Sportswear maker warns on earnings

Chinese sportswear brand Li Ning Co Ltd has warned of declines in revenue and profit this year due to weaker sales and higher marketing costs.

The announcement, released on Monday, drove its shares to a six-year low.

The shares closed on Tuesday at HK$5.25 (67 US cents), down 8 percent.

Leading domestic sportswear brands face mounting challenges including high inventories, rising costs and pressure from foreign brands such as Nike and adidas, not to mention increasing rivalry among Chinese producers.

The domestic sportswear sector's growth rate dropped to 13 percent last year from 20 percent in 2010, according to Ivy Zhao of China Merchants Securities in Hong Kong.

Foreign brands such as Nike and adidas have expanded into second- and third-tier cities, forcing domestic brands to make a structural adjustment, Zhao said.

Li Ning said trade fairs this year had been completed and new product trade fair orders for the full year would show a high single-digit percentage fall from last year.

For the fourth quarter, trade fair results showed total orders by value would fall by the high teens in percentage terms year-on-year.

This included a fall of more than 20 percent for apparel products, it said, and a low teens decrease for footwear products.

"Competition within the sporting goods industry has intensified, discount promotion efforts have further increased and the pressure of inventory clearance at the retail level remains strong," the company said.

The announcement said the company also saw a "substantial" increase in brand marketing and promotion expenses after it signed a five-year agreement to be the equipment sponsor for the Chinese Basketball Association. The agreement runs from the fourth quarter this year to the third quarter of 2017.

Other profit factors include impairment of intangible assets on the Lotto brand licensing business, as well as interest payable on convertible bonds.

In the face of these challenges, "during this year and next year, the group will strive to clear out inventory at the retail level, streamline the retail store network, control the pace of new store openings, close inefficient stores and improve retail efficiency", the company said in the statement.

Li Ning's sluggish performance is in contrast with the robust growth of the top local sportswear brands in 2008, the year of the Beijing Olympic Games. That year, the company's profit grew 57.4 percent.

Last year, sales fell 5.8 percent to 8.93 billion yuan ($1.4 billion). Profits deteriorated as well to 631 million yuan, from 1.54 billion in 2010 and 1.34 billion in 2009.

The company is lagging its major rival, Anta, in terms of the number of retail stores, profit growth and market position, said Zhao.