Topsports International Holdings Limited (6110) Earnings Call Transcript & Summary

Ladies and gentlemen, dear investors, I'm Fiona from Topsports IR team. I'd like to welcome you to join us for Topsports International Holdings Limited Operational Performance for Q3 fiscal year 2024 to 2025. Joining us here today are Rebecca, Head of the Capital Markets; and myself, too, from the IR team. Before we begin, please allow me to read the disclaimers as follows. The operational performance data contained in this announcement does not constitute, represent or identify a complete picture of the group's revenue or fiscal performance. The announcement has been prepared based on the group's unaudited operational data and is not based on the data audited or reviewed by the group's auditor. The information contained in this announcement is subject to modifications or adjustment. Shareholders or potential investors of the company are advised to exercise caution when dealing in the securities of the company. Please allow me to give an overview of our Q3 performance, and then Rebecca will answer your questions. As mentioned, we're still going to strategically prioritize our inventory management. As been said in October, we plan to utilize various scenarios combined with promotional activities in H2 of the fiscal year to improve our inventory positions by the end of this year. Our Q3 performance met expectation. As disclosed in the announcement, our pretax sales revenue, including wholesale and retail, declined by mid-single-digit number on a Y-o-Y basis. From a business model perspective, retail and wholesale trends are largely aligned, retail performing slightly better than wholesale. Regarding the retail sales performance, consistent with H1, overall retail sales continue to be driven by online channels. This aligned with our strategic priority of inventory management. Q3 includes major online shopping festivals, especially Double 11, whereas platform generally launched the promotional activities 1 to 2 weeks before than usual, so we capitalized on the online sales window during the quarter. This can help to register a double-digit Y-o-Y growth. Now overall online sales. Direct-to-consumer online sales accounted for approximately 40% of the total direct retail sales, showing sequential and year-on-year increase. Notably, Topsports flagship store ranked #1 among all sports footwear and apparel retail on Tmall Double 11 sales ranking. We can also see that in terms of the offline channel, foot traffic remained weakened during the quarter. The same-store traffic declined slight improvement compared with H1 of the year. Based upon our circumstances, our inventory management progress through Q3 has met expectation. Moving forward, we'll continue to collaborate with our brand partners to achieve planned inventory improvement by the end of the year. Regarding discounting, due to inventory clearance efforts and increased proportion of the online sales channel, the direct-to-retail discount rate deepened year-by-year during the quarter with the magnitude largely consistent with first half of this year. Regarding our retail channel, as of the Q3, the gross margin GSA has been directly operated store decrease by 4.4% on a Y-o-Y basis and 2.1% compared with the end of August. The net store reduction rate in Q3 was similar to Q1 and Q2. In response to the macroeconomic environment, we continue to accelerate the closure of the underperforming and loss-making stores. We're taking a practice approach of new store openings and innovation. By the end of November, the total store count decreased by high single digit Y-o-Y. As a decrease in the GFA was less pronounced than the decrease in store count, the average store size at Q3 end continued to show Y-o-Y growth. Well, in terms of the retail network development strategy, we're focusing on the omnichannel operation efficiency, implementing precision store openings, renovations and closures, finding the best way to develop our business to unleash the performance of the single store. To conclude our Q3 trend overview, Q3 performance was in line with our expectation. We are working very hard to continue with our strategic priorities. This also showcased our great efforts. Coming next, we're going to start the Q&A session.

I will hand over to the meeting coordinator to tell you how to start the Q&A session.

[Operator Instructions] Let's now welcome Wei Xiaopo from Citibank.

I have two questions. The first question is regarding Nike, and we can see that Nike is going to announce their performance in a few days. Nike also changed a new global CEO. So right after the interim results was announced, did you ever talk to the new CEO of Nike for market exchange and how they view China, the potential of the future market, the inventories, new product or any outlook in 2025? This is my first question. My second question. In the morning session, probably many of you already see the social retail business report. It seems that many companies have been pressured. Different companies actually help to review their offline retail network. Of course, we also see some innovation. So I'd like to ask Topsports, how you're going to consider your future offline retail network? Is there any innovation you can share with us?

