Financial Report 2023 | BOSIDENG Performance Conference: Can Brand Upgrades Counteract Consumer Downgrading?

Over the past five years, benefiting from the trend of consumer upgrading, Bosideng (3998.HK), the global leader in down jackets, has achieved the high-end positioning of its brand amid controversy, with the retail price of its products increasing at an average annual growth rate of 20%.

At the same time, thanks to the improvement of brand strength, Bosideng's profitability has been continuously enhanced. During the five-year period, its net profit growth rate far exceeded the revenue growth rate, with compound annual growth rates of 28.3% and 13.6% respectively. The gross profit margin of its main brand, Bosideng, reached 70.8%, which is 3 percentage points higher than that of Canada Goose.

However, due to external factors such as the pandemic, Bosideng's growth in the brand's down jacket business has slowed sharply in the previous fiscal year, and the management's description of the pricing strategy has become more cautious.

Bosideng's CFO and Vice President, Zhu Gaofeng, stated in the 2023 fiscal year performance briefing that the decrease in gross profit of its mid-to-low-end brands, Xuezhongfei and Bingjie, was due to changes in the Chinese consumer goods market: "On the one hand, there is brand upgrading, and on the other hand, there is simultaneous consumer downgrading."

This phenomenon has also been interpreted by CICC as a "K-shaped recovery". In a report titled "K-shaped Recovery: High-end Inflation, Low-end Deflation," CICC pointed out that the high-end consumption recovery in the industry is faster than that of the mid-to-low-end.

This year, enthusiastic luxury consumers have propelled LVMH's boss to the top of the world's richest list, and high-end down jacket brands Canada Goose and Moncler both maintained growth rates of over 20% in the previous fiscal year.

However, not all high-end brands will benefit, at least in the mass consumer goods sector. FILA, which used to be Anta Sports' growth engine, experienced negative growth in the past year, while Anta's main brand, which is relatively affordable, achieved a growth rate of 15.5%.

When the march of consumer upgrading comes to a halt, the strategy of raising prices may not be so effective. How to capture the limited purchasing power is the question that Bosideng needs to answer now.

More cautious pricing strategy

On June 28, Bosideng released its financial report for the 2023 fiscal year (ending on March 31, 2023). During the reporting period, Bosideng achieved revenue of 16.774 billion yuan, a year-on-year increase of 3.5%; operating profit of 2.826 billion yuan, a year-on-year increase of 10%; and net profit of 2.139 billion yuan, a year-on-year increase of 3.7%.

However, Bosideng's previous experience of "the more expensive, the better it sells" was somewhat ineffective in the previous fiscal year. The total revenue contribution of the brand's down jacket business was 13.575 billion yuan, a year-on-year increase of 2.66%.

But the growth rate of Bosideng's main brand decreased from 16.3% last year to 1.2%; the performance growth rate of the mid-range brand Xuezhongfei decreased from 76.6% to 25.4%; and the low-end brand Bingjie recorded negative growth. The management attributed this to the peak sales period of down jackets in November and December last year, when the pandemic caused a significant reduction in foot traffic.

Another core business, OEM manufacturing, contributed 2.294 billion yuan in revenue, accounting for 13.7%, with a gross profit margin increase of 1.3 percentage points to 19.9%. Regarding this achievement, Zhu Gaofeng mentioned that the export of OEM business has been under pressure in the past, but it has achieved growth for three consecutive years. According to Minsheng Securities research report, Bosideng's OEM business clients include well-known brands such as Adidas and Columbia.

During the performance briefing, Bosideng's management also discussed the changes in the consumer environment. Although they emphasized that Bosideng will still focus on the main brand, they also mentioned the three key areas of "cost-effective products" that maintained double-digit growth YoY in the previous fiscal year.

As for the business strategy in the new fiscal year, Zhu Gaofeng stated that they will develop products that are "in line with the characteristics of the times" and "meet consumer needs," which will definitely seize market opportunities. In terms of pricing strategy, Zhu Gaofeng said, "We need to be cautious this year. The brand needs to go 'up,' but we must also consider the actual market situation in terms of pricing."

