Li Ning's good days seem to have come to an end.
On October 25, Li Ning released the third quarter operation report. In the report, the retail flow only recorded a moderate unit growth, and the growth in the middle of the second quarter was significantly lower than that in the second quarter, which was 10% - 20%. This undoubtedly disappointed investors. In response, Li Ning's share price fell 20.7% the next day, the largest one-day decline in recent years, and its market value lost HK $16.5 billion in one day.
However, for Li Ning, the stock price decline is obviously nothing new. From the high point of 79.33 yuan/share at the beginning of the year, as of December 5, the share price of Li Ning had fallen by 72.79%, and there was no sign of stopping the decline. The market's disappointment at Li Ning was clear.
It was also popular for a while
In fact, Li Ning, once the "elder brother" of Guochao, had a chance.
In 2018, Li Ning's high-end brand "China Li Ning" appeared at New York Fashion Week, and the "tomato scrambled egg" color matching suit rushed out, which directly ignited the "national trend" in China. In that year, the annual sales of clothing products exceeded 5.5 million, and related products even sold out. In 2019, Li Ning's operating revenue reached 13.88 billion yuan, up 31.85% year on year.
While the popularity of Li Ning is gradually fading and the revenue and profit are slowing down, a heavier "Xinjiang cotton" event will happen in 2021. Nike and Adidas, which have occupied the high-end market for many years, have suffered a heavy reputation. Li Ning, as the "representative of Chinese goods", took the opportunity to rise and was directly sold out. In that year, the revenue reached 22.572 billion yuan, a significant increase of 56.1% year on year, Net profit soared by 136.1%, reaching a record 4.011 billion yuan.
In the four years from 2018 to 2021, Li Ning has successfully doubled its performance and increased its revenue from 10.527 billion yuan to 22.667 billion yuan. Correspondingly, Li Ning's share price has also been soaring. On September 7, 2021, Li Ning's closing price was HK $104.58, and Li Ning seems to have ushered in its own peak moment.
The road of transformation is full of difficulties
At the same time, the ambitious Li Ning also began to move towards high-end, trying to promote the transformation and upgrading of the brand to the middle and high-end, obtain more brand premium, and improve the company's profit structure. For this reason, Li Ning specially launched LINING 1990, which is aimed at high-end luxury. The price of this product has jumped to about 800-5000 yuan, and 24 direct stores have been opened in the core business circles of Hang Lung, MIXC, SKP and other front-line and new front-line businesses.
The price of Li Ning's products has also been rising. Taking running shoes as an example, the new price of the Ultralight 15 launched in 2018 was 499, while the new price of the Ultralight 20 launched in 2023 rose to 599, and the Liejun series rose by 400 yuan in three years.
However, "high-end" has not brought good performance. After 2022, Li Ning will be unable to run. On the one hand, the return of Adidas and Nike, and the efforts of domestic brands such as Anta have squeezed Li Ning; On the other hand, what is more critical is that the wool comes from sheep, and consumers are unwilling to pay for Li Ning's "high-end". Li Ning's transformation is full of difficulties.
Li Ning pointed to the high-end, but the increase in income did not increase profits, and spending did not pay off. According to the 2022 annual report, the revenue of Li Ning will reach 25.803 billion yuan in 2022, a year-on-year increase of 14.31%. It is reasonable to say that the revenue side will fall back temporarily under a high base due to the sudden positive impact in 2021. The net profit was only 4.06 billion yuan, an increase of only 1.32% compared with 2021, which was far lower than the year-on-year growth of revenue. The year-on-year growth of net profit was also very different from 136.1% in 2021, which might surprise the market.