Thank you. Thanks for Mr. Wei. Let me answer your question one by one. First of all, you mentioned about Nike and how did we talk to Nike. By the end of October, when we're announcing our H1 financial performance, I think I have already shared with many of you, for the new global CEO of Nike or its responsible person for the China team are actually being promoted from another job to be the responsible people of the China market, including Angela, who is in charge of the China market, who is now working as CEO and President of Greater China region of Nike and even its outdoor product line. So I think I have already shared with you in the October call regarding some of our comments on Nike. Jointly speaking, I do believe those Nike executives when they are in the new position, they're going to bring some new strengths and new experience to Nike. So right after discussing with the capital market in October, recently, we also met the new global CEO of Nike. A few days ago, he also made the first China visit after taking the position as the global CEO of Nike. We met each other and had some overall communication. So we actually built a very strong consensus on a few points. First of all, as we are talking to the new global CEO of Nike, we can still deeply feel that the brand owner attach great importance to China market. This is indeed a consensus made by Nike and by the partners in China. At the same time, we can also feel this new CEO is indeed very interested in tightening the corporation with retail partners, especially the omnichannel effective corporation. And I think we share some consensus here. Just now, you were also asking about the product. Actually, when we were discussing with each other, we also mentioned some consensus regarding product. Nike new executives also showcased their great commitment of professional sports product, especially in running segment and in outdoor segment. In the near future, Nike may have some new development. ACG is a new sub-brand for Nike. And I do believe this also greatly demonstrate Nike's commitment to China market in the outdoor environment and segment. Recently, you can also read some open public information or the news coverage. Nike actually hoped to further review its product line in running shoes. There are some new product metrics being released recently, especially for vibration [redemption], they have Structures, they have [Fima], and they also have another brand named Vomero. Those product lines will be used for the vibration-canceling supportive structures with very premiere product performance characteristics to take care of the needs for different runners. Well, recently, you can also notice, for the [indiscernible] organized in Shanghai, Nike also made a deep investment from the marketing perspective. By the end of November, Nike also invited [Fortjog] as a [running rental] [indiscernible] to come to Beijing and Guangzhou to join the Nike event. This is also the fourth Nike [active] China visit event. So as we were talking to the executives of Nike, I do feel we have a great consensus being made. We do hope that in the near future, no matter from the business strategy or from the product perspective, we do hope that we will be able to have more synergies to work with each other with more implementations of the actions being taken. We're talking about the second question, the offline retail network. I do feel that for this year, offline retail network has been pressured. As Fiona has already mentioned, in Q3 of our fiscal year, that is October, November and September, we do see some pressure in the offline channel. Even the store foot traffic is being improved compared with H1. But still, the overall performance is still negative. We look into the future, we are not going to be that pessimistic about the offline channel, the ecosystem, because I do believe sports is still a great market with omnichannel operations. The opportunities are still there. But for sure, offline channel, it's role is going to be transformed. Offline channel need to meet the nature of different brands, take care of the brand attribute, having a more precision and refined operation. While at the same time, for offline store, they should also have the online capacity, continue to drive the business growth by taking the omnichannel operation. And I do believe the impact of the single store should also further expand its influence and service range. I don't believe offline will be replaced by online because online to offline still going to have a very balanced development in the near future. So generally speaking, from the qualitative level, I do believe for the existing fiscal year or next fiscal year, or should I say, for this fiscal year, we have clearly remind all of you, and we're still going to have a good performance for offline retail network. In H2, our store closure, especially for offline store, will be no less of the H1 of this year. And until now, we still keep such a strategy and the plan in our mind. And I also shared with you, we're not going to be over pessimistic about the offline channel. If we take a look at the whole business operations, we'll still be less pessimistic. Well, for next year, we hope we're going to have a very stable store count in the offline channel. So Mr. Wei, that's my response to your two questions.

