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

Investors, good morning. Welcome to Li Ning Company Limited's 2023 Annual Results Announcement. Let me first introduce to you our management on stage: Executive Chairman and Joint CEO, Mr. Li Ning; Executive Director and Joint CEO, Mr. Qian Wei; Group Vice President and CFO, Mr. Zhao Dong Sheng. In today's session, Mr. Zhao will first present the 2023 full year financial review and then there will be a strategic direction introduction followed by outlook and then there will be a Q&A session. Let me pass the floor to Mr. Zhao.

Good morning, everyone. I am Zhao Dong Sheng. Now I will review our company's financial position in 2023 with you. In 2023, we actively carried out business layout, controlled opportunities and risks and we made progress while maintaining stability. We finally achieved the following operating results. Financially, our revenue was up 7%, reaching RMB 27.598 billion, gross profit margin was 48.4%, remaining flat year-on-year. In the volatile market environment, we prudently controlled expense investment while focusing on investment and layouts to drive long-term business growth. Adding government subsidies and reductions in other nonoperating income, the final net profit was RMB 3.187 billion. After deducting onetime off income unrelated to operations, net profit was RMB 3.046 billion. Net profit margin, 11%. Overall funding position is efficient. Operating cash flow rose 19.8% to RMB 4.688 billion. Average working capital to revenue ratio is 7.6%. Cash conversion cycle, 35 days, maintaining at a healthy level. The Board of Directors recommended final dividend of RMB 0.1854 per share, together with the paid interim dividend of RMB 0.3620 per share, full year dividend is RMB 0.5474 per share. Dividend payout rate increased from 30% in the same period last year to 45%. So we have increased shareholders' returns. In terms of operations, Li Ning's core brands, retail sell-through achieved year-on-year growth in all channels in the lows, 10% to 20%. Despite challenges faced by the retail environment, offline new product retail sell-through still achieved a growth of low teens. At the end of the year, omnichannel inventory amount decreased by mid-single digit year-on-year. Omnichannel inventory to sales ratio, 3.6 months, which was further improved year-on-year at the end of the previous year. During the year, our revenue was up 7% year-on-year, thanks to the strategic focus on professional categories. Footwear revenue accounted for 49%, a stable and healthy level. In the volatile market environment, Li Ning brand adheres to the channel strategy of balanced development. The balanced proportion of wholesale and D2C helps us better balance the opportunities and risks between channels and finance as well as operating funds and profit and loss. Overall, the proportion of channel sales remains stable and healthy as the pandemic eases and people's lives gradually returned to normal, online shopping becomes less popular. Proportion of e-commerce revenue dropped 2 percentage points to 29%. And direct retail revenue increases in share by 5 percentage points to 26%. In order to help dealers or distributors relieve terminal pressure and ensure further improvement of channel health we reduced distributor shipments, reducing proportion of wholesale revenue by 3 points to 45%. For offline sell-through, new products within 6 months, 87%, a healthy level. For same-store performance in 2023 for all channels, same-store sales came down low single digits. Offline same-store sales increased low single digit; e-commerce same-store sales decreased high single digit. First quarter same-store pressure mainly came from the negative impact of the pandemic on the consumer side at the beginning of the year. In Q2 and 3 off-line stores gradually recovered, but consumption recovery was not as good as expected causing same-store pressure to continue. E-commerce was affected by temporary changes in consumer channel choices after the pandemic. and same-store sales faced greater challenge. In Q4, based on the low base of the pandemic in the same period, same-store sales growth was relatively high. In particular, the outlet direct retail channel recovered very fast, which drove overall same-store growth quite significantly. Overall, weak consumption recovery environment still posed greater challenges to same-store growth. In terms of channel development, in 2023, a number of channels, number of POS totaled 7,668, an increase of 65 compared with same period in 2022, Li Ning core brand stores decreased by 55, Li Ning Young stores increased by 120. In the challenging environment Li Ning's core brand has expanded its core business areas and optimized our layout. Although the number of core brand stores has slightly decreased low single-digit year-on-year, total sales area of stores and average area of single store have increased a mid-single digit year-on-year. Overall sell-through increased 10% to 20% low range and e-commerce sell-through achieved low single-digit growth. Offline sell-through increased low teens year-on-year, average unit price or unit average selling price increased mid-single digit. Sales volume increased high single digit. Li Ning brand wholesale business, excluding international market and Li Ning Young business, annual revenue was slightly up 1% year-on-year. Number of stores was down 123. In order to ensure efficient collaboration of terminal business, we optimized product structure of professional channels and controlled business scale of professional channels. At the same time, for the sake of channel health, we reduced distributor sell-in, in the second half of the