China International Capital Corporation released a research report stating that TOPSPORTS (06110) maintains an "outperforming the industry" rating, with EPS forecasts for FY25/26 remaining unchanged at 0.22/0.28 yuan, a Target Price of 3.1 Hong Kong dollars unchanged, corresponding to a PE of 14/10 times for FY25/26. The company announced its 3QFY25 (September to November 2024) operational performance: total sales amount for retail and wholesale businesses decreased in the mid-single digits year-on-year, and the gross sales area of directly operated stores decreased by 2.1% compared to the end of August.

CICC's main points are as follows:

The decline in quarterly revenue growth rate narrowed sequentially, guided by inventory as the core element in operations.

In 3QFY25 (September to November 2024), TOPSPORTS' total revenue across all channels decreased in the mid-single digits year-on-year, with the decline narrowing from the low double digits compared to the previous quarter.

By channel, the decline in retail channel flows was slightly better than that of franchise channels, and channel optimization is still ongoing. The gross sales area of directly operated stores decreased by 4.4% year-on-year and 2.1% compared to the end of August. As of the end of November, the number of directly operated stores for TOPSPORTS decreased by a high single digit year-on-year, and the average area per directly operated store is still increasing year-on-year. Online sales continue to grow rapidly, and the company effectively seizes sales opportunities, having double-digit year-on-year growth in online sales during 3QFY25, with online revenue from direct stores accounting for 40% of direct revenue.

Regarding inventory and discounts, the company guided operations in the quarter with the core goal of "improving year-on-year inventory by the end of FY25", appropriately relaxing retail discounts in 3QFY25 to control inventory. Simultaneously, due to the increase in online proportion, the retail discount year-on-year deepened in the quarter. As of November, TOPSPORTS' inventory reduction progress was in line with expectations, and the inventory-to-sales ratio at the end of 3QFY25 remained within the normal range of 4-5. By category, the growth rate of professional sports categories outpaced that of mass sports categories, while the growth pressure on Leisure categories was relatively large.

The main brand Nike is currently undergoing active adjustments.

TOPSPORTS, one of the main brands of Nike, is currently making active adjustments on the product side. The firm expects the brand to innovate in specialized segments such as running and outdoor sports. As an excellent strategic partner for Nike in China, TOPSPORTS is also discussing the implementation of brand marketing and sales in China with Nike. Looking ahead, the firm anticipates that the Nike brand will gradually emerge from its adjustment phase, bringing flexibility to TOPSPORTS' revenue growth.

Risks: intensified competition in the industry and a retail environment at the end not meeting expectations.