[Operator Instructions] Coming next, let's welcome Dustin from Morgan Stanley.

I'm Dustin. Rebecca, I have a question to you. And you mentioned for this quarter, you have a mid-single-digit sales reduction. I think in October, the management team provided us a guidance and said in fiscal year 2025, your sales is going to reduce by high single-digit number. Profit will be down by 35% to 45%, but it seems that Q3 performance was pretty good. So is it means that the e-commerce or the offline store performance is better than what you predicted in October? What would be the final profit? Do you believe the profit growth will decline less or performing better than what you estimated in October call? So I have three questions actually. Let me just name the question one by one.

Okay. Good. Let me respond to your first question. So Dustin, thank you very much. I think my colleague, Fiona, has already shared with all of you. We do see some external challenge in Q3 for sure, but we always prioritize our actions on optimizing inventories. So from the sales perspective, in Q3, the performance truly demonstrated our concerted efforts of Topsports as a whole. Well, going back to your question, sales has already been mentioned in our announcement, but the discount continue to be deepened. As we enter into Q4, now we only have 2 weeks in December, but still, I think the trend is in line with the momentum of Q3. If you take a look at the retail in first 2 weeks of December, the performance was better than Q3 on Q-on-Q basis. But at the same time, if we want to further optimize inventories, still the discount has been deepened. This is indeed what we witnessed in the market with the precondition of optimizing inventory. So until now, I can say that the overall environment has been improved or the actual challenge we saw are less than what we see in October. I can't make such a statement because the overall macro picture is changing all the time, and I also believe the offline business performance is not actually having a leapfrog improvement compared with what we saw in H1 of this year. So indeed, as a retail company, we do hope we will be able to improve our performance. But based upon what I see in the market, we still would like to maintain the statement or the turn we made in October. By 2024 and 2025, the full year profit will be down by 35% to 45%. This is the guidance we have to the market based upon what we accept from the market. Thank you.

Just now you have already mentioned about the December sales, it's been improved. You were mentioning about the improvement on a quarterly basis, right?

Yes, yes.

Just now, you also mentioned the profit has been pressured. It's not because of the sales, but also the deepening of discount rate. Is it possible for you to further elaborate on the discount rate of different brands or in different channels? So from the group perspective, do you believe the inventories or the discount of the sports market has been improved by the end of Q3 or the beginning of December?

Thank you. Thanks for your question. You can see for this year, many of the platforms started the online sales much earlier than the previous years. Double 11, the presales being started from October. Wherein 2025, the Spring Festival is in January. So actually, in December, we not only have the Double 12 selling festival, but we also have the festival year good event. So everything has been placed in advance. With what we see, I think it's also going to impact our existing performance with some positive impact being made. So because of this, as I have already shared with you, we need to take a look at the discount from two things. First of all, how we're going to further improve the selling rate based upon the inventories. Secondly, we also see more sales are coming from the online channel. Both factors indeed impacted our direct sales discount rate in H1 of this year. Going back to October, that is from September to November, in Q3, as I have already believe shared with you, we also have a similar discount rate deepening with the same reasons as what we saw in H1 of this year. The offline performance discount rate has been further deepened. But I think the discount rate for online channel is still looking good, which can partially compensate the negative impact due to the ever-increasing online sales. But those factors actually lead to the further deepening of the discount in Q3. In December, because many of the shopping festivals, discount rate is being impacted again. So as far as I believe, in the market, the promotional momentum, no matter we are approaching to the end of the calendar year or the end of the natural year, still, the promotional momentum is pretty strong. Just now you mentioned the online discount has been improved. But because it's being compensated because more sales from the online, yes, indeed, you are right.

Okay. My final question that is regarding the e-commerce business. I remember in H1 of this year, you mentioned the online sales accounted for 50% of your total sales. This number used to be a mid-20 number. But introduced by Fiona, these numbers improved by 40%. Do you mean the 40% of the retail or 40% of the total sales of the company, would you mind to help us to review the e-commerce performance for Double 11 and the recent e-commerce platform promotional events? You are performing good. Is it because you take the right strategy? Can you elaborate on that further?

