Chinese Apparel Firm Addresses Falling Profits (HongKong)

With sales and profits falling as Chinese consumers tighten their purse strings, engineering a turnaround at the sputtering sports apparel company Li Ning may seem to be an Olympian undertaking.

At least that must be what the company — China’s answer to Western giants like Nike and Adidas — is hoping.

The retailer of athletic footwear and clothing said Thursday that its founder, Li Ning, the 49-year-old former Olympic gold medalist, would expand his duties as chairman after the dismissal of the company’s chief.

Mr. Li won six medals as a gymnast at the 1984 Olympics in Los Angeles — China’s first appearance at the Summer Games since 1952. More recently, he is perhaps best known outside of China as the man who, dangling from a wire, ran suspended in the air above the rafters of the Beijing National Stadium to light the torch at the start of the 2008 Summer Games.

Today, Mr. Li has the task of delivering the spark in a different high-wire act. In announcing the biggest executive shake-up in its 22-year history, his company, Li Ning, which this year brought in the private equity firm TPG Capital as a substantial shareholder, said Thursday that it would begin a three-year “transformation blueprint” to cut costs, reverse falling profits, reduce inventory backlogs and solidify its No. 1 position in the Chinese market for sports apparel.

“We are determined to develop Li Ning into a world-class sports brand, a brand that is fundamentally anchored on sports values,” Mr. Li said in a statement. The decisions to dismiss the chief executive, Zhang Zhi Yong, and start a campaign to reinvent the company came after “evaluating the business as it stands today, the challenges both inside and outside the group, as well as where we want it to be in the medium to long term,” he said.

Other clothing companies in the Asia-Pacific region have also struggled recently. Shares in the Australian surf-wear retailer Billabong International have fallen 29 percent since June 25, when the company announced a heavily discounted stock sale to raise money.

Billabong has replaced its chief executive, and its sales have continued to fall since February, when the company’s founder and controlling shareholder, Gordon Merchant, rejected a buyout offer from TPG that valued it at 841 million Australian dollars ($865 million) — more than three times its current market value.

The chief executive and the chairman of the fashion retailer Esprit which, like Li Ning, is listed in Hong Kong, announced their departures within 24 hours last month. The company has struggled with the economic downturn in Europe, which accounts for more than three-quarters of its sales and has strived to reinvent a brand that Esprit itself said last year had “lost its soul.”

But while some of the issues confronting Li Ning echo across the industry globally — slack overseas demand, fickle brand loyalty among consumers — analysts say the biggest problems the company must tackle are unique to the Chinese market.

Rising affluence among China’s 1.3 billion people has driven increased spending on products as varied as cars, luxury handbags, refrigerators and sports apparel in recent years. But a race for market share and a rapid expansion of distribution networks have also created intense competition among specialized retailers, analysts say.

In particular, China’s homegrown athletic apparel companies have expanded at a breakneck pace in the years since the Beijing Olympics.

Li Ning competes with Chinese rivals like 361 Degrees, Anta Sports, China Dongxiang, Peak Sports and Xtep International. The six companies had a combined 31,010 stores in China at the end of 2008. Three years later, at the end of 2011, they had expanded to 42,235 outlets — an increase of more than 11,000 stores.

Analysts say this has left the sector grossly oversaturated by too many brands with too many points of distribution. That forces the companies to compete for consumer demand that, while still growing, has failed to keep pace with supply.

“Strikingly different from other markets, China is the only country with five domestic sportswear brands in the top 10 apparel brands,” J.P. Morgan analysts in Hong Kong wrote of brands in the Chinese market this year in a research report.

The analysts said the sports apparel sector faced threats like rising costs, a brewing battle for consumer dollars against more general fashion brands and the aggressive penetration of inland Chinese cities by foreign competitors like Nike — which said last week that its revenue from greater China, which also includes Taiwan and Hong Kong, had risen 23 percent, to $2.54 billion, in the 12 months ended in May.

Li Ning has had difficulty responding to these pressures.

Last year, sales and net profit both dropped for the first time in at least 10 years; the company’s published accounts date only to 2001. Revenue fell to 8.93 billion renminbi ($1.4 billion), down 6 percent from 2010. Profit plunged 65 percent, to 358.8 million renminbi.

Shares in Li Ning fell last month below 5 Hong Kong dollars (64 cents) for the first time in seven years. That is less than one-sixth of their peak value of 30.15 Hong Kong dollars a share in 2010.

Compounding the sector-specific challenges, shares in Li Ning and its competitors have been beaten down by investors’ broader concerns over slowing economic expansion in China.

China’s overall retail sales by value rose 13.8 percent in May compared with a year earlier. Stripping out the distortions to the January and February data caused by the Lunar New Year, the figure for May represented the weakest growth in monthly retail sales since 2006.

Although policy makers in Beijing have in recent months reversed economic tightening measures in a bid to stimulate growth, analysts say they believe the Chinese economy may grow about 8 percent this year, which would be its slowest annual increase since 1999.