID-19 impacting negatively on the retail sell-through. Our net cash increased 22% to CNY 5.76 billion compared to same period last year. In addition, we were able to maintain a healthy working capital structure even under such time. Our gross average working capital was down 7%, mitigating the negative impact of the 1.2% revenue decline. Our cash conversion cycle improved by 2 days to 30 days. Operationally, the COVID-19 had made its presence felt in all KPIs. Notably, a low-teens decline in total platform retail sales including both online and offline channels for the Li Ning core brand. While our channel and company inventory increased low-teens and mid-teens, respectively, it's considered within a tolerable level in view of the negative impact on retail sell-through during majority of first half, and the recovery rate is behind expectation. Our offline new product performance impacted by the challenged and promotional retail environment, down mid-teens, driven by volume decline. Average selling price registered a low single-digit increase as low-teens increase in our MSRP or tag price was largely offset by about 6 points half year discount performance. New product 6-month sell-out rate declined by over 6 points while 3-month sell-out rate down approximately 5 points as compared to the same period of 2019 on a weighted average basis. Clearly, you can see the impact of COVID-19 had created a very challenging retail environment in the first half. Now let's take a look at the revenues. During first half of 2020, our revenues declined 1%, impacted by 4% drop in apparel and flat in footwear. Our balanced channel strategy for Li Ning core between wholesale and the direct-to-consumer channels, which also known as the DTC has played a very important part at times like this. Specifically, it balanced the risk between channel and financial as well as working capital and P&L. The electronic commerce channel continued its growing trend over the past few years with sales revenue rose 23%, driving its contribution to 28% of the total from the previous 23%. Our wholesale rose 1%. And as mentioned in our March presentation, the initiatives we have rolled out since October of last year have put most of our wholesale partners in a better starting position before the COVID-19 impact. Hence, the revenue mix contributed from wholesale has increased from 48% to 50%. Direct retail declined 24% and its revenue mix dropped 7 points to 22% of total Li Ning corporate business. Nonetheless, the DTC, which is the direct-to-consumer segment, still account for 50% of Li Ning core brand revenues, giving us a balanced channel penetration. On the right-hand side of the slide, you can see that our sales from new products category aged 6 months or less improved by 2 points. As discussed in March presentation, we have taken precautionary measures in Q4 of 2019 to accelerate our inventory clearance rhythm, which in hindsight of the current COVID-19 situation, has proved to be a prudent move. Coming to the same-store sales performance. As there is no offline store that opened all 6 months during the first half of the year, hence, we will just discuss the Q2 performance. Our overall same-store sales decreased mid-single-digit during Q2. Our offline SSSG stood at low-teens decline, driven by high-teens decrease in direct retail and low-teens decline in the wholesale channel. Meanwhile, our online SSSG accelerated to mid-20s growth from Q2 -- for Q2 from low-teens increase in Q1. As far as channel strategy is concerned, the number of stores for total platform decreased by 311 as compared to June of 2019. The decline came from Li Ning core brand as LI-NING YOUNG is up 138 stores during the last 12 months. Due to the COVID-19 impact in the first half, we have accelerated the store closing rhythm and delayed store opening schedule. From the sell-through standpoint, as you can imagine, due to the COVID-19, our offline channels experienced a decline of 16%. And with the positive contribution from consistent e-commerce expansion strategy driving a low 20s growth, the total online and offline sell-through decline narrowed to 11%. Our offline channel decline is all driven by unit decrease as our average selling price, also known as ASP, actually stayed flat even with such heavy promotion environment. As mentioned during March presentation, we have a high single-digit to low-teens increase in our MSRP or tag price for the 2020 H1 new products, which enable us to mitigate some extent of the deepened discount on both new and old product impact to our sell-through amount. Wholesales of Li Ning brand, excluding international and LI-NING YOUNG, saw a 3% increase, with the number of store decreased 309 over the same period last year. Excluding specialty wholesalers for badminton and soccer, our sell-in was up by 1%, as low-teens increase in our new product MSRP was largely offset by high single-digit decline in unit sell-in. On the right-hand side of this slide, you can see our wholesale sell-through decline has been gradually narrowed, with high-teens decrease in Q1 to high single-digit decline in Q2. For more current view, I brought up this next slide from Appendix 3, which show