Thank you. Regarding the online sales, let me make it in this way, I think we always keep the same caliber, no matter 20% for last fiscal year or 30% in H1 of this year or 40% in Q3 of this year. We are using the overall retail sales volume online pretax. To divide the total retail of the direct sales, that is online plus offline pretax volume. So actually, we never use divided by revenue. No matter if it's 20%, 30% or 40%, they always have the same caliber for calculation. And my second point, for the online promotional sales, it's been started much earlier in this year. But at the same time, I also see more promotional momentum. We do have our own strategies and tactics. Generally speaking, we have a wider channel presence. Besides traditional e-commerce platform, we also work with live streaming e-commerce, including TikTok. We also have our own private mini programs to help to run the online sales. So for Q3, the overall performance, let's take a look at the channel breakdown. I think the performance is very like what we saw in H1 of this year. In Q3, we see more growth coming from the live streaming e-commerce platform. And then the private online channel sales and the e-commerce platform sales are showing similar trends. So in the fiscal year of 2024 to '25, we have our own strategies and tactics. We would like to have a multidimensional and multinational online presence in order to further improve our sales. Now we're also keeping an eye on the online momentum, providing more resources allocation to online. What do I mean by saying resources allocation? Because in our total commodities, some of the liquid commodities being given for the online channel because for this year, we indeed have a challenged foot traffic in the offline stores. In order to further optimize and improve the turnover of our inventory, we provide more inventory resources support to the online channel. That can also help to further improve and optimize the product structure for the online channel. In that way, it can also help to further improve the discount rate for the online sales. So for this year, let me say it in this way. First of all, the online sales promotional momentum has been pretty strong. And secondly, we hope that we can cover as many of the numbers as possible; and also our differentiated strategies, taking the offline store as a way to cover the online business; and we also continue to improve the turnovers of the product, identify very effective measures to continue to support the online sales performance. In that way, we will be able to continue to optimize the inventory by the end of this year.

Next question. Let's welcome [Shun Tai] from Haitong Securities.

I'm [Shun Tai] from Haitong Securities. I have a few questions regarding the operations for next year. As you have already mentioned, you mentioned the channel going to be stabilized. So how about the store rental for next year? Do you have any comment on that? And just now, Nike is now having the new global CEO, who attaches great importance for the omnichannel development. So how Nike going to support the channel partners? Any color you can shed on that? And the third question is that, what would be the trend for discount in the near future? And you probably noticed Nike is now in the de-inventory stage. Nike has to proactively clear some of their product lines. Do you have a time line? How long are we going to take?

