Profit Warning! Stock Price Plunges Over 20%, Top Sports Struggles with Performa
On September 11th, the sectors of sports equipment, apparel retail, and footwear experienced a collective downturn, with related concept stocks falling across the board. By the midday break, the sportswear giant Li-Ning (02331.HK) saw a significant drop of 6.48%; Anta Sports (02020.HK) also declined by 2.88%; Jiuxing Holdings (01836.HK) and Xtep International (01368.HK) were also underperforming, with their stock prices weakening.
Among the many falling stocks, the decline in the share price of Top Sports (06110.HK) was particularly severe. Today (September 11th), during the trading session, the share price plummeted by 20.67% to HKD 2.11 per share, setting a historical low; by the midday break, the stock had fallen by 16.17%, trading at HKD 2.23 per share.
In terms of news, on September 10th, Top Sports issued a profit warning, expecting a net profit attributable to the parent company to decline by approximately 35% for the six months ending August 31, 2024, compared to the same period last year, which was far below market expectations and caused considerable disappointment among market participants.
Regarding the decline in performance, Top Sports attributed it mainly to the macroeconomic consumer weakness that has dragged down the industry's retail environment, leading to a year-on-year decrease in group revenue during the reporting period. Additionally, the slowdown in demand has had a more significant impact on offline customer traffic, resulting in negative operating leverage effects, which led to an increase in the sales and distribution as well as general and administrative expenses compared to the same period last year.
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Furthermore, the retail discount rate deepened year-on-year, leading to a decline in the gross margin. During the reporting period, the revenue drop led to an increase in inventory in the short term, prompting the group to increase promotional efforts; at the same time, the online retail discount rate was deeper than the offline retail discount rate during the same period, and the proportion of online sales increased year-on-year. These two factors together led to a deepening of the retail discount rate year-on-year, affecting the gross margin performance during the same period.
Data shows that Top Sports is the largest sports equipment retail distributor in China. Within the industry, Top Sports represents more than ten sports brands and is the second-largest retail partner of Nike globally and the largest retail partner of Adidas globally.
In recent years, both Adidas and Nike, the two sports giants, have faced their own challenges. According to Nike's (NKE.US) previously announced financial results for the fourth quarter ending May 31, 2024, the performance was below expectations. At the same time, Nike also lowered its outlook for the coming year.
As the most important offline distribution channel for Nike and Adidas in the Chinese market, more than 80% of Top Sports' revenue comes from these two giants. Naturally, its performance could not escape the fate of rising and falling together.According to BOC International's calculations, based on Top Sports' net profit of 1.337 billion yuan in the first half of last year, the profit warning implies that the net profit for the first half of the current financial year is only 869 million yuan, which is lower than the bank's and the market's expectations of 2.634 billion and 2.3 billion yuan, respectively, representing 33% and 38% of the bank's and market's expectations.
The bank stated that the profit warning suggests that the retail sales of sports goods from July to August were below expectations. Even though Nike has its own issues, the bank believes that Top Sports is more affected by consumer downgrading compared to its peers, due to the higher retail prices of Nike and Adidas brands. Given the higher uncertainty regarding this year's "Singles' Day," the bank expects more downward adjustments in the industry's profit forecasts.
UBS issued a report pointing out that Top Sports' profit warning indicates that the performance is worse than the bank's expectations. The report cited management as saying that one of the main customers' leisure product categories is under pressure, but another customer's new product sales rate and discount levels have improved year-on-year, benefiting from inventory clearance in the past few years. The report also cited management as saying that sales from June to August have deteriorated from the beginning of the year, and the situation is not expected to turn around in the short term. The company plans to expand into new channels and collaborate with new brands, while closing underperforming stores and strictly controlling operating expenses. The company also promises a dividend payout ratio of 100% in the absence of special capital expenditure needs.
The bank stated that management believes the decline in revenue and the intensification of discounts in the second half of the financial year will be worse than in the first half, and plans to adjust the annual guidance when announcing the interim results.
Due to operational pressures, Morgan Stanley forecasts that Top Sports' sales for the first half and the full year of 2025 will fall by 8% and 5% year-on-year, respectively, with gross margins expected to contract to 42.7% and 40.6%, below pre-pandemic levels, mainly due to the group's discount rates not yet returning to previous levels. Considering the downward trend in sales prospects, Morgan Stanley expects the SG&A ratio to increase, and has reduced its profit forecasts for the fiscal years 2025 to 2026 by 33% to 36%; currently, it predicts a 24% year-on-year decline in profits for the 2025 fiscal year, with the net profit margin narrowing to 6.1%, falling to the lowest level in the past six to seven years.
Recently, CICC also pointed out in its report that, considering the pressure on Top Sports' sales and potential operational deleveraging risks, it has lowered the company's profit forecasts. Additionally, with the industry's valuation center falling, the target price has been correspondingly reduced by 32% to 3.81 Hong Kong dollars.
The poor performance outlook undoubtedly raises more concerns among investors about Top Sports' future. As the saying goes, "the ducks know when the spring river warms," in the secondary market, this year, the stock price of Top Sports (06110.HK) has continued to slide, and to date, it has fallen by more than 60%.