the Q3 to date trend further narrowed to mid-single digit. Please note that Q3 comparison is on a very high base that third quarter last year registered a mid-30s growth in sell-through. However, I must add that being the sporadic recurrence of the infected cases, the sell-through trend to date can change in a heartbeat. At times like this, sell-through usually trail selling trend as you will need increase in sell-in to drive the sell-through in order to fully capitalize on the recovery. Nonetheless, as we always said, we manage our wholesale business with a sell-through focus, and we will keep striving to maintain the balance between sell-in and sell-through to ensure channel inventory is in a healthy state once the short-term negative impact is worked through the channel. As far as trade fair order concerned. Orders for the fourth quarter 2020, excluding LI-NING YOUNG and China Li Ning, reached a mid- single-digit growth. This is expected at times like this as distributors will be committing less upfront and leave more open to buy resource at the replenishment level, which is already the trend before the COVID-19. With COVID-19 impact, the order trend will further become irrelevant to what the actual selling revenues trend to be. Hence, starting from 2021 orders, we will not be disclosing the trade fair results. Moving on to retail channel. The revenues of directly managed stores declined by 24% with 140 stores less in ending store count compared with same period in 2019. Our direct retail sales were impacted heavier versus our wholesale business from the COVID-19 as almost 85% of the store base in direct retail is in the Metro and higher-tier cities, which were the more severe impacted part of the country in terms of traffic decline. This is visible from the right-hand side of the slide, where we have plotted the daily footfall decline in our higher-tier and lower-tier city stores, along with the sell-through decline. You can clearly see the higher-tier cities' average daily footfall recovery has been trailing that of the lower tier. Please note that the average daily footfall data is based on the stores where we have installed the traffic tracker system and is for directional purpose only. We try to mitigate the negative impact on store profitability resulting from the 24% sales decline and gross margin erosion due to the heavier discount environment through managing our controllable expense and negotiating on the fixed rental expenses. As a result, our store profit margin reduced from high-teens to high single-digit in the comparable period. The next slide, I brought up from Appendix 4, will give you a sense of the direct retail sell-through direction of third quarter to date. While the road to recovery continue, it's still trailing last year amid the sporadic recurrence of the infected cases in Beijing, Xinjiang and northeastern part of the country, which is still affecting the store traffic. Turning to gross margin. Our gross margin remained relatively flat, notwithstanding a very promotional environment. The 0.2 percentage point decline was driven by improvement in wholesale gross margin that was attributable to a low-teens increase in MSRP or tag price of our new product due partially from a low to mid-single-digit increase in our initial markup, which is also known as IMU. In addition, the improvement of new and old product mix in our sell-in revenues also drive the increase. Together, they contribute 1.4 percentage points. As said in our prior discussions, our old product clearance is more prioritized in our direct retail channels. Hence, somewhat positive margin impact from our new own mix in our wholesale sell-in is offset in our direct retail channel. Speaking of retail, heavier discounts on both new and old products sell-through for our direct retail negatively impacted 0.6 percentage points. Dilution in channel mix due to higher decline in revenues from direct retail, which has the highest gross margin, deducting 0.6 percentage points. Additions in inventory provision due to higher inventory, deducting 0.4 percentage points. Before moving on to next slide, I just want to comment on the increase in our IMU as it plays an important part of the channel economics. IMU basically represents the markup from our cost to tag price or MSRP. Under a normal discount environment, the increase in IMU is driven by brand and product elevation, as in our case, the past 2 years, basically expand the gross profit chain in the channel. Simply put, it increases the sell-in revenues and gross margin rate for us as well as increasing the gross profit per unit for the distributors. Under a very promotional environment as seen in the first half, it still gives a better starting position for our partners to mitigate some extent of the deepened discount. Now let me walk you through the profitability analysis. Driven by small decrease in revenues and gross margin rate, we saw a CNY 51 million decline in gross profit. As far as expenses are concerned, we carry out disciplined cost control and variable cost to ensure better leverages. This is even more important when revenue experience decline. As you can see from this slide, the total