Okay. Thank you. Thanks for [Shun Tai]. Let me help to respond to your question one by one. The first question is about store rental fees. It truly depends on how we negotiate with different property management company. This is also the part of our daily practice. Well, regarding the rental fees of the stores, in H1 of this year, as I have already mentioned, there are some improvement for rental fees, but you can't directly take it as a structural factor. There might be some special circumstances we have to consider. So overly speaking, from the management strategy perspective, we're going to be proactive, talk to the property management companies to get a better treatment, but it truly depends on the realities of the property management company. For some property companies, they are having the foot traffic pressures and they can't manage the pressure very well with some high-quality stores, and we're actually going to talk to the property management regarding the preferential treatment. We will try our best in order to have a good preferential treatment from the property management companies. So generally speaking, looking to fiscal year 2025, we're still prudent, cautious yet positive. This is the overall attitude we have for the future. Well, secondly, let's talk about the support from the brands. After talking to our brand partners, we do notice the site has a very strong consensus of working with each other. The brand also showcased they are still committed to join hands with retail partners to help identify more opportunities in the market. To be more specific, especially for the fiscal year we are having now, as I have already shared with you, in October, the brand gave good support to China market. But with the support, it's been quite diversified. If we talk about subsidy only, subsidies are being divided into multiple kinds, including future subsidies, discount subsidies. Discount subsidies need to be in line with the promotional sales. And also subsidy for interior decoration. But subsidy of the interior decorations will not be built into the P&L, and it's going to support our P&L in next year due to the amortization. So after talking to the brand, until now, we find out the brand still have a very clear philosophy of providing more support to China market. Regarding the third question, that is about discount. Well, as well in the retail industry, how the discount might be in certain time frame, I think one thing you need to consider is still inventory. For Topsports, we always have a very good inventory management. I hope by the end of this year, we can have inventory improvement. And I do believe the high-pressure inventory we saw in the mid of this fiscal year is going to be improved by the end of the fiscal year. This is indeed what we're trying to achieve. Even in Q3 or even in the mid of December, at least for inventory management, everything or every performance is truly in line with our expectation. Looking into the next fiscal year, the macro environment is still going to be variable. As I mentioned, we're going to be cautious yet positive to next year. Cautious is because we see what is happening for the economics and the retail environment. But the positive things if we'll be able to hit our target for inventory optimization by the end of this year, then to a great extent, that also can help us to have a better and much more well-established foundation to enter into a new fiscal year. That's my response to your third question.

[Operator Instructions] Coming next, let's welcome Liu Pei from Shenwan Hongyuan Securities.

I'm Liu Pei from Shenwan Hongyuan. I have two follow-up questions. First of all, I see your Q3 performance is better than what is expected. But with a mid-single-digit sales decline, is there any difference between different brands? Would you mind to provide the breakdown? My second question, Rebecca has already mentioned some support from the brand owner, very diversified ones, including subsidies for interior decorations, for discount and for inventories. So regarding different subsidies, how it's going to be materialized? How it's going to benefit your financial performance? Well, the third question is regarding the inventory. What is your inventory sales ratio and also the inventory age?

Okay. Thank you, Liu Pei. Let me answer your question one by one. First of all, regarding inventory, by the end of Q3 or by the end of November, we are still doing a good job of inventory optimization in line with our expectation. But due to seasonalities and arrival of the product, I do see the inventory still have some slight increase. We're going to take further actions to take care of the inventory optimization. It's controllable. Well, regarding the inventory age, new products still accounted for 70% to 80% of the total inventories. The inventory sales ratio by the end of November is still 4:5. But due to the different product arrival, the timing, we are also preparing for the shopping festivals, so from the Y-o-Y or Q-on-Q basis, there might be some slight increase, but it's still within our control, only 4 to 5 months for the inventory turnover. What you were asking about is inventory. You also asked me about Q3 sales, especially the sales difference based upon brands. So generally speaking, we seldom comment on the performance of our brand partners, especially those companies being listed. So let me make it in this way. I think in Q3, we see if we will be more brand-specific, all brands are facing the same external environment. So from the challenge perspective, I think brands are facing similar situation. But different brands, they may have different business development with very different timeframe. For certain brands, they prioritize their targets for inventory optimization. They may leverage different ways of the inventory themselves. Sometimes, deepening the discount rate will also facilitate the sales. Well, for other brands, they are also taking for good improvement along with the market needs. So from the brand perspective, I think what we saw is the same as what we see in H1 of this year. Professional sports brand partners, their growth is still the fattest one. Mass population sports perform average, but the leisure sports are facing more pressure. So in Q3, I think the performance is still in line with what we have in H1 of this year. Regarding the subsidy from the brand partners, as far as I can see, the subsidies in place based upon our actual plan and schedule, which is truly in line with our own expectation. And I also mentioned there are different kinds of subsidies with very different timing. So according to my observation, I think the subsidy is indeed in place as what we expected. Thank you.

[Operator Instructions] Coming next, let's welcome [Ku Ri] from Yangtze River Securities.

