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Shrink to fit

12 Aug 2013 By John Foley

Most fitness plans come down to two things: burning fat and building muscle. Li Ning has managed the first, but not yet the second. In the first half of 2013 the Chinese sportswear brand closed stores and shed inventory, narrowing its operating losses to 39 million yuan ($6.3 million). But Li Ning has yet to prove it can follow this up with sustainable top-line growth.

Under the control of private equity group TPG, Li Ning is undoubtedly slimmer. A year ago the company was stuffing retailers with stock, much of which proved unsaleable. Since then it has shut almost a fifth of its shops, and set aside 1.5 billion yuan in provisions to help retail partners shift unsold goods. That’s going better than expected: Li Ning’s first-half operating loss beat analysts’ forecasts chiefly because of a 232 million yuan provision writeback.

While revenue has taken a hit, falling 25 percent year on year, what’s beneath looks more toned. The company has taken a cue from successful retailers like Zara owner Inditex by cutting the time it takes new products to come to market, from over a year to as little as three months. Its franchisees now shift stock in seven months on average, rather than nine.

What matters to investors now is how quickly Li Ning can bulk up. Investing in its brand, including a multi-million dollar tie-up with basketball star Dwyane Wade, makes sense, but only if it creates visible revenue outperformance. Sales at Li Ning’s directly operated stores grew 9 percent year on year, yet by the company’s own estimates from last year, the market overall should grow over the next few years at a double-digit rate.

Investors aren’t yet giving Li Ning much credit. Say it is able to expand its EBITDA margin from the current 2 percent to 15 percent – a bit less than the company managed in better days. Applied to analysts’ forecast of 5.6 billion yuan revenue in 2013, it would put the company’s current enterprise value at seven times EBITDA, half the rating of U.S. rival Nike and a 15 percent discount to the global footwear industry average.


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