sales related variable costs such as commissions, direct store expenses as well as logistic costs decreased a total of CNY 27 million, offsetting more than 50% of the CNY 51 million decline in gross profit. With the cost control initiatives we put in place, the platform expenses decreased CNY 91 million, driven by staff costs, travel and entertainment as well as consulting fees reduction. Our advertising and promotion expenses basically stayed flat and stand at 9% of revenues, literally unchanged to 8.9% of revenue in H1 of last year. As you can see, our cost reduction initiatives focus mainly on nonbrand-related expenses as we want to make sure we are well positioned to capitalize on the recovery trend. Other income and interest increased CNY 93 million, mainly due to increase in government grant and increase in interest income due to higher net cash during the comparable period. As a result, our operating margin improved from 11.4% in 2019 to 14.5% in 2020 after adjusted for the one-off nonoperating goodwill provision in 2019. Consequently, our net margin improved by 2.1 percentage points to 11.1% from the 9% last year. Moving on to channel inventory. Our channel inventory increased low-teens in relative to low-teens decrease in retail sell-through. Consequently, as expected, our inventory turnover cycle exhibited a negative comparison. On the left-hand side of the slide, the red line you see is based on our traditional rolling 12-month average sell-through calculation, which would not reflect the negative impact because of a very strong retail sell-through experienced during second half of last year. Therefore, we have inserted a gray line this time to show the short-term impact, which is based on a 6-month sell-through calculation. As expected, the inventory month comparison has increased to 5.4 months compared to a revised 4.6 months in the first half of 2019 under this method. While this is the first time we saw an increase since 4 years ago, we believe we have mitigated some extent of the epidemic impact affecting heavily on the channel retail sell-through during first half while we try to balance the protection of brand positioning. With the COVID-19 impact affecting the sell-out performance for our Q4 products, the proportion of inventory aged between 7 to 12 month category increased to 17% from 14% a year ago. We have set up straight inventory initiatives with the goal to further mitigate the impact by the end of the year without limiting our ability to capitalize on the recovery trend. At the company level, our gross inventory rose 14% compared to a 1% decline in revenues. The proportion of inventory aged less than 6 months declined 3% points to 69% from 72% in the comparable period last year. As you can see, this aging structure trend resembled the channel inventory which reflected the short-term impact from the COVID-19. As far as trade receivables are concerned. Our gross trade receivable increased by 3%, which corresponds to the 3% revenue increase from the wholesale business as seen before. Notwithstanding the negative impact of the COVID-19, our days sales outstanding continue on the improving trend, shortened by 2 days. Particularly when you look at the aging structure, our current mix improved from 61% a year ago to 73%. As I said back in March presentation, while no one is exempted from the negative impact from the epidemic, what we have done before the COVID-19 has made a difference to the starting position of ourselves as well as our distributor partners. We will be monitoring the wholesaler sell-through recovery trend in the next few months and make sure enough support is granted. But as you can see, we have sufficient resource, both financially and operationally. As far as working capital efficiency is concerned, our working capital remained at a very healthy level. Gross average working capital was down by 7% to support a 1% down in revenue. The working capital as a percentage of our revenue declined by 1 point to 10%, giving us sufficient resource to weather through the epidemic as well as capitalize on the full recovery. The COVID-19 negative impact on our retail sell-through has taken a toll on our operating cash flow. Nonetheless, while it declined 65% compared to same period last year, we managed to achieve positive operating cash flow of CNY 479 million. Consequently, our net cash improved by CNY 1.04 billion to CNY 5.76 billion compared to CNY 4.72 billion at the same period last year. This cash balance not only has given us a strong buffer in facing the current COVID-19 situation, it also allow us to better prepare to capture the business rebound once the virus situation is totally under control. Looking back on the first half, we are encouraged with our financial performance, notwithstanding with such a severe impact to the retail landscape. As seen in the closed-loop slide, majority of our important KPIs has been negatively impacted, ranged from sell-through, sell-out and sales efficiency. Nonetheless, as we said during March presentation, there are a couple of things that we have done before the COVID-19 impact that allow us to weather through the negative impact in the retail landscape and