Li Ning warns of loss over plan to buy inventory

The sportswear maker Li Ning Co Ltd warned on Monday it will post a substantial loss for 2012 as a result of its plan to reduce the inventory held by its distributors by buying products back from them.

The plan calls for replacing the older inventory now found on store shelves with newer products that better meet the demands of customers.

It is also aimed at helping distributors have stronger financial positions and better cash flow.

Carrying out the plan will cost the company between 1.4 billion yuan and 1.8 billion yuan ($224.4 million to $288.5 million), the company said.

Li Ning, executive chairman of the group, said: "The results of the pilot plan ... have been highly encouraging. We expect the combined actions to strengthen the long-term productivity and profitability of our sales channels, which will in turn support the profitable growth of our company."

Kim Jin-goon, executive vice-chairman of the group, said the wholesale business practices that had allowed Li Ning to quickly capture a large part of the Chinese market for sportswear did not prove so successful when the market began to slow down and become saturated in the past few years.

The company's overexpansion led to its distributors having too much inventory on their shelves and to a decline in their profits and productivity, he said.

Zhu Qingye, a researcher with CIConsulting LLC, said Li Ning's plan to improve its distribution channels and concentrate once again on basketball products will help the company regain its dominant position in the market.

The company has seen its earnings decline continuously in the past two years. In the first half of 2012, its revenue dropped 9.5 percent year-on-year to 3.88 billion yuan. Its local rival, Anta Sports Products Ltd, had 3.93 billion yuan worth of revenue in the same period.

The Li-Ning brand, which takes its name from former Chinese Olympic gymnast Li Ning, gained popularity following the 2008 Olympic Games, in Beijing.

In 2009, the company opened 751 stores in China and its first store in Hong Kong. That same year, it had more sales on the Chinese mainland than the Germany-based sportswear company Adidas AG.

Since then, an overestimation of the market demand for sportswear and accessories has foisted large inventories on six of the largest makers of those products, including Li Ning, Anta and 361 Degrees International Ltd.

Li Ning has undergone many changes in an attempt at regaining its dominance of the market. In October, it signed a partnership with NBA All-Star Dwayne Tyrone Wade to promote its basketball products in China.

Li Ning is among the many Chinese sportswear brands that have encountered obstacles while trying to expand into overseas markets. To concentrate on its mainland business, Li Ning closed its Hong Kong shop in September.