Due to the strong seasonality of down jackets, there are obvious peak and off-peak seasons. Therefore, Bosideng has tried to make the business "seasonal" in the past, but the effect was not good, so they set a strategy to focus on the down jacket business in 2018.

Currently, Bosideng's women's clothing business is in a shrinking state, accounting for only 4.2% of revenue. However, Zhu Gaofeng stated that the company has made adjustments to the management and operation team of the women's clothing business this year, and a turnaround is expected in 2023.

Last year, Bosideng once again ventured into spring and summer clothing by launching sun protection clothing products, attempting to earn a functional premium. The Hong Kong Stock Exchange, which specializes in selling sun protection products, achieved a comprehensive gross profit margin of over 60%.

During the performance briefing, Zhu Gaofeng revealed two sets of sales data: the annual sales of sun protection clothing exceeded 100 million yuan last year, and the sales from April to June this year exceeded 200 million yuan. He also mentioned that sun protection clothing products are only sold in more than 1,200 outlets in first- and second-tier cities, while Bosideng currently has over 3,000 retail outlets.

Shrinking Channels

In the past five years, Bosideng's net profit growth rate, which has been close to 30% on a compound annual basis, has not been achieved by opening stores, but rather through store closures and supply chain transformation to reduce inventory pressure.

During the previous fiscal year's performance briefing, Bosideng's Vice President Rui Jinsong stated that they would progress together with franchisees and distributors, with plans to open 300 new franchise stores. Zhu Gaofeng also explicitly stated that in the new fiscal year, more support will be given to distributors in third- and fourth-tier cities, and 200 stores have already been confirmed for opening.

However, this was not reflected in the financial report for the 2023 fiscal year, and even the trend of wholesale channels for down jackets growing faster than self-operated channels came to a halt. During the reporting period, the wholesale and distributor agent channels contributed revenue of 2.742 billion yuan, a decrease of 10.6% YoY, accounting for approximately 20.2% of the revenue from the branded down jacket business. Correspondingly, the number of distributor stores decreased by 73 to 1,682.

During the performance briefing, Zhu Gaofeng explained to the media, including TradeWind01, that due to the pressure brought by the pandemic, the company extended the three-year period for franchisees to receive their renovation refunds to four years during the annual settlement, resulting in an expenditure of over 100 million yuan. Additionally, in order to clear the inventory backlog held by franchisees, some expenses were incurred. In the past, Bosideng's profitability has improved, benefiting from both price increases and the efficient supply chain mechanism of its pull-ordering system, which has significantly better inventory turnover efficiency than its peers. According to Minsheng Securities' research report, the proportion of initial orders at Bosideng's annual ordering conference does not exceed 40%, effectively avoiding the problem of high initial inventory.

In the 2023 fiscal year, Bosideng's inventory level remained relatively unchanged, reaching a total of 2.689 billion yuan, of which finished goods accounted for approximately 1.799 billion yuan, a YoY increase of 1.5%; work-in-progress inventory was only 11.93 million yuan, a significant YoY decrease of 49.8%.

During the reporting period, Bosideng's inventory turnover days reached 144 days, a decrease of 6 days compared to the previous year. This level is higher than that of Li Ning, a sports brand, but much lower than that of its peers, Canada Goose and Moncler, and comparable to Anta.

This significant change may be Bosideng's flexible adjustment in response to the consumption outlook for the new fiscal year. After the performance briefing, TradeWind01 contacted Bosideng's relevant personnel for inquiries, but as of the time of writing, no response has been received.

In terms of financial management, due to its scale advantage, Bosideng has relatively strong bargaining power in the upstream and downstream of the industry chain, allowing it to further compress the collection period and extend the payment period. In the 2023 fiscal year, the average turnover days of accounts receivable and bills for Bosideng decreased by 1 day to 23 days, while the average turnover days of accounts payable and bills increased by 9 days to 171 days.