361 Degrees Announces 2013 Interim Results

HONG KONG, Aug. 20, 2013 /PRNewswire/ -- 361 Degrees International Limited ("361 Degrees" or the "Company", together with its subsidiaries, the "Group"; HKSE stock code: 1361), one of the leading sports brand enterprises in China, announces its interim results for the six months ended 30 June 2013.

Financial Highlights

  For the six months
ended 30 June
2013 2012
Turnover (RMB mn) 1,998.2 2,869.1 -30.4%
Operating profit (RMB mn) 306.1 643.8 -52.5%
Profit attributable to equity shareholders (RMB mn) 205.3 595.6 -65.5%
Basic EPS (RMB cents) 9.9 28.8 -65.6%
Interim dividend
per share
RMB4.0 cents
(HK5.1 cents)
RMB7.0 cents
(HK8.5 cents)
Profitability ratios (%)          
Gross margin 39.0 42.7 -3.7p.p.
Operating margin 15.3 22.4 -7.1p.p.
Net margin 10.3 20.8 -10.5p.p.
Effective income tax rate 28.2 16.2 +12.0p.p.
Costs as percentage of turnover (%)       
Research and Development 2.4 1.2 +1.2p.p.
Admin staff costs 1.5 1.2 +0.3p.p.
Advertising and Promotion 9.8 9.2 +0.6p.p.
Rack subsidy 3.9 4.3 -0.4p.p.
Turnover ratios (days)  As at 30 Jun 2013 As at 31 Dec 2012 Change
Inventory 67 56 +11 days
Trade and Bills Receivable 193 165 +28 days
Trade and Bills Payable 166 112 +54 days
Cash Conversion Cycle 94 109 -15 days

The six months under review was a very difficult period for the Company with a slowing economic environment affecting general consumer sentiment. The sportswear industry, which has been going through an upheaval because of a stock glut accumulated from the past, continued to see heavy discounting as retailers tried to clear their back-log even as they order less new products.

As a result, the Company's revenue dropped by 30.4% to record just under RMB2.0 billion for the six months to 30 June 2013. Both Apparel and Footwear saw weaker deliveries as well as lower ASPs as retailers opted for a cheaper mix. Gross margin slipped by 3.7 percentage points because of lower wholesale prices to distributors whilst on the cost side, factory surplus capacity and rising labour costs aggravated the situation. The result is an operating profit of RMB306.1 million, a decline of 52.5% from the same period last year, as below-the-line expenses, however well-contained, could not fall proportionately. After finance costs and income taxes, profit attributable to shareholders was RMB205.3 million, down 65.5% from the same period last year.

The effective tax rate is substantially higher this period because a major subsidiary in mainland China no longer enjoys the preferential half-rate tax from 2013 and also because of losses in Hong Kong due to a lack of income to offset off-shore payments such as interest and finance charges.

Noting the strength of its balance sheet and in pursuant of an expressed dividend policy, the Board has declared an interim dividend of RMB4.0 cents per share (2012: RMB7.0 cents), which represents a payout ratio of just over 40% on earnings of RMB9.9 cents per share for the period (2012: RMB28.8 cents).

The Company has implemented various measures in view of the deplorable state of the industry. It has called for unprofitable stores to close while others that are performing at below par to consolidate with similar outlets in the vicinity. As a result, the number of franchised network has reduced to 7,826 at the end of June 2013, a net decrease of 256. At the same time, certain stores have been revamped to promote the sports fashion sub-brand, "Innofashion", in recognition of the growing popularity of consumers towards casual wear. This review of store profitability is a continuous exercise and it is likely that the network will shrink further in the foreseeable future.

In addition, the Company has thoroughly reviewed the orders placed by the distributors in order to ensure that the overall healthy level of the channel inventories is maintained. To sustain the profitability of the distributors in view of falling volumes, it has been necessary to adjust the wholesale price downwards, and the distributors would in turn help out deserving retailers. The Company intends to maintain this flexibility in wholesale pricing, even though this will affect its own gross margins and profitability, as ultimately, the real strength of the brand in the main street.

The Company has also critically revised its product-line up and composition of SKUs, with a greater emphasis on cross-selling between apparel and footwear and an improved entry-price level for specialist lines in Outdoor and Basketball. A continuing bright spot has been the development of the 361° Kids, which is operated as an independent business unit. By 30 June, 2013 the number of dedicated points of sales has increased to 1,678, of which about 46% are street-level stores. This Kids business is now entering an established phase in its development and its revenue should continue to account for 10% of the Group's turnover, with a respectable growth in the number of outlets.

The Company has intensified its training of its 3,000 strong retailers, in both product and general sales education. Classes are held regularly and especially at the Trade Fairs, when new products are launched. Strong retail management will be an ongoing theme for the management.

Efforts in building the equity in the brand and in research and development continued, as these have a longer-term impact. Of particular mention is the Company's sponsorship of the 2nd Youth Summer Olympic Games in Nanjing in 2014 as this will probably be the last international multi-disciplined sporting event to be held in China for the foreseeable future.

On the production side, the Company has been challenged to reduce the operating overheads of its two factories at a time when there is surplus capacity. In the short term this has resulted in a higher overhead absorption as Management juggled between out-sourcing and self-production for maximum benefits.

The general slowdown in the macro-economy has meant that credit for small and medium enterprises remain tight with the result that the Company had not been able to improve on its account receivable collections and had to rely on its strong ratings with the suppliers to achieve a positive cash inflow for this period. Nonetheless, the Company remains in a very strong financial position to emerge from this difficult environment as cash and cash equivalents stood at over RMB3.1 billion at the end of June 2013.

In view of the weak order book on hand for deliveries in the coming months, the second half of this financial year will see further erosion in profitability, especially if worsened by a downward adjustment in wholesale pricing.

Looking further ahead, whilst uncertainties in the industry remain, the general consensus is that the worst of the inventory debacle is over and there are some hopeful signs that things would improve from here on. However, the strength of this recovery is dependent on the state of the macro-economy and an improvement in consumer sentiment towards discretionary spending. In the longer-run, there remains much optimism as with rising disposable incomes and a renewed national emphasis on urbanization, the general population will be much more health conscious and sporting activities are bound to increase.

Because of the various measures which the Company has taken in order to strengthen both the supply chain as well as the channel management systems, the Board of Directors is confident that the Company will have a solid foundation to emerge through the current difficulties in an even stronger position and should be able to deliver superior returns to the shareholders.

About 361 Degrees International Limited

361 Degrees International Limited is one of the leading sports brand enterprises in China, possessing brand marketing, research and development, design, manufacturing, distribution and retail capabilities. The Group's products include footwear, apparel, accessories and equipment for sport and leisure uses. The Group has established an extensive supply chain management system through proprietary and sub-contracted manufacturing operations; and an exclusive distribution and retail network in China through distribution via authorized distributors.

For further information, please contact:

361 Degrees International Limited
Mr. Y F Chen
Vice-President, Investor Relations
361 Degrees International Limited

iPR Ogilvy LTD.
Natalie Tam/ Charis Yau/ Janis Lai/ Eric Chan
Tel: +852-2136-6182/ +852-2136-6183/ +852-2169-0646/ +852-3920-7625
Fax: +852-3170-6606

Source: 361 Degrees International Limited
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