On May 21, the American sports brand Lululemon (LULU.US) issued an announcement announcing the departure of its product director Sun Choe.

After the news was announced, Lululemon's stock price fell by more than 7% the next day. Raymond James analyst Rick Patel pointed out in a report that Sun Choe's withdrawal heightened “concerns” in the short term. Clearly, the market sees the departure of its product director as a sign of further weakening of Lululemon's sales.

Coincidentally, while Lululemon's stock price was thwarted due to the departure of the product director, the stock price of another sports brand, Yamafen Sports, also fell due to poor earnings conditions in Q1.

The Zhitong Finance App learned that on May 21, Amalfin Sports (AS.US) announced the 2024Q1 quarter results. According to the data, Yamafin Sports' Q1 revenue increased 13% year over year to 1.18 billion US dollars, exceeding the average analysts' expectations of 1.13 billion US dollars; however, its net profit for the period was 6.9 million US dollars, down more than 60% year on year; net profit attributable to shareholders was 5.1 million US dollars, down more than 70% year on year.

In the context of the current domestic and overseas market environment being completely open and the overall revenue of the industry increasing dramatically, the Q1 results handed over by Amalfin do not seem ideal, and it also directly affects its stock price. As of the close of the US stock market on May 21, Amalfin Sports's stock price was reported at $14.76, down nearly 8%.

Profitability is still a big problem

In fact, from the business side, Amalfin's Q1 performance is still remarkable.

In terms of overall business revenue, it achieved a double-digit increase of 13% year over year, which is worthy of investors' attention. Due to the positive impact of the Q1 quarter of 2023 due to the positive impact of the decline in global public health events, there is a high benchmark for current results. However, even after comparing these two sets of data, Amalpine achieved significant growth in Q1 this year.

Breaking down its business data, it can be found that although Salomon's footwear business achieved double-digit growth in the Greater China region and the Asia-Pacific region, behind the popularity of the market, Amalfin's outdoor performance apparel business only increased 6% to 400 million US dollars; the revenue of another ball and racket equipment business was even only 273 million US dollars, down 14.2% from the previous year.

The key to truly supporting Amalfin's performance is the outdoor functional apparel business. The business's revenue increased 43.7% year over year to $510 million in the Q1 quarter, and the core brand of this business is Archaeopteryx. It was the outstanding performance of the brand at the beginning of the current period that boosted the growth of Amafen's overall performance beyond expectations.

In addition to promotion from the brand side, the DTC business under the direct brand management model is also the key to Yamafen's performance growth. According to the data, according to channel and region, Amalfin's DTC (direct-to-consumer) channel growth rate was 41%, and double-digit growth was achieved in all regional markets. The growth was mainly driven by Greater China and the Asia-Pacific region. Their revenue increased by 51% and 34% respectively, EMEA (Europe, Middle East, Africa) grew 1%, and revenue in North America had “zero growth”.

However, it is also the vigorous construction of DTC channels in recent years that has become the main reason why Amafen's profit margins have declined.

According to the Zhitong Finance App, Amalfin has been losing net profit continuously in recent years, and the continuous rise in sales expenses is an important reason for this. According to the prospectus previously submitted by Amalfin, the company's sales and marketing expenses from 2020 to 2022 were US$733 million, US$963 million, and US$1,108 million, respectively.

In fact, the increase in sales expenses is inseparable from investment in DTC channels. Judging from the change in channel investment ratio, in the Q1 quarter of 2023, Amafine's DTC channel revenue accounted for about 33.1%, but in the Q1 quarter of this year, its revenue share increased to 41.3%. The corresponding share of current operating expenses in the revenue increased from 40.2% in Q1 2023 to 45.2% this year.

Financial reports show that at present, the number of retail stores owned by the Archaezoniao brand has reached 146, an increase of 12% over the previous year, providing a driving effect on the DTC channel revenue growth for the technical apparel sector.