delivered an improved financial results. First, we have started and funded the inventory optimization initiative last October, putting our channel inventory and our distributor partners in a better starting position before the virus. Second, capitalizing on our brand elevation. We have continued to increase our IMU as well as elevating our product pricing structure giving us a low-teens increase in our MSRP or tag price, if you will. Third, our scalable cost structure also gives us the ability to implement productive cost-cutting in a very short, responsive time frame. Fourth, our more than healthy working capital structure has come in handy during these times. Collectively, these factors allow us to deliver a satisfactory profit and loss statement, reasonable balance sheet with good working capital and ample net cash. More importantly, while we cannot control the COVID-19 impact, we have mitigated the severe impact to a controllable challenge. Of course, the recovery has been slower than most people expected, and there are still lots of uncertainty because of the recent sporadic outburst in various cities in China as well as the rest of the world. Hence, we are taking a very cautious approach for the full year of 2020. We are looking at a flat to mid-single-digit growth in top line, and a baseline net profit margin of 10.5%, which represent at least 140 basis points improvement over 2019. And now Chairman will walk you through our strategic direction. Thank you.

[Interpreted] Ladies and gentlemen, greetings to you. Let me now give you an introduction about our company's strategic operation. In the first half of the year, because of the epidemic, it had impacted negatively the economy. However, at the same time, the national health awareness had been strengthened and heightened. And also, the epidemic had created the stay-at-home economy, bringing on a bonus to the e-commerce operators. And therefore, our company had been actively exploring the new retail business. And as the epidemic situation stabilized and with the support of the state policies, we believe the sports industry in the long term is continue to be positive. For our corporation, we have adhered to the strategy of single brand, multi-categories and diversified channels. We have been focused on professional sports brands. And at the same time, we have been exploring into casual and fashion to strengthen our core competency for our products and also for our brand name. During this period, there had been challenges brought on by external environment. Our 5 core categories in terms of retail sell-through compared to same period last year had dropped by 11%. During the epidemic, there have been great restrictions in terms of going out and also in doing sports for the people. And as a result of that, functional and professional category sales greatly -- were greatly affected. However, for sports casual and fashion, there had been good resilience, recording a 12% retail sell-through. With the situation of the epidemic now, it is still fluctuating and will take time for the channels to recover. But we are fully confident for our Li Ning brand in the long term. Now let's talk about the different categories. First of all, for basketball, we continue to focus on our functional technology, leading the basketball culture. And we continue to strengthen our products and also the competitiveness. And we also focus on looks and design, which is also important for the professional basketball shoes. For marketing, we continue to work together with the CBA games and also the signed players for NBA to increase our sales and also to fully utilize our cross-sector resources so as to increase the exposure for our basketball products. For basketball culture, we continue to utilize the BADFIVE and redefine the street basketball image and, at the same time, create what's fashionable and cool to make it highly popular and relevant to our young consumers. Now for running. For the longest time, we have been focused on the runners' demands and needs with the aim of providing excellent product experience for our professional runners. And all along, we have been focused on building a world first-class running shoes matrix. And we have been focused on strengthening the awareness and the knowledge of consumers for our running shoes image. Recently, for our running shoes, we have added one more member. And that is to say, if you look at the PPT on the left-hand side, you'll see a photo there. And this is Shadow, our professional protective-grade running shoes. It -- on the one hand, we have the double technology of Li Ning Boom. And at the same time, we have the new technology platform of LI-NING YOUNG. And these together greatly increase the shock absorption and also the bounce for our running shoes. And it is really a heightening of the performance of the shoes. As for the mass market, we continue to extend the classics, the Super Lights and also the [ Lin Lan ]. These are the classic running shoes. And at the same time, we develop and showcase fashionable and young series and also to increase our exposure during the fashion week so as to further increase exposure of our product image. As for