Raising HKD 1 billion, can Saucony help XTEP win the "running shoe war"?

After divesting its loss-making brands, XTEP chooses to replenish its ammunition.

On February 10, XTEP (1368.HK) announced on the Hong Kong Stock Exchange that it plans to place 90.909 million existing shares in a way that prioritizes old shares over new ones, at a price of HKD 5.5 per share.

The company also proposed to issue HKD 500 million convertible bonds, with an initial conversion price of HKD 6.325, which can be converted into a maximum of 79.0514 million shares.

The announcement stated that the net proceeds from the share placement and bond issuance are approximately HKD 985 million, which will be used to further develop the main brand and the DTC model of Saucony, enhancing the promotion and product portfolio of the Saucony brand.

XTEP stated that Saucony has achieved significant success in retail network management, leading it to decide to apply the DTC model to its main brand.

"In the future, XTEP's main brand plans to gradually reclaim distribution rights from retiring distributors, optimize the retail channel structure, ensure timely and accurate market insights, and ultimately achieve better sales growth."

As one of the four major running shoe brands globally, Saucony is known as the "Rolls-Royce of running shoes."

In 2019, XTEP established a joint venture with Wolverine Worldwide to obtain the operational rights of Saucony and Merrell in mainland China, Hong Kong, and Macau.

Four years later, in 2023, the Saucony brand became profitable.

In the first half of 2024, XTEP's professional sports division, primarily consisting of Saucony and Merrell, saw revenue increase by 72.2% year-on-year to HKD 593 million; net profit was HKD 31.8 million, with operating profit increasing by over 20% year-on-year.

It is predicted that the sales growth rate of the Saucony brand for the entire year of 2024 will exceed 60%, with retail sales in the third and fourth quarters exceeding 50%.

Despite Saucony showing certain growth potential, the company's stock price fell by 8.73% on the day the fundraising news was released.

Some investors questioned the necessity of XTEP's refinancing. After all, XTEP, which has paid dividends for consecutive years, does not seem to lack funds.

Wind data shows that XTEP's historical dividend payout ratio has remained above 50%.

After the disclosure of the 2024 interim report, XTEP announced a dividend distribution of HKD 380 million.

In November of the same year, after completing the sale of KP Global Group, which holds the K·SWISS and Palladium brands, the company also distributed a special dividend of USD 1.51.

As of June 30, 2024, XTEP had cash and cash equivalents of HKD 3.66 billion.

With ample cash on hand, can XTEP, which continues to "replenish its ammunition," reverse the slowdown in growth?

Increasing Investment in Profitable Brands

In 2019, XTEP built a diversified matrix through the acquisition of international brands.

In addition to incorporating Saucony and Merrell through joint ventures, XTEP also acquired K·SWISS and Palladium from the Korean E-Land Group for USD 260 million.

According to statistics, XTEP has invested a total of approximately HKD 2.4 billion in the aforementioned acquisitions.

However, the pandemic and changes in the economic environment disrupted the localization process of these brands It wasn't until 2022 that Xtep opened its first store in the domestic market.

In 2022, the fashion sports segment, which includes Xtep and Paladin, achieved revenue of 1.402 billion yuan, with only 10.2% of that revenue coming from the mainland Chinese market.

In 2023, revenue grew by 14.3% year-on-year to 1.602 billion yuan, with a net loss of 189 million yuan.

Cheng Weixiong, an independent analyst in the fashion industry and founder of Shanghai Liangxi Brand Management Co., Ltd., believes that after 2022, the domestic footwear and apparel market has shifted from "sports fashion" to "sports outdoor." Xtep entered the market too late, missing the golden period for development.

In May 2024, Xtep announced that it would sell its wholly-owned subsidiaries of Xtep and Paladin to its controlling shareholder Ding Shuibo and his family for $151 million.

In the announcement, Xtep stated that Xtep and Paladin have accumulated losses of over $100 million since their acquisition in 2019.

In the first three months of 2024, the two brands had already lost about $9 million. Xtep expects the total loss by the end of 2024 to be on par with that of 2023.

After divesting the sports fashion segment from the listed company's assets, Saucony, which was the first to achieve profitability, became the optimal solution for Xtep to seek a second growth curve.

In January 2024, Xtep invested $61 million to acquire equity in the joint venture, raising its ownership of the China business of Merrell and Saucony to 100%.

Subsequently, Saucony's expansion speed has accelerated.

In 2024, the net increase in Saucony stores reached about 48, nearly doubling the average of previous years.

The brand also officially announced Eddie Peng as the new spokesperson, launching lunar concept stores in Shenzhen and Shanghai, and opening its first urban experience store in Beijing.

Shenwan Hongyuan's research report estimates that Saucony's retail sales in 2024 are expected to exceed 1 billion yuan.

According to Cheng Weixiong, Saucony's brand has a low penetration rate in the domestic market, with room for store openings in first- and second-tier cities. Focusing on the running shoe market, Saucony is also expected to leverage Xtep's marketing advantages in marathon events.