year. Excluding professional channel shipments, wholesale revenue increased low single digit. Year-on-year wholesale sell-through growth, low teens, much faster than the growth of wholesale revenue. In the long term, we'll continue to empower distributors and improve retail operation efficiency to promote healthy development and suitable growth of channels. Direct Retail revenue was up 29% year-on-year. Number of stores was up 68. As shown in the revenue change analysis chart, direct retail revenue growth was mainly contributed by new stores and same-store growth. Even though the consumption environment is not as good as expected, we strive to improve business performance of same stores sales through direct retail channels by continuously strengthening our retail operation capabilities. And we are operating -- opening new stores in core business districts to promote revenue growth. During the year, gross profit margin remained at 48.4%, flat year-on-year. The main factors are as follows: one, GP margin of direct retail channel due to the optimization of retail efficiency and improvement of discount, the group's gross profit margin increased 0.2 percentage points; two, GP margin of e-commerce channels was down 0.8 percentage points due to intensified promotion competition and deepened discounting; three, proportion of DTC channel has increased driving GP margin to increase by 0.4 percentage points; four, channel structure of other business units improved, driving GP margin to increase by 0.2 percentage points. The 7% revenue growth resulted in an increase in gross profit of RMB 867 million. In terms of expenses we promote better long-term investment returns through strategic expense investment and control. Sales related non-fixed expenses such as direct retail store fees, platform competitions, logistics expenses increased RMB 1.531 billion, mainly due to the expansion of direct retail stores in core business districts, which increased store expenses. Advertising and marketing expenses increased by RMB 217 million. Expense ratio was up 0.2 percentage points to 9%. Increase in marketing expenses was mainly due to the increase in promotion and promotion expenses driven by recovery of sell-through. In addition, increase in staff costs and R&D expenses, recovery of daily expenses such as travel after the pandemic, depreciation of assets and increase in taxes and fees caused by income growth, et cetera, led to increase in other platform expenses of RMB 213 million. Other income, down RMB 65 million due to increase -- due to decrease in other nonoperating income, such as government subsidies. Overall, the group's operating profit margin dropped 6 percentage points from 18.9% in the same period last year to 12.9%. Net profit margin dropped 4.2 percentage points from 15.7% in the same period last year to 11.5%. Under strict channel inventory management, total channel inventory dropped by mid-single digit year-on-year in 2023. Omnichannel inventory turnover months is 3.6 months. And inventory age structure remains stable and at a healthy level. In the future, we'll continue to implement rigorous inventory management measures to ensure inventory turnover efficiency and inventory aging structure to be healthy in the long term. In terms of our inventory, in 2023, pre-provision inventory costs increased by 3% year-on-year compared with 7% revenue growth, the increase is reasonable and overall inventory is healthy. Our inventory age structure shows that proportion of new product inventory within 6 months is stable at 80%. Healthy age structure is an important foundation for supporting healthy and sustained growth of the business. We believe that through continuous improvement of merchandise efficiency and operational efficiency, there will be more opportunities in the future. Trade receivables comparing with a 7% increase in revenue, our pre-provision trade receivables increased by 6%. Trade receivable turnover days increased to 15, which is a reasonable and healthy level. As shown in the right chart, proportion of trade receivables within 90 days increased from 84% in the same period last year to 86%. And based on our past support for strategic partners and the joint effort of both parties, we optimized channel efficiency with our partners management. And overall business situation is healthier. In the future, we'll continue to maintain strategic support for our partners to promote win-win between both parties. In terms of working capital efficiency, our working capital remains at a healthy level. Working capital accounted for 8% of annualized revenue giving us sufficient resources to drive business growth. Our cash flow from operating activities was abundant, rising 19.8% to RMB 4.688 billion. Our net cash decreased by RMB 1.074 billion from same period last year to RMB 17.976 billion. Adequate cash reserve enables us to better manage pressure and risk in the face of complex retail environment and also allows us to be in a better position to effectively seize new business growth opportunities in the future. At present, the Chinese economy maintains basic trend of recovery, but it is also facing a challenge of weak consumer demand and expectations. For 2024, we insist on stable operation and being practical. We believe that the whole year revenue will grow mid-single digit and net profit will be a low teen or low single digit. At the same time, we believe in the long-term development of China sports footwear and apparel industry, and we believe that Li Ning brand will continue to have growth momentum. That's all in my financial presentation. I will now defer to the Chairman to introduce to you key strategic directions for 2023. Thank you.