However, even with increased investment in DTC channels, Archaeopteryx has not been able to bring higher profits to Amafine. In terms of gross margin, compared to the parent company's record high of 62.6% gross profit margin in 2023, Amafen's gross margin is currently only 54.0%. It is also driven by a lack of brand power, so profit is still a persistent problem for Amafen. From 2020 to 2023, its net losses were US$237 million, US$126 million, US$253 million and US$209 million respectively, with a cumulative loss of more than US$800 million over four years. Due to another year-on-year decline in the company's net profit in the Q1 quarter of this year, the profit situation for the whole year does not seem optimistic.

Let Archaeopteryx “fly out”

As a global sports and outdoor brand company, Amalfin currently has three core brands: high-end outdoor equipment brand Arc'teryx (Archaeopteryx), French mountain outdoor off-road brand Salomon (Salomon), and American tennis equipment brand Wilson (Wilson). For Amalfin, the key to its future revenue and profit growth is how to “play” with these three brands.

For its core brand, Archeopteryx, the problem it is currently facing is probably the “sales channel dependency” in Greater China, just like its competitor Lululemon.

Take Lululemon as an example. The average revenue growth rate in the past ten years was 88.91%, far exceeding the industry average. In 2023, Lululemon's revenue reached US$9.6 billion, up 19% year over year, mainly due to significant growth in the Chinese market.

However, in this annual report conference call, the company's management expressed concern about the North American market, mentioning that Lululemon's sales in North America started slowly in the 2024 Q1 quarter. Furthermore, compared with the 29% year-on-year revenue growth rate in North America in the 2022/Q4 quarter, it was only 9% in the same period in 2023, and even down 3 percentage points from the 2023Q3 quarter.

Back to Archaeopteryx, in fact, the brand also had the above problems. According to previous prospectus data, Archaeopteryx has 63 stores in Greater China. Greater China has become the largest market for Archeopteryx. During the same period, Archaeopteryx's Greater China region achieved revenue of 453 million US dollars, contributing nearly 80% to the total revenue of the Greater China region. In comparison, there were 48 Archaeopteryx in North America, 21 in the rest of the Asia-Pacific region, and only 6 in Europe during the same period.

At present, Archaeopteryx's sales in Greater China have reached 2/3 of Lululemon's, and the number of stores is close to half of Lululemon's, which means that Archaeopteryx is beginning to face the same market competition problems as Lululemon.

Take the yoga track where Lululemon has an advantage. In the Chinese market, Lululemon's various substitutes are pouring into the yoga track. Sports brands such as Anta, Decathlon, Nike, Adidas, Li Ning, and Descente are all speeding up the launch of yoga series products; while Ubras on the underwear circuit has also launched products such as yoga pants and a beautiful back to “grab the cake.”

As far as Archaeopteryx is concerned, manufacturers such as Under Armour and Onpao are also currently competing for outdoor brand tracks in Greater China. Taking Onpao as an example, they are mainly benefiting from Onpang's expansion in the Chinese market. The growth rate of the Asia-Pacific market, led by the Chinese market, reached 75.9% in 2023. By the end of 2023, Onpou had opened 22 direct-run stores in China. Compared with the 12 stores that entered the Chinese market in 2018 until the end of 2022, the speed and pace of opening stores has accelerated markedly. At the previous performance exchange meeting, Onpao emphasized expanding the coverage of the Chinese market in the next three years and plans to increase the sales share of the Chinese market to 10%.

Therefore, the key to investing in Amalfin now depends on its overseas market expansion outside of Greater China. Judging from Yamafen's execution strategy, the company is clearly preparing to first open up DTC channel construction and strengthen the Archaeopteryx brand power through the channel. This means that the core of Amafen's subsequent “reinventing an Archaeopteryx” overseas is the construction of overseas DTC channels, and thanks to the parent company's accumulated experience in overseas DTC channel construction for sub-brands such as FILA, Archeopteryx's future overseas expansion path seems to have already been opened.