Official data shows that Xtep has sponsored over 1,000 marathon events and activities, making it the sports brand that sponsors the most marathon events in China.

In the Shanghai Marathon event held on December 1, 2024, Saucony ranked third in the overall runner wearing rate, accounting for 11.5%.

Xtep Group President Tian Zhong previously stated that Saucony's brand positioning targets two elite groups: running elites and social elites, which complements and differentiates from Xtep's positioning as a mass sports brand.

Guoxin Securities compiled sales data from three major e-commerce platforms and found that Xtep's top three explosive products in the first three quarters of 2024 were all professional running shoes, with average selling prices ranging from 310 yuan to 510 yuan.

Thus, the higher-priced Saucony may take on the responsibility of helping Xtep expand into the mid-to-high-end market and improve overall profit margins.

Related changes have begun to show in the financial statements.

In the first half of 2024, the gross profit margin of the professional sports segment, where Saucony is located, reached 56.8%, an increase of 14.8 percentage points year-on-year; during the same period, the gross profit margin of Xtep's main brand in the mass sports segment was 43.9%

Unwilling to Fall Behind

In 2021, XTEP's total revenue exceeded 10 billion, marking the most glorious moment in recent years. The 160X series and 300X series products received recognition from both professionals and the market.

That year, XTEP proposed the "Five-Five" strategic plan.

According to the plan, by 2025, XTEP's main brand revenue will exceed 20 billion; the scale of new brands, including Saucony, will reach 4 billion, with a compound annual growth rate of over 30%.

To sprint towards this goal, between 2021 and 2023, the company accelerated store openings, with net increases of 130, 162, and 258 stores respectively.

However, in recent years, XTEP's revenue growth rate has slowed year by year.

In 2023, XTEP's revenue was 14.346 billion, a year-on-year increase of 11.08%, significantly lower than the nearly 30% growth rate in 2022.

Among them, the revenue proportion of footwear products dropped from 60% in 2022 to 57% in 2023, with a growth rate of only 5.3%.

In the first half of 2024, XTEP's overall revenue growth rate fell to around 10%, with the main brand revenue growth rate only at 6%.

The inventory turnover cycle is also lengthening.

In the first half of 2023, XTEP's average inventory turnover days rose from 106 days in the same period last year to 115 days, approaching 4 months, but dropped to 94 days in the first half of 2024.

The average accounts receivable turnover cycle reached 114 days in the first half of 2024, an increase of 8 days compared to the same period in 2023.

In March 2024, XTEP's CFO stated at the earnings meeting that the five-year plan would be shelved. The company stated that, given the poor consumption outlook, XTEP chose to prioritize profit growth, with the primary task being to maintain stable cash flow.

Cheng Weixiong believes that, with Li Ning and Anta occupying the leading positions in the domestic footwear and apparel market, XTEP's current main task is to distinguish priorities and solidify its running foundation.

The good news is that the running shoe sector, which XTEP has bet on for many years, is showing strong growth potential.

A research report from market research firm NPD shows that although the global footwear market's growth rate has significantly slowed, the prices of high-end running shoes are still on the rise in 2024.

NPD pointed out that since the pandemic began in 2020, the sales performance of running shoes has significantly outperformed other types of sports shoes.

In recent years, the popularity of domestic marathon events has been rising, with significant increases in public participation in long-distance running.

According to statistics from the official website of China Marathon, in 2024, a total of 671 road running events will be held nationwide, with approximately 6.56 million participants. iResearch estimates that there are nearly 300 million recreational runners in China, with 100 million core runners.

Guosen Securities' research report suggests that the effect of running shoes driving growth in the sports industry is becoming increasingly evident.

To curb the decline in performance in the Greater China region, Nike has decided to revitalize its running shoe product line. Nike's Chairman and CEO for Greater China, Dong Wei, publicly stated that the potential of the Chinese running market is enormous and that they will increase investment in the running business.

Top brands like Anta and Li Ning are gearing up, while niche brands like Hoka One One and Salomon also have their followers.

XTEP, which has "endured more than a decade of silence" in the running shoe vertical, may face even more intense competition In recent years, XTEP's selling expenses have been increasing year by year.

From 2021 to 2023, XTEP's selling expenses grew from 1.891 billion yuan to 3.369 billion yuan, and the selling expense ratio rose from 18.8% to 23.5%.

From a long-term perspective, XTEP's choice to focus on the running shoe segment is more about avoiding the spotlight of the giants.

However, as time goes on, the Matthew effect in the industry may become increasingly apparent.

In the first half of 2024, XTEP's net cash flow from operating activities was 826 million yuan, while Anta and Li Ning had 8.502 billion yuan and 2.73 billion yuan, respectively, during the same period.

At the beginning of the year, while the market was hotly discussing the alternating Olympic sponsorship rights of Li Ning and Anta, XTEP still lacked exposure at the Olympic event level.

If XTEP wants to further close the gap with its competitors, it may need more breakthroughs