Thank you. Good morning. I will make a review of our 2023 strategies. In 2023, with the gradual recovery of domestic economy and social activities, the consumer market will also enter the state of a gradual recovery. And the promotion of national policies to national health awareness has been significantly improved. The potential of sports consumption needs to be further released and the sports goods industry has broad prospects for development. And in 2023, the company focused on product quality improvements through increased investment in R&D to promote the simultaneous upgrading of product to functionality and fashion attributes. At the same time, the company paid close attention to retail operations and store optimization to deepen the value of Li Ning style experience. The company continues to focus on the strategy of a single brand multi-category and diversified channel plowing into professional sports brand accumulation product innovation and integrating the elements of sport trends to provide consumers with professional and fashionable sports products through a multi-categorical diversified channel matrix and strengthen the competitiveness of the brand and the products. In 2023, we focused on the 5 core categories of running, basketball, fitness, badminton, sports live, strengthen the brand's toughness with technological innovation, continuously improve product performance, strengthen the brand image happening and satisfy the growing sports needs of consumers. The specialty category continued to gain momentum during the year with the 5 core categories recording 12% growth in our new channel retail sales in 2023 and including a 40% increase in running and a 25% increase in fitness, driving the overall growth momentum. And we deeply cultivated the markets influence our professional running shoes build a mature professional product matrix and net various needs from an entry to advancement. And the ultralight and Rouge Rabbit and the Feidian exceeded 9 million pairs throughout the year, the cultivated sales volume of core IP Feidian 3 Challenger exceeded 1.3 million pairs throughout the year, becoming the phenomenal IP in carbon plate running shoes. Relying on the technology platform, we created a top speed running shoes, Feidian 3 Ultra to help easy to runners, win many awards. In February '24 Feidian 3 Ultra helped athletes created the fastest speed record in China's running shoes and China's running shoes officially entered the [ 203 ] era. In the second half of the year, we launched a new professional cross-country products. Dilu cross-country running shoes family officially entered the professional cross-country track. This further enriches Li Ning's running shoes matrix and it covers more consumer groups. Basketball category promotes professional attributes through technology platform. In the year, we launched Yushuai ULTRA professional basketball shoes, which are equipped with new carbon core power system to break through the conventional midsole structure and equipped with GCU ground control system to improve sports efficiency. In addition, Li Ning brand has been committed to promoting the development of Chinese use basketball. It has reached a 10-year strategic cooperation with the China Middle School Sports Association on Chinese primary and secondary school students campus basketball and has long supported the used CPA. We look forward to gathering all forces to build a diversified and professional growth platform and the stage for use of basketball. In terms of fitness, Men's Fitness further upgraded fabric technology to optimize the wearing experience, expand the core product categories to cover the crossing needs of a variety of people and things. Women's fitness insights, deep cultivation of products and the markets and the introduction of women's exclusive IP strengthened communication and contact with the women consumers. In the future, we will continue to build high-quality fitness equipment for multiple sports scenarios with functional technology as a core. The category of Sports Live takes into account both fashion and the sports attributes. Softest sports shoes were launched this year to precisely focused on the daily needs of the public for working and commuting. The sales of this series exceeded 1.5 million pairs this year. At the same time, we will continue to explore the culture of sports trends create a characteristic product through stories and original design with unique culture connotations and use popular IP to strengthen the differentiation advantage of Li Ning brand to attract young groups and break through the fierce market competition. In terms of brand marketing, we relied on sports stars and the professional events to strengthen brand exposure. And in basketball, marathon, badminton, table tennis and other fields, we continue to establish consumers professional knowledge of Li Ning's professional products. At the same time, we focus on upgrading and rejuvenating our brand image, attracting young consumers through cross-border co-branding looking up with entertainment resources and other means to strengthen our professional and useful brand awareness and further expanding the number of our consumer base. So that's all for the strategic direction of 2023. And let's welcome Qian Wei, CEO of the group to introduce the operation results of the company.

