After divesting from the loss-making brand, Xtep chose to replenish its resources.

On February 10th, Xtep (1368.HK) announced on the Hong Kong Stock Exchange its proposal to place 90.909 million existing shares in a manner of old shares first, at a price of 5.5 Hong Kong dollars per share.

The company also proposes to issue 0.5 billion yuan of convertible bonds, with an initial conversion price of 6.325 Hong Kong dollars, convertible into a maximum of 79.0514 million shares.

The announcement states that the net proceeds from the stock distribution and bond issuance are approximately 0.985 billion Hong Kong dollars, which are intended for the further development of the main brand and Saucony's DTC model, enhancing the promotion and product mix of the Saucony brand.

Xtep stated that Saucony has achieved significant success in retail network management, leading it to decide to implement the DTC model to the main brand.

In the future, Xtep's main brand plans to gradually reclaim distribution rights from retiring dealers, optimize the retail channel structure, ensure timely and accurate market insights, ultimately leading to better sales growth.

As one of the globally recognized top four running shoe brands, Saucony is known as the 'Rolls Royce of running shoes.'

In 2019, Xtep established a joint venture with Wolverine Worldwide, acquiring the operational rights for Saucony and Merrell in Mainland China, Hong Kong, and Macau.

Four years later, in 2023, the Saucony brand turned profitable.

In the first half of 2024, Xtep's professional sports division, mainly consisting of Saucony and Merrell, reported revenue growth of 72.2% year-on-year to 0.593 billion yuan; the net income was 0.0318 billion yuan, with operating profit increasing by more than 20% year-on-year.

It is predicted that the sales growth rate of the Saucony brand for the entire year of 2024 will exceed 60%, with retail sales in the third and fourth quarters expected to surpass 50%.

Despite Saucony showing certain growth, on the day the fundraising news was released, the company’s stock price fell by 8.73%.

Some investors questioned the necessity of Xtep's refinancing this time. After all, Xtep, which has consistently paid dividends for many years, does not seem to be short on cash.

Wind data shows that Xtep's historical dividend payout ratio has maintained above 50%.

After the 2024 interim report was disclosed, Xtep announced a dividend of 0.38 billion yuan.

In November of the same year, after completing the sale of the KP Global Group, which holds the K·SWISS and Palladium brands, the company also distributed a special dividend of $1.51.

As of June 30, 2024, Xtep's cash and cash equivalents totaled 3.66 billion yuan.

With ample cash on hand continuing to 'replenish ammunition', can Xtep reverse the slowing growth situation?

Increase investment in profitable brands.

In 2019, Xtep built a diversified matrix through the acquisition of international brands.

In addition to incorporating Saucony and Merrell through joint ventures, Xtep also acquired K·SWISS and Palladium from South Korea's E-Land Group for $0.26 billion.

According to Statistics, Xtep has invested a total of approximately 2.4 billion yuan in the aforementioned mergers and acquisitions.

However, the pandemic and changes in the economic environment disrupted the localization process of the aforementioned brands.

It wasn't until 2022 that Gaiswei opened its first store in the domestic market.

In 2022, the fashion sports Sector where Gaiswei and Paladin are located achieved revenue of 1.402 billion yuan, with only 10.2% coming from the mainland China market.

Revenue in 2023 increased by 14.3% year-on-year to 1.602 billion yuan, with a net loss of 0.189 billion yuan.

Cheng Weixiong, an independent analyst in the fashion Industry and founder of Shanghai Liangxi Brand Management Co., believes that after 2022, the domestic footwear and apparel market trend has shifted from 'sporty fashion' to 'sporting outdoors'. Xtep entered too late, missing the golden period of development.

In May 2024, Xtep announced it would sell its wholly owned subsidiaries, Gaiswei and Paladin, to controlling shareholder Ding Shuibo and his family for $0.151 billion.

Xtep stated in the announcement that Gaiswei and Paladin have cumulatively lost over $0.1 billion since their acquisition in 2019.

In the first three months of 2024, the two brands have already lost about $9 million. Xtep expects the total loss by the end of 2024 to be on par with that of 2023.

