Revenue in the third quarter fell 6% year on year, and gross margin and expense ratios increased due to an increase in the share of direct management. The company is a leading brand in the men's pants segment. The company's revenue for the third quarter of 2024 was -6.3% YoY to 0.69 billion yuan. Benefiting from the increase in the share of direct operations with higher gross margins, gross margin was +1.5 percentage points to 64.4% year over year. The overall cost rate increased by 15.8 percentage points, mainly due to changes in the store structure, an increase in the share of direct-managed stores, an increase in sales terminal operating costs, and an increase in brand promotion activities, which led to a slight increase of 0.9 percentage points in the sales expense ratio. Mainly affected by the increase in the expense ratio, the net interest rate after deduction was -4.6 percentage points year-on-year to -3.7%. Due to market fluctuations during the period, net income from fair value changes in the company's investment business increased, accounting for +16.4 percentage points to 13.7% of revenue, +11.8 percentage points to 12.3% year on year, and net profit to mother increased sharply to 0.085 billion yuan. Inventory levels rose at the end of the third quarter. The inventory amount was +6.1% year over year to 1.01 billion yuan, and the number of inventory turnover days was +30 days to 338 days year over year.

Continue to promote channel optimization and upgrading to improve the quality of operations. 1) Looking at each channel, the company continues to promote the optimization and upgrading of the channel structure, continuously break through high-potential channels, increase the proportion of direct-run stores, and carry out all-round brand strength building to increase the revenue of direct-run stores. Direct store/franchise revenue for the third quarter was +11.4%/-11.5% YoY to 0.23/0.39 billion yuan, respectively, and gross margin +1.9/1.4 percentage points YoY to 71.4%/62.7%. In terms of stores, the number of direct-operated/franchise channel stores was +6/-35 compared to 815/1,541, respectively. Online revenue was -13.1% YoY to 0.05 billion yuan, and gross margin fell 7.6 percentage points YoY.

2) By brand, the revenue of Jiumuwang/FUN/ZIOZIA in the third quarter was -3.1%/-49.2%/-29.7% to 0.42/0.1/0.11 billion yuan, respectively, and gross margin was +1.7/-9.0/+9.7 percentage points year-on-year to 64.8%/59.1%/79.9%, respectively. Jiumuwang is deeply involved in men's pants. As a “men's pants expert,” he released free jeans during the period, using comfortable fabrics to reduce movement restrictions and enhance the product's breathability and skin-friendliness, so as to adapt to consumer needs day by day.

Risk warning: Organizational reforms fall short of expectations, damage to brand image, systemic risk.

Investment advice: Focus on the elasticity of profit recovery after channel optimization and adjustment. I am optimistic that the company's direct management channel will drive revenue growth after channel adjustment and optimization. At the same time, higher direct operating gross margin will drive the company's overall gross margin increase. The cost ratio is expected to continue to be optimized after sales growth resumes, channel adjustment slows down, and store efficiency continues to rise, so I am optimistic that the company's profit will return to elasticity in the future. Due to short-term pressure on the company's performance due to macroeconomic consumption and channel changes, we lowered our profit forecast. We expect net profit to be 0.18/0.24/0.27 billion yuan for 2024-2026 (previous value was 0.28/0.34/0.4 billion yuan), respectively, -4.6%/+31.6%/+11.9% year-on-year. Due to the reduction in profit forecasts, the target price was lowered to 8.2-8.6 yuan (previous value was 10.6-11.2 yuan), corresponding to 19.5-20.5 xPE in 2025, and lowered to a “neutral” rating.