Thank you. Good morning investors. I'm Qian Wei. I'm going to make a summary of our an operation for 2023. In 2023, we focused on the departmental strategy of our core business. And in the face of a certain market environment, we drove out our business operation in orderly manner and we realized a revenue of RMB 27.598 billion, an increase of 7%. And the this direct retail business in 2023, a complete strategic channel layout and effective expansion and also driving the business steady growth. At the same time, in order to effectively control risks and the ensure the health of dealers, distributors operation, we took the initiative to reduce shipments to alleviate distributors operating pressure. E-commerce was influenced by the industrial environment. The revenue scale was slightly increased. Regrettably performance in 2023 fell out of our expectation, but the business is healthy and sound and the risks are manageable. In terms of merchandising operation, we continue to strengthen our operation and the management capability to enhance the efficiency of the merchandise operation. And we also continue to improve these low single digit. And by continuously strengthened merchandising planning system and integrating product and marketing and strengthen the merchandising retailing, we have continued to raise the discount rate of the new products to around 80% in 3 months, slight improvement year-on-year and maintained a healthy level of sell-out and with the new product sell-out rate of 70% to 80% in 6 months. And we also optimized our professional product matrix. And we are focused on the professional basketball shoes and running shoes product matrix. We have achieved a total sale of over 12 million pairs of professional running shoes and the basketball shoes in 2023. In the face of a challenging market, the group has achieved a good level of inventory management through continuous systematic management. Omnichannel inventory sales ratio of 3.6 months, inventory turnover efficiency is good. From the group's own inventory point of view, the company's inventory costs totaled RMB 2.628 billion, an increase of low single digit in line with the group's inventory management expectation. As of the end of 2023, 80% of the inventory was the 0 to 6-month range, 14% in the 7- to 12-month range and 6% in above a 12-month range. So this is offline, and we will continue to maintain this manageable inventory level. And in terms of the direct sale, the offline business is stable. The overall offline sell-through is stable. And the same store with a small increase in the offline is low single digits. And through the improvement of the management and it is a retail operation, the overall discount trend is stable. And also the average unit price increased medium single digit, and the linkage rate maintained flat. By the end of 2023, we have realized a 3-year high-level market channel layout. Focusing on the core cities, core business districts, core business bodies to achieve the expansion of large stores over 1,660 with an average area of 410 square meters. And then focusing on channel expansion and optimization, we have carried out precise planning and the key breakthroughs for the core commercial bodies across the country. And the occupancy rate of stores has increased to nearly 90% in 2023. And the channel expansion, single store efficiency improved and this in average store efficiency is also increased. We also accelerated the store inlet promoted the remodeling of old image stores and increased use of nice generation stores in the opening and remodeling of stores. And we -- a total of more than 230 new and upgraded stores have been opened with average monthly store efficiency of more than 500,000 in the future, focus on the improving operational efficiency. And in terms of the e-commerce, we also faced challenges in 2023 and the overall online platform declined. This is the main reason. The revenue didn't meet the expectation. So on one hand, through the group, integrated and marketing, we put through this traffic. On the other hand, we also reduced the retail discounts. And at the same time, we formulated this differentiated business strategies and to drive more traffic and the opportunities with a slight improvement in the business conversion rate year-on-year. In terms of [indiscernible], we continue to adjust commodity structure due to professional sports product matrix and is through the improvement of product power, channel resource integration to -- we achieved the retail indicator and the overall sales through increased significantly by 30% to 40% in the mid-teens and same-store sales growth of 10% to 20%. And by the end of the year, the number of [indiscernible] stores reached 1,428. The average store efficiency was increased by 20% to 30%. In the supply chain, we have strengthened this basic capacity of the supply chain, continue to strengthen the quality awareness of all staff and we also strengthened the synergy with the front-end commodity management, enhanced the rapid response capability, reduced inventory risk. And in terms of the shoes and apparel supply chain, we will focus on this streamlining of packaging and other means. At the same time, the group matches the high-quality supply resources and improve the layout of the supplier matrix and formulate a 3-year production capacity planning for strategic suppliers and increased the proportion of production, capacity of strategy supply. And we introduced the new supply resources of China LI-NING and LI-NING 1990 and other products. In addition, we continue to transform and innovate to build competitive advantage and upgrading and challenging the existing product development. And also, at the same time, we will promote the construction of the supplier information system based on the construction of the Li Ning's own supply chain information system, build entire supply chain upstream and downstream digital transformation. In the future and the guidance of the group's vision and the core values, we will adhere to the strategy of a single brand multi-category diversified channel. And we'll focus on the strategy of consolidating and stabilizing the business represented by basketball, running and sports live remodeling China LI-NING and LI-NING 1990 to make full adjustments and the preparation for the release for potential and focusing on the segments of the racetrack to attract women and other markets. At the same time, we are deeply cultivating the market, building a multidimensional channel network and improved efficiency of the high-level market. We hope through continuous adjustment, optimization and a deep cultivation, we can promote the enterprise to achieve long-term and sustainable growth. Thank you.