training category, we continue to provide as a core, our sports functionality. And also through technological innovation, we resolved multiple sports scenarios' needs. And also, we raised the product experience as well. And we also engage the women's sector. We haven't done enough even though we have continued to communicate with women consumers. But in the future, we will want to raise the competitiveness in this area so as to focus on the women's sector to create an all position product exposure. As for sports casual. In this category, we pursue a trendy taxonomy so as to interpret the younger and also trendier sports value. Our sports gene of Li Ning and Chinese culture elements and also fashion and trendy, we want to be able to organically integrate all these so as to express the characteristics and idiosyncrasies of the Li Ning brand. And we have also worked together on the rhythms of the time. That is at different times, such as the Chinese New Year, revival of work, et cetera, we have come up with story packages to attract the consumers' attention for our brand names on a continued basis. And we have deeply cultivated our fan economy with signed stars. We have signed up new and young spokesperson and also cooperated with a number of quality young artists to further extend our influence and also our brand name volume. And further, we continue to focus on the women's sector and also on international resources exploration so as to strengthen our Li Ning brand among the different consumer groups and also to increase our influence in the fashionable and trendy realm. As for brand marketing, we continue to focus on the professional, working together for the longest time with CBA. The cooperation had been good. In the first half of the year, because of the epidemic and with the cessation or suspension of competitions and events, we have explored new ways of marketing. For example, in badminton category, we mobilized star players to form champion teams. And also, we have staged livestreaming performances so as to very flexibly use digital methods to continue to attract attention of the consumers and to strengthen our brand name in exposure and influence. For brand marketing crossover, we continue to be creative and explore diversified resources in the first half of the year. Together with QQ Dance, we have created an idol, an AR idol to promote our products. And also this year, we are working together with the Dunhuang Museum to provide e-commerce products. And this is individualized product designs with historical elements, and it's widely well acclaimed by the consumer community. And this year is also the 30th anniversary of our brand. And along with this theme, we have this year for Digital Paris Men's Fashion Week, we have this short video that we have shown. If you are interested, you are able to click on the right-hand side, right-hand bottom of the screen, and you'll be able to see this video. It's been 30 years for our brand. There had been various challenges and we have grasped opportunities, and we have overcome major challenges. Our brand name, in our DNA, it is a competition and sports gene. We are stemmed from sports. We love sports. And this passion allow us to dare to think and dare to compete, and we never say die. And this is the spirit. And on the competitive grounds, the fields, we continue to bring on gold medals and further performance. And next, I will ask our CEO to further share with you about our future. Thank you very much.

[Interpreted] Good morning to you. I am Qian Wei. Because of the epidemic situation, I'm not able to come to the venue to communicate with you, and I am only able to report to you on the phone. Please accept my apologies. Today, I want to report on 2 areas. The first area is still about the epidemic and its impact on the company and some of the measures that we have taken. The second area is about in March, we have talked about some strategic measures. I would like to talk to you about the progress of the execution of these measures. These are the 2 areas. First of all, as you all know, because of the epidemic which broke out in the early part of the year, it had impacted a number of industries. As the epidemic came under control in May, our performance had significantly recovered. However, after June, because of the fluctuations of the epidemic situation in certain cities, the traffic recovery had slowed down. And therefore, we are looking at uncertainties with regards to the epidemic situation. And because of this, the company will continue to be steadfast in controlling our costs, exploring new streams of income and also controlling our inventories. In opening up new sources, we continue to use every opportunity presented to us online and off-line to maximize our business opportunities and, at the same time, control our costs. For each item of cost, we continue to reassess and adjust them so as to effectively control costs. In the second half of the year, there will still be fluctuations and the epidemic will become a normalized situation. We will be very cautious in making full preparation for this uncertainty and maximize on our business opportunities, at the same time, control