I'm [Ku Ri] from Yangtze River Securities. I have two questions to you. First question, as we can see, Nike is actually doing the inventory for this fiscal year. But from the market performance perspective, I believe Nike was not performing good in this year. It's because they have more leisure sports product. As this segment is being pressured, then the sales being further weakened. Or is it because of rising of the domestic brands, the competition is getting more furious? Nike, as it has a relatively high retail price, its sales has been somewhat compromised. Is it possible for me to tell you why Nike sales been pressured in this fiscal year? And is there any signal that Nike is going to improve its sales in Greater China region? This is my first question. My second question, actually for Nike, fiscal year end by May of 2025, according to Topsports, you mentioned you're going to improve your inventory to a good level. No matter from the inventory or product perspective, Topsports and Nike indeed have a time difference of optimizing the inventories. So how you are going to work with Nike to make sure inventories and sales will be conducted in a synchronized approach? Those questions are relevant.

Thank you very much. Those questions are relevant. Let me respond to your question in this way. From the inventory perspective, for the past 20 years as we are working for the business, we are indeed working with brand partners of running the retail business in different markets and in different scenarios. So overall speaking, if you take a look at our track record. We'll still be able to work with brand partners to de-inventory the brand or even to help to take more actions and help them to implement the actions. So generally speaking, for Topsports, as mentioned by my colleague, by the end of February of 2025, we do believe we're going to see some improvement. Well, regarding the measures we're going to take, first of all, as inventory is relatively high, the first thing we're going to do is to well control the inflow of the inventories. So we're going to keep an eye on the arrival of the new products to the inventories. And secondly, we also would like to have some digestion of the existing inventories. For example, in H1 of this year and in Q3, we leveraged the online channel to the inventory in the warehouse, and we also took discount rate in order to further reduce inventory. Those are all the measures and actions being taken. Well, for the brand partners, they're also going to work with us for this. But going back to the question regarding Nike, as a listed company, we seldom comment on the performance of our brand partners because they are also listed company. But you see that according to the capital calls made by Nike for the past few years, Nike also mentioned some key points. Nike's classic product and the performance is not as good as what has been assumed. So Nike was also taking intentional control over the product supply, making sure its classic product could be well-controlled from the supply side. Therefore, it can help to further optimize the sales and the inventories for Nike as a whole. And I have already shared with you, Topsports has already talked to the new CEO of Nike for its global business. From the product or from the product category perspective, I do see Nike has very clear strategies and philosophy for running and for outdoor sports. In the professional sports segment, we see those are very nice signals, but I think what we need to do now is to optimize inventory. Hope by so doing, we will be able to have a new start by the end of next year. That's all for me within my capacity of disclosure. Thank you.

Okay. Thank you the question from the investors, and thanks for the management team. Due to time reason, here comes to the end of the Q&A. Coming next, we're going to welcome Rebecca to wrap up today's call.

Thank you very much. Thanks for all of your participation. I'd like to summarize what has been mentioned just now. First of all, our Q3 performance still focusing on our core objective of inventory improvement, we met our expectation. This achievement reflected the collective efforts and the dedication of our entire team. Secondly, we remain confident in achieving our inventory improvement target by fiscal year-end, while we maintain cautious and positive outlook for next fiscal year, but inventory will remain a leading indicator and fundamentals for all retail operations. Regardless of next year's demand may look like, we aim to start from a stronger foundation regarding the inventory. My third point, as I have already shared with you, recently, we held in-depth discussion with our brand partners' global leadership. The conversation reinforced their strong commitment to China market and their intention to strengthen collaborations with large-scale efficient omnichannel retail partners like Topsports. Our brand partner also align their product portfolio closely to the regional market preference. We look forward to explore the broader market opportunities together. I hope all the points in today's call are going to be helpful to all of you. My team will continue to maintain communication with you, including meetings at different broker summits in the early of next year. Thank you for your time, and we would like to wish you Merry Christmas and Happy New Year. Thank you. That's all.

Here comes to the end of today's call. You may disconnect from the call now. Thank you.