Over the past 19 years, income has continued to decline compared with the same period last year, and net profit has been at a loss.

In the first three quarters of 19 years, the company achieved operating income of 4.034 billion yuan, down 27.27% from the same period last year; the net profit returned to the mother was-238 million yuan, deducting non-net profit-248 million yuan, EPS-0.09 yuan. The loss of net profit is mainly caused by the decline of income, the decline of gross profit margin and the rigidity of expenses.

From a quarterly point of view, 19Q1~Q3 revenue increased by-20.68%,-44.81% and-16.99% respectively compared with the same period last year. Since 2019, due to the weakness of terminal retail and the closure and adjustment of inefficient direct stores, the revenue side has continued to decline. In the first half of the year, due to the delay in the listing of goods in the spring and summer of 1919, the revenue declined significantly compared with the same period last year. The delivery period of the supply chain gradually improved in the second half of the year, and new products in autumn and winter were listed on demand. The decline in revenue narrowed in the third quarter. In terms of profit, the net profit of 19Q1~Q3 in a single quarter was 38 million yuan,-176 million yuan and-100 million yuan respectively, with losses increasing since the second quarter.

Lower gross profit margin, higher expense rate, slightly slower inventory turnover, and pressure on accounts receivable and cash flows

Gross margin: in the first three quarters of 19 years, gross margin fell 4.33PCT to 41.42% compared with the same period last year. 19Q1~Q3 single-quarter gross profit margin fell 1.40,2.93 and 7.69PCT respectively compared with the same period last year, which has been dragged down by destocking efforts since the second quarter.

Expense rate: during the period, the expense rate increased 1.23PCT to 43.63% compared with the same period last year. The sales / management / R & D / financial expense rates were 37.34% (year-on-year + 0.22PCT), 2.51% (+ 0.14PCT), 2.17% (+ 0.16PCT) and 1.61% (+ 0.44PCT), respectively. The total cost is relatively rigid and the decrease is less than that of income, resulting in an increase in the rate of expenses.

Other financial indicators: 1) inventory is 8.15% lower than at the beginning of 1919, 13.16% lower than the same period in 18 years, and the inventory turnover rate is 1.05, slightly slower than the same period last year.

2) accounts receivable increased by 15.16% to 1.402 billion yuan over the beginning of 1919, mainly due to an increase in credit sales. The turnover rate of accounts receivable was 3.08, down significantly from 6.88 in the same period last year.

3) the impairment loss of assets decreased by 38.19% to 123 million yuan compared with the same period last year, mainly due to the reduction of inventory decline loss.

4) the net cash flow of business activities decreased significantly by 75.74% to 51 million yuan compared with the same period last year, of which the cash obtained from selling goods decreased by 23.38% to 4.388 billion yuan compared with the same period last year, and the cash expenditure on purchasing goods decreased by 21.22% to 2.615 billion yuan compared with the same period last year. Cash flow pressure mainly comes from the decline in income and support for franchisees (increased accounts receivable).

Inventory removal will be intensified, and the pressure on the profit side will remain.

In 2018, the company's revenue began to improve, and the year-on-year growth rate of revenue rose to nearly 20% from the positive and negative single-digit fluctuations in previous years, indicating that the company's early active reforms were effective. However, due to the weakness of the terminal retail environment, the company's continued adjustment and optimization of channels and the delivery of goods in the spring and summer of 1919, revenue has declined, while the profit side has also suffered losses and pressure.

The company expects to return home net profit of-10 million-500 million yuan in 2019, mainly against the background of continued weakness in the terminal sales environment, although the problem of delivery time in the supply chain in the first half of the year has been improved, however, the company will further increase inventory removal efforts, online and offline channel plans to make use of the fourth quarter "double 11", "double Twelve" and other major marketing activities to simultaneously carry out strong promotional activities to speed up the recovery of cash.

The company plans to raise no more than 1.304 billion yuan in a non-public offering to invest in brand upgrading and product supply chain transformation projects (to use the raised funds of 999 million yuan), to repay bank loans (305 million yuan), and to issue shares with a lock-up period of one year, which needs to be approved by the CSRC.

We believe that short-term company performance is under pressure, which is mainly affected by the delivery period of spring and summer goods in the first half of the year, and destocking in the second half of the year may increase the drag on gross profit margin and profit, and focus on increasing sales in the fourth quarter to promote cash flow improvement. The above factors are expected to be alleviated in 2020, and the year-on-year improvement is expected to be achieved in the context of 19 years of low base. Considering the lack of obvious improvement on the retail demand side and the increasing pressure on the company's performance, the EPS in 1921 was lowered to-0.23,0.01,0.05 yuan, to "neutral" rating.

Risk tips: consumption continues to be weak, goods are not digested as expected or inventory is overstocked, and improper fee control.