every item of our costs and expenses. For inventory control. As we have said in March, we will, with good timing, control our inventory to a controllable level. In the first half of the year, cost control had been effective. For inventory control, it is still in progress. We will try our best to ensure that within this year, our inventory will be effectively controlled. The epidemic had given us an opportunity to reexamine ourselves. This is a very good opportunity in terms of reassessing our cost control and inventory control. Even after the epidemic, we'll continue to do so to raise our efficiency of operation and lower risk. Overall, this year, there are still uncertainties in the market. But we will continue to be steadfast to raise the operation efficiency to be higher than that of last year. And also, we will try our best for the entire year to achieve net profit margin of over 10.5%. And next, I would like to talk to you about the past few months, what we are doing to pave the way for our future development, some of the progress we have achieved. As we have mentioned in March, we want Li Ning to become a fit and muscle-type corporation so that we are able to continuously develop and raise our profitability. This is the direction of our transformation. We will continue to focus on the market, on consumers, on products and also on sales funnel so that we will, in 6 areas, continue to raise our efficiency: in operation, in inventory, in-store operation channel, cost control and also in our organization structure. Now let us talk about different areas. First of all, for product strategy initiatives, we will continue to raise the efficiency of our product operation. We will have planned sales planning and also rationale our product inventory and also to achieve efficient operation. In the past few months, we have in a number of areas, effective integration in product planning and development, in sales planning, in sales venue, marketing and also in inventory control. And we have built our headquarters platform for product sales. And also, the scale of business optimization and improvement had also been done. And also, we have developed a month and week units for our planning to support our wholesale and also direct sales business. For our products operation, we have compressed 20% of our styles. And also, we have increased 10% of our single-style depth so as to increase the product operation efficiency. This is to improve the efficiency of our product operation and also to integrate our product architecture. And also in the period, we have also developed our products to raise the supply chain efficiency. And also, in terms of our fabric types and patterns and also the color, they were integrated. And also for our major brand patterns, there had been integration for sizes as well to 50%. And also, there have been cross-sectors maximization. So as to optimize our size and also our patterns, we have lowered 10% -- to 10% our fabric types and also integrated our colors, et cetera, so as to lower to over 30% of our colors, so as to increase the accuracy and also the efficiency of our products. And this effort will continue. Now let us talk about channel expansion strategy initiatives. We continue to focus on single-store sell-through, profitability, efficiency and to extend our profit-making shops. In the past period of time, we have continued to develop our business through store design. And also, we have integrated our -- and increased the consistency and integration of our channel business. For wholesale and direct retail, at different levels of the market, we did planning. And for each new store, we did profit and loss assessment to make sure the profitability and efficiency of single store. And for store design, well, we also focus on business and business-oriented stores. So we have done some preparation for the early stage. And in the first half of the year, there was impact from the pandemic. So in relation to channel development, we had been very prudent. And for the low-efficiency loss-making stores, we accelerated store closing. And for new stores, we conducted very careful assessment, and there was deferment of new store opening. So in the first half of the year, number of store closures was higher than expected. For new openings, it is lower than our expectation. But then if you look at last year, on the comparable channel, there was also a decline. And so there is still a growth of 10% in the single store average area for our operation floor area. In the future, we'll continue to develop high-quality stores. That will be our channel development direction. So that is my report on channel expansion strategy. Now let me turn to omnichannel strategy. As we said in March, we integrated online and offline, and we continued to develop e-commerce business. This is a very important goal for us. In order to ensure integration of online channels in the past few months, various departments, categories, online channels that were spread over different places, they were consolidated onto one e-commerce business system. And then we are able to have effective resource sharing, and we're able to operate with consistent and unified