The company released operating data for the first quarter of 2024, and sales performance was in line with expectations. 24Q1 Li Ning's main brand (excluding Li Ning YOUNG) achieved low unit growth in retail sales (data from company announcements and public conference calls, same below). Among them, the number of units reduced under offline channels, the number of units growing in offline direct management, the number of units falling in distribution, and e-commerce grew at a low level of 20% to 30%. The performance was in line with expectations. Online sales are generally better than offline sales. It is expected mainly due to the concentrated rebound in customer flow and consumption in 23Q1 after the epidemic eased, and some traffic returned online in '24. At the same time, the direct sales channel performed better than the franchise, mainly due to the better performance of the Ole channel in direct management.

The running shoe category is growing rapidly, and the channel side continues to be optimized and adjusted. 1) By category, running shoes and fitness products performed well, and basketball is still being adjusted in the short term. According to the company's public conference call, the overall growth rate of the running shoe category was more than 20% in the first quarter, and sales of the Red Rabbit 7 Pro running shoes have increased nearly 50% since its launch; in addition, fitness products also experienced double-digit growth; the basketball category experienced negative growth in the first quarter. Next, the company will further strengthen the basketball category research and development, launch products that meet the needs of users in the low-tier market, consolidate its market position, and focus on improving indicators such as discounts and sell-out rates. 2) Offline stores are still being optimized in the first quarter, and net store openings are expected throughout the year. According to the company's public conference call, as of 24Q1, there was a net decrease of 26 sales points for Li Ning's main brand (excluding Li Ning YOUNG), of which direct sales increased by 1 to 1,499, and sales decreased by 27 to 4715. The number of Li Ning YOUNG sales outlets was 1,405, a net decrease of 23. In '24, the company plans to close about 20 directly-managed stores, about 100 dealerships, and 150 Li Ning YOUNG stores, mainly in the second half of the year. 3) In terms of same-store performance, e-commerce has improved significantly, and direct management and distribution channels have declined. The number of units in the same store of the Li Ning brand (excluding Li Ning YOUNG) declined year-on-year in the first quarter of '24. Among them, the number of units declined under the direct management channel, the distribution channel fell 10% to 20% in the middle, and the e-commerce channel increased by 20% to 30%. According to the company conference call, offline same-store performance was relatively weak, mainly related to the weakening of offline customer traffic. The decline in offline customer flow in the first quarter was about double digits.

Inventory remains at a healthy level, and discount rates are improving steadily. 1) The inventory and storage age structure both performed well. According to the company's public conference call, as of the end of March, the company's inventory sales ratio was slightly higher than 4 months, which was an improvement over the previous year. The storage age structure remained flat year over year, and 80% were new products within 6 months. 2) Improved inventory drives a tightening of discount rates. According to the company's public conference call, the brand's online and offline discounts in the first quarter all showed a low single-digit year-on-year improvement. The overall offline discount level was in the high 40% off range, and the same period last year was in the middle of 60% off. Direct sales channels improved the best, with mid-single digit year-on-year improvements. 3) Improvements in tag prices and discounts drive the increase in ASP, which is the main driver of growth. According to the company's public conference call, the company's tag price rose in the first quarter, and the number of units with low discounts increased, which jointly drove the increase in the number of units in ASP. However, the double-digit decline in offline customer flow led to a drop in the number of high units sold, and in the end, offline sales declined by the number of low units. In the future, under healthy inventory control, it is expected that discount improvements will continue, ASP is expected to remain stable, and sales volume is expected to improve as the base is relaxed and new products are launched.

The retail side is recovering steadily. Growth in the second half of the year is expected to be faster than in the first half of the year, and management maintains guidance throughout the year. Management believes that the company's goal for 24 years is steady operation and pragmatic development. On the basis of ensuring the health of core operating indicators, continuous product upgrades and channel optimization are carried out to fully cope with the uncertain market environment. Currently, the newly launched products in the Running Shoe Matrix are performing well. In May, Wade's Road basketball shoes will be officially launched. Combined with the subsequent launch of new products such as low-priced basketball shoes and running shoes, and in the second half of the year, due to the effects of the peak season and the easing of base pressure, the flow rate is expected to accelerate. Currently, the company still maintains the goal of increasing the number of units in revenue and low double-digit profit margins for the whole year.

The company continues to cultivate sports tracks, has unique brand assets, and continues to increase its ability to develop products and create popular models. The 24-year development target is relatively steady, focusing on long-term principles and business quality. Subsequent sales growth is expected to accelerate, driven by activities such as the launch of products such as basketball shoes and running shoes in the second quarter, and supporting marketing for the Olympics. Maintaining the profit forecast, the company's net profit for 24-26 is estimated to be 33/37/4.1 billion yuan respectively, corresponding to PE 13/12/11 times, maintaining the “increase” rating.

Risk warning: New product performance falls short of expectations; channel inventory risk; market competition increases risk; consumption recovery falls short of expectations.