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KGI Alert: 361 Degrees (01361.HK/1361 HK, U): 3Q13 SSSG flat; channel inventory still high




KGI Greater China


29 Oct 2013





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What’s new 361 Degrees (361D) released operating data for 3Q13. SSSG was flat from last year and channel inventory remained high at 4.4 months of sales. We see little improvement at the brand’s retail end. Implications 3Q13 SSSG flat, marginally better than the 0.8% decline in 2Q13. Flattish SSSG in 3Q13 was based on sales from 4,247 retail outlets, which comprise 56% of total stores under the brand. The marginal improvement from 2Q13 is not meaningful, in our view. We have seen 20% discounts on new items, and 40% off on purchases of two items earlier in October. Stores in Shanghai recently run a promotion for which customers paying Rmb19 on top of the original purchase price receive an additional product. We see little traffic improvement at the retail stores, indicating a rather slow recovery process. Channel inventory-to-sales at 4.4 months, implying no improvement from 2Q13. Inventory-to-sales at its retail channels increased to 4.4 months in 3Q13, the same as in 2Q13 due mainly to slower traffic in July and August, the result of weak demand and poor weather. More competition in the lower-tier cities is also affecting 2nd-tier sportswear brands like 361D. The environment remains tough and we don’t expect channel inventory to return to normal in the near term, particularly as the executive in charge of channels recently departed. Store closure accelerates. The total number of franchised stores decreased 243 QoQ to 7,569 in 3Q13, with 443 outlets having been closed and 186 stores opened, vs. a net decrease of 243 stores in 2Q13. The faster store closure reflects the still sluggish retail environment, including rising competition from peers. The company lowered its wholesales discount by 2 ppts to 65% at the SS 2014 trade fair, to help stabilize its customer base. The higher discounts will negatively impact gross margin in 2014. Changing order structure positive for the long term, but will take time to adjust. The recently announced SS 2014 trade fair results, including an 11% YoY decline in 361 brand orders, reflects continuing weak sentiment. However, 361D has just started to change its model to one that allows customers to order only 70% at trade fairs and 30% for replenishment later, compared to all the ordering being done at trade fairs (three a year) before. The company is slower than its peers in making such changes, and the effects of the reform will likely take another year to have an impact. Valuation & action We don’t see much change in the company’s operating data. We maintain our forecasts of 26% YoY revenue decline and 58% YoY net profit decrease in 2013, and we see downside to our 2014 forecasts if the changing ordering model doesn’t work well. We maintain our Underperform rating on this counter. Risks Slower-than-expected inventory digestion; competition in low-tier cities intensifies further.

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