Turning to the financial report of Li Ning, we can see that the biggest loss of Li Ning's profits is the huge marketing expenses and greater discounts. In 2022, Li Ning's advertising and marketing expenses will increase from 1.779 billion yuan last year to 2.279 billion yuan, a year-on-year increase of 28%, much higher than the year-on-year growth rate of 14.31% of operating revenue. At the same time, Li Ning's gross profit margin has also declined significantly. In 2022, the gross profit margin will be 48.4%, down 4.6 pct year on year. The most important reason is that Li Ning was forced to give higher discounts to reduce inventory and revitalize cash flow through price reduction.
However, vigorous marketing and discount promotion are contradictory. Marketing itself is to establish the high-end image of the brand, occupy the minds of consumers, and then improve the average price of the brand, as well as the high-end market share of the brand; However, discount promotion will make the product price guarantee mechanism greatly discounted, which will have a very negative impact on the company's brand value, trigger consumer dissatisfaction, and even cause loyal customers to bite back.
The reason why Li Ning took such a contradictory approach is, in the final analysis, that Li Ning's real brand strength cannot support the current high-end positioning and high pricing. At the moment of economic downturn and income decline, consumers are more prudent and will not hesitate to vote with their feet for "low-end and high price" brands. However, Li Ning blindly pursued price increase, but neglected to promote product reform and improve the cost performance ratio. It can be said that he was hit by the "gun" of the new consumption form after the epidemic, and finally could only fall into the embarrassing situation of "increasing price while discounting".
What is more worrying is that Li Ning is not selling well even at a discount. From the 2023 midterm report, Li Ning's revenue will grow by 13.0% in 2023, while its net profit will decline by 3.1% year on year. Among them, the main reason is that the company has increased the discount of online channels and retail terminals again in order to promote sales, resulting in a year-on-year decrease of 1.2 pct in gross profit margin. At the same time, the average inventory turnover days of Li Ning increased from 55 days in 2022 to 57 days, and the backlog of goods became more serious. The coexistence of price reduction and goods shortage indicates that Li Ning's high-end road has reached the most bumpy road.
Li Ning's Solution
In the short term, the company has begun to adjust the channel layout, and the performance inflection point has arrived. In the past few years, the company has been focusing on channel expansion in the high-level market. In the long run, this will help to enhance the brand value of Li Ning, which will be of great benefit to the long-term development of the enterprise. However, in the economic downturn, when consumers are sensitive to product prices, this strategy has also brought some pressure on the company's revenue and profitability. However, Li Ning has publicly stated that the layout of the high-level market has been basically completed. Next, it will adjust the product price distribution to further expand the sinking market share. This indicates that Li Ning's "high road" may slow down temporarily, and the channel sinking is expected to further promote the stable recovery of the company's flow, clear up the channel inventory, and ease the pressure on the company's revenue. At the same time, the store layout in the high-level market is also expected to enter the harvest period. While further expanding high-end sales, it will also help stabilize the price level of the company's products and gradually narrow the overall retail discount level. It is expected that on the basis of this year's low base, Li Ning is expected to achieve stable volume and price in 24 years, with a relatively obvious improvement in revenue and profit.
From a long-term perspective, Li Ning also has beautiful new stories. From the perspective of height, although Li Ning's "road to high" has encountered pressure in the short term, as one of the few domestic brands that can enjoy premium in the secondary market, Li Ning, who has been deeply involved in the sports apparel field for more than 30 years, is still one of the most likely brands to reach the high-end; In terms of breadth, Li Ning is also piloting new tracks, focusing on children, women, outdoor, Guochao and other emerging fields. Li Ning YOUNG, LINING 1990, China Li Ning and others are expected to open up the second growth curve for the company.
After more than 30 years of stumbling, Li Ning finally embarked on the road of high-end. The road is longer and more bumpy, but Li Ning will break through eventually.
[Note: The market is risky, so investment should be cautious. In any case, the information or opinions contained in this subscription number are only for exchange of views, and do not constitute investment suggestions for anyone. Except for special remarks, the research data in this paper is supported by Flush iFinD]
This article was originally written by "Xingtu Financial Research Institute", and the author is Wu Zewei, a researcher of Xingtu Financial Research Institute
