Incidents:

Revenue and net profit to mother for the first three quarters of 24 years increased 4% year over year and fell 84% year on year. Q3 profit pressure increased, and Golix released its 2024 three-quarter report. In the first three quarters of 2024, the company achieved operating income of 2.15 billion yuan, a year-on-year increase of 4.2%, net profit of 21.53 million yuan, a year-on-year decrease of 84.2%, after deducting non-net profit of 13.22 million yuan, a year-on-year decrease of 89.6%, and EPS of 0.06 yuan. Among them, the company achieved operating income of 0.7 billion yuan and net profit to mother of -37.03 million yuan in a single quarter in Q3.

On a quarterly basis, the 24Q1-Q3 company's revenue in a single quarter was +12.5%/-1.1%/+1.6%, respectively, and net profit to mother was -38.2%/-52.9%/loss, respectively.

Comment:

The main brand/Laurel/SP brand performed relatively well, and EH/IRO was still under high pressure 1) By brand, the revenue share of Golix, Laurel, Ed Hardy and Ed Hardy X, IRO, and Self-portrait brands in the first three quarters of 24 was 38.1%/13.1%/8.4%/21.6%/16.5%, respectively, with revenue of +14.2%/+21.3%/-19.8%/-17.0%/+18.2%, respectively. Among them, against the backdrop of the weakening retail environment in Q3, domestic business revenue increased 5.3% year on year, while Golis/Laurel/SP/IRO's revenue in China remained flat year over year/ +9.2%/+31.7%/+8%; EH/IRO's overseas revenue declined under pressure year on year.

2) By channel, direct-run stores and distribution stores accounted for 84.2%/13.7% of revenue in the first three quarters of 24, respectively, with revenue of +10.3%/-25.5%. Looking at online and offline sales, revenue for the first three quarters of 24 was 80.7%/17.1%, respectively, with revenue of -1.8%/+37.5%, respectively.

3) In terms of number of stores, the company's total number of stores was 658 at the end of September '24, a net increase of 6 (+0.9%); among them, Colisse, Laurel, Ed Hardy, and Ed Hardy X, IRO, and Self-portrait stores were 295 (-2.0%) /90 (+3.4%) /91 (-4.2%) /70 (+25%).

The increase in the expense ratio exceeds the gross profit margin, increased inventory and slowing turnover. Gross profit margin increased by 1.3 PCT to 68.2% year-on-year in the first three quarters of 24. On a quarterly basis, the gross margin of 24Q1-Q3 companies in a single quarter was +1.7/+2.0/+0.5PCT to 67.3%/71.4%/66.1%, respectively.

Expense rate: The cost rate increased by 5.6 PCT to 62.9% year-on-year during the first three quarters of 24 years, with sales/management/R&D/finance rates of 50.8%/8.6%/2.6%/0.9%, respectively, +5.4/+0.3/+0.1/-0.2 PCT, respectively. Among them, the increase in sales expenses was mainly due to the decline in overseas business revenue and cost rigidity, as well as the year-on-year increase in direct stores and labor costs. On a quarterly basis, the expense ratio for the single quarter from 24Q1 to Q3 was +2.6/+6.9PCT, respectively. The significant increase in the cost rate since Q2 was mainly due to the increase in sales expenses.

Other financial indicators: 1) Inventory increased by 1.1% to 0.95 billion yuan at the end of September '24 compared to the beginning of '24, an increase of 22.8% year on year; the number of inventory turnover days was 375 days, an increase of 68 days over the previous year. 2) Accounts receivable decreased by 19.6% to 0.3 billion yuan at the end of September '24 compared to the beginning of '24, a year-on-year decrease of 3.5%; the number of accounts receivable turnover days was 42 days, an increase of 3 days over the previous year. 3) Investment income and asset impairment losses in the first three quarters were -70.0% and +88.2%, respectively; 4) Net operating cash flow was 0.24 billion yuan in the first three quarters, a decrease of 32.6% year-on-year.

Overseas business adjustments have been stepped up in the short term, and performance is expected to be temporarily pressured. To maintain the “increase in holdings” rating companies adhere to a multi-brand strategy. Against the backdrop of poor domestic retail sales in the first three quarters of 24, the company's domestic business revenue continued to grow and performance was steady, but overseas business dragged down overall revenue and profits. Currently, there is still uncertainty about overseas macroeconomic factors, and the company will step up the adjustment of the IRO brand's overseas business. It is expected that the short term will put pressure on the cost side, and performance will be gradually pressured.

We lowered the company's profit forecast for 24-26, corresponding to EPS of 0.14/0.53/0.85 yuan for 24-26 (down 79%/40%/20% from the previous profit forecast, respectively), and the 24/25 PE was 50/13 times. Considering that performance is under pressure in the short term due to increased adjustments and there is still room for recovery in the future, we maintained the “gain” rating.

Risk warning: weak domestic and foreign demand; small brand expansion falls short of expectations; improper cost control; inventory backlog; risk of impairment of goodwill; exchange rate fluctuations.