plan. And now we are already able to integrate and unify online and offline business. In the first half of the year, through online/offline synergy, omnichannel strategy, O2O business and also our membership system, we have seen increase and improvements in the number of members. In the future, by means of online/offline integrated product, pricing, marketing channels, membership system and service, with this complete online/offline integration, we hope to be able to enhance operating efficiency of e-commerce. And at the same time, we can grow the scale of e-commerce business. Now let me turn to store operation strategy initiatives. Regarding store operation, our goal is to establish high efficiency, high effectiveness, single-store operating model with high productivity. And we hope that this system can be replicated to all channels so as to improve operating efficiency on the whole. In the past few months, we put in place some initiatives. We adjusted the operating architecture of sales system. So we separated wholesale and direct retail business, and we built a wholesale team and direct retail team. We will continue to strengthen and optimize our wholesale business. And we will focus on single-store operation model for direct retail at the same time. And there are different functional departments at the head office. We want to motivate the first-tier salespeople's participation in the business. So every week, there is business presentation, proposal and business review. And we shortened the distance between the frontline salespeople and the headquarters, so that various departments can grab business opportunities as soon as possible and identify business solutions. So in other words, our focus is on the sales floor. And with the frontline people taking active part in business building, we hope to be able to identify more business opportunities and to maximize single-store productivity. In the first half of the year, our direct retail business accounted for 80% of business in Super Tier 1, Tier 1 and Tier 2 markets. These markets were more affected by the pandemic. And comparing with the same period of last year, there was a big decline in footfall, in sell-through rates as well as conversion rate. And we hope to be able to improve the situation. And right now, in our weekly KPIs and business review, we are trying our best to improve the results. We focus on single-store operation efficiency and operation. At the same time, the store managers will have to change their functional focus more towards business building. So these are some initiatives that we have put in place in terms of store operation. Now let me turn to supply chain strategies. Regarding supply chain, we achieved the transition from passive to proactive production. That's our goal and we already made that point in March. In order to enhance supply chain efficiency in the past few months, first of all, we integrated the supply chain system structure, so from a decentralized to a centralized arrangement. So it has been a cross-product, cross-category integration of our supply system. That is, for the categories of shoes, clothes, et cetera, we have been more planned. And also with the integration, we have been able to increase efficiency operation. For example, for supply chain for a number of areas, including for e-commerce and other business units, we have been able to integrate our supply chain so as to lower our cost and to provide the platform. After integration for our supply, we -- in terms of the quality, the certainty of delivery and also cost, we will be further optimizing this. We will continue to work on this. And also on the supplier structure and matrix, it is further being optimized. We want strong and flexible suppliers. That is our goal. For our existing suppliers, we evaluate them and we optimize them. We bring in new entrants and there are exits. There is this system, so as to ensure that the company's products can be raised in the quality and also be supplied on a consistent and stable basis. And compared to the same period of last year, we have exited 30% or over 30% of our suppliers. We have exited the small scale, small resources, unstable delivery suppliers so as to optimize our core suppliers. And at the same time, we have extended our resources for continued strategic cooperation with the suppliers. We continue to raise and optimize this. And also, we continue to strengthen our product research and development. We have, in the area of shoes and also clothes, set up our new and innovation development center to strengthen our capabilities in new products research and also to focus on the services for our consumers and to provide better products. As I've mentioned, we continue to work on the basis of the past few months. But because of the epidemic, the market is uncertain. So we will continue to be cautious and serious and our attitude in meeting with the situation. And we would want to be well prepared for the future, to open up new sources of income to increase our operation efficiency and to cut costs. These are very important for the second half of our operation. This ends my report. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]