361 Degrees Announces FY2013 Annual Results

HONG KONG, March 17, 2014 /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 results for the year ended 31 December 2013.

Financial Highlights

   For the year
ended 31 December
2013 2012
Turnover (RMB million) 3,583.5 4,950.6 -27.6%
Operating profit (RMB million) 352.2 864.4 -59.3%
Profit before taxation
(RMB million)
314.9 830.4 -62.1%
Profit attributable to equity shareholders (RMB million) 211.3 707.2 -70.1%
Basic EPS (RMB cents) 10.2 34.2 -70.2%
Profitability ratios (%)          
Gross margin 39.5 39.8 -0.3p.p.
Operating margin 9.8 17.5 -7.7p.p.
Net margin 5.9 14.3 -8.4p.p.
Effective income tax rate 36.7 14.4 +22.3p.p.
Costs as percentage of turnover (%)        
Research and Development 2.4 1.7 +0.7p.p.
Admin staff costs 1.8 1.4 +0.4p.p.
Advertising and Promotion 11.4 10.6 +0.8p.p.
Rack subsidies 4.8 4.1 +0.7p.p.
Cash position (RMB million)       Change
(RMB million)
Net cash position 1,959.5 1,841.6 117.9
Net cash generated from
operating activities
323.2 1,658.8 (1,335.6)


In a defining year under the new Chinese leadership, the sportswear industry continued to struggle throughout 2013, although there were increasing signs of a very modest recovery. As inventories declined in the face of lower new supplies by the leading brands, retailers were able to hold discounting at a more reasonable level. However, with a slowing economy, store traffic remained rather weak as consumers were confronted with an ever-increasing choice of brands. E-commerce further posed an ever-increasing threat to the traditional brick-and-mortar stores in the industry, although it primarily now serves as a clearance channel.

On the back of a weak order book from the Trade Fairs held earlier, the Group's revenue slumped by 27.6% to close the year at RMB3,583.5 million. Gross margin shed 0.3 percentage points to 39.5%, primarily due to two reductions in wholesale pricing to distributors during the year, although production efficiencies largely compensated.

Footwear and Apparel both registered double-digit reductions in volumes and Average Selling Price ("ASP") as the Company worked with distributors to ensure channel inventories remain healthy, as has always been the case throughout this downturn in the industry.

361° Kids showed encouraging progress, with its turnover improving by a further 13.6% from last year, the fourth year of successive growth. Most importantly, both volume and ASP showed strong momentum as the brand gained a strong following in the market. For the first time, its turnover contribution exceeded 10% of the Group's total, and management is confident it can build on this success.

In its quick expansion in recent years, the Group has given generous credit terms to some of its key distributors. However, because of poor collections of account receivables during the year, not helped by the market's tight liquidity conditions in the last quarter, the Group has felt it necessary to take an impairment charge for 50% of the account receivables aged in excess of 180 days totaling RMB152.0 million on grounds of prudence to mitigate the effects of possible bad debts even though there are no evident signs that the situation will aggravate any further. In addition, the rack subsidy program for retailers continued during the year, costing the Group RMB170.4 million for a total of 2,053 outlets as it is imperative to spruce store image during such difficult times to remain competitive.

In line with the reduced turnover, the Group selectively pruned its advertising expenses, realigned staff costs and generally exercised strict control. Without taking into account the impairment charge, this helped to cut operating costs by about 16%, a commendable effort but which is still not enough to see a drop in net profit before tax to RMB314.9 million, 62.1% lower than that of 2012.

During the year under review, the Group's taxation rate, at 36.7%, is higher than the standard rate for Mainland operating companies because of the non-deductibility of expenses in the Hong Kong subsidiaries, primarily relating to the interest on the convertible bonds and the set-up costs of the Overseas Business Unit.

The profit after tax, attributable to equity shareholders, fell to RMB211.3 million, about 30% that of 2012.

The Group is fully cognizant of the challenges facing all sportswear companies and has implemented a number of measures to counter the difficult trading environment. The greatest pressure in the industry is at the retailing end of the business. To ensure a sustainable platform for retailers to operate profitably, the Group has further reduced its pricing structure to distributors in 2014 with the savings passed on. It will continue to award direct renovation subsidies to qualifying stores to improve the look and image. Product offerings at Trade Fairs have also been streamlined and product training and education for retailers and their staff made an ongoing exercise. Finally, the Group has encouraged the consolidation of stores to that of a larger format (above 100 m2) that can carry the entire merchandising lines of the Group's main brand as well as its two sub-brands, 361° Kids and Innofashion. This revised retail store strategy enables retailers not only to be more competitive as there are substantial savings in rentals and manpower but also presents a comprehensive range of products to a wider audience.

In the short run, some of these measures will add to the burden of the Group but it is believed that the brand will benefit in the longer-term from this sharper focus on retailing will ensure a stronger footing for all stakeholders in the business.

Two other initiatives of the Group are worth noting. The first is a joint-venture with One Way, a leading Finnish brand with substantial exposure to Nordic sports in Continental Europe. Although relatively small in terms of profit contribution in the initial years, it will greatly benefit the Group in high-end research in outdoor wear, a segment that is among the fastest growing in the market.

The second is the establishment of an Overseas Business Unit comprising very senior and experienced professionals who have been charged with the responsibility of taking the brand onto an international stage, with its first expansion into Brazil and Latin America. The Group is painfully mindful that this bold and exciting move requires substantial investment over the next five years in order to be successful but believes it can generate a new earnings stream.

 Financially, the Group remains in a very strong position, with cash and cash equivalents, amounting to a net of just under RMB2 billion, at year-end with the bulk of the free cash held in Renminbi, having been derived from operations. Any improvement in the collectability of the accounts receivables, which stood at RMB1,916.0 million as at 31 December 2013 will ensure that operations continue to generate positive cash flows.

Earnings per share amounted to RMB10.2 cents, which is lower than the equivalent of RMB34.2 cents in 2012. In view of the poorer results, the Board has decided not to recommend a final dividend. As an interim dividend of RMB4.0 cents has been paid in September 2013, the dividend policy has broadly been maintained.

Towards the end of 2013, there are hopeful signs that the industry has seen the worst of times. A recovery is inevitable but its strength will depend on the broader economic situation and consumer sentiment. As China grapples with reforms, at both the social and government levels of a depth not previously seen, the Central Government will steer economic growth towards personal consumption and a more balanced society. This augurs well for the Group and its strong fundamentals will ensure it will continue to feature as a meaningful player in the sportswear industry.

Source: 361 Degrees International Limited
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