After spinning off the sporty fashion Sector from the listed company assets, Saucony, which was the first to achieve profitability, became the optimal solution for Xtep to seek a second growth curve.

In January 2024, Xtep spent 61 million USD to acquire equity in a joint venture, increasing ownership of the business of Maile and Saucony in China to 100%.

Subsequently, Saucony's expansion speed has accelerated.

In 2024, the net increase in the number of Saucony stores reached approximately 48, nearly doubling compared to previous years.

The brand also officially announced Peng Yuyan as the new spokesperson, launching the lunar concept store in Shenzhen and Shanghai, and opening the first city experience store in Peking.

According to SWHY's Research Reports, Saucony's retail sales are expected to exceed 1 billion yuan in 2024.

In Cheng Weixiong's view, Saucony's brand has a relatively low penetration rate in the domestic market, and there is still store opening space in first and second-tier cities. Focused on the running shoe market, Saucony is also expected to leverage Xtep's marketing advantage in the marathon event sector.

Official data shows that Xtep has sponsored over 1,000 marathon events and activities, making it the sports brand that sponsors the most marathon events in China.

In the Shanghai Marathon held on December 1, 2024, Saucony ranked third in the overall runners' wearing rate, accounting for 11.5%.

The president of Xtep Group, Tian Zhong, previously stated that Saucony's brand positioning is aimed at dual elite groups, namely running elites and social elites, which complements and differentiates from Xtep's positioning in the mass sports brand sector.

Guosen Securities compiled sales data from three major e-commerce platforms and found that all three hot-selling products of Xtep in the first quarter of 2024 were professional running shoes, but the average sales price ranged from 310 to 510 yuan.

From this perspective, the higher unit price of Saucony may take on the responsibility of helping Xtep expand its mid to high-end market and improve overall profit margins.

Relevant changes have started to show in the financial statements.

In the first half of 2024, the gross margin of the professional sports division where Saucony belongs reached 56.8%, an increase of 14.8 percentage points year-on-year; meanwhile, the gross margin of Xtep's main brand in the mass sports sector was 43.9% during the same period.

Unwilling to fall behind.

In 2021, Xtep's total revenue surpassed 10 billion yuan, marking the most glorious moment of performance in recent years. The 160X series and 300X series products received recognition from both professionals and the market.

That year, Xtep proposed a 'Five Five' strategic plan.

According to the plan, by 2025, the main brand of Xtep is expected to exceed 20 billion yuan in revenue; including Saucony, the new brand scale will reach 4 billion yuan, with a compound annual growth rate of over 30%.

In order to accelerate towards this goal, between 2021 and 2023, the company accelerated its store opening, with the net increase in store numbers being 130, 162, and 258 respectively.

However, in recent years, the revenue growth rate of Xtep has been slowing down year by year.

In 2023, Xtep's revenue was 14.346 billion yuan, a year-on-year increase of 11.08%, significantly lower than the nearly 30% growth rate in 2022.

Among them, the revenue proportion of footwear products decreased from 60% in 2022 to 57% in 2023, with a growth rate of only 5.3%.

In the first half of 2024, Xtep's overall revenue growth rate dropped to about 10%, while the main brand's revenue growth rate was only 6%.

The inventory turnover cycle is also lengthening.

In the first half of 2023, Xtep's average inventory turnover days rose from 106 days in the same period last year to 115 days, close to 4 months, but fell back to 94 days in the first half of 2024.

The average accounts receivable turnover cycle reached 114 days in the first half of 2024, an increase of 8 days compared to the same period in 2023.

In March 2024, the CFO of Xtep stated during the Earnings Conference that the five-year plan would be put on hold. The company indicated that, given the poor consumer outlook, Xtep has chosen to prioritize profit growth, with the primary task being to maintain stable cash flow.

Cheng Weixiong believes that with LI NING and ANTA occupying the leading positions in the domestic Footwear and apparel market, Xtep's primary task is to differentiate priorities and solidify the running foundation.

The good news is that the running shoe sector, which Xtep has invested in for many years, is showing strong growth potential.

A Research Report from market research company NPD shows that although the growth rate of the global Footwear market has slowed significantly, the prices of high-end running shoes are expected to continue rising in 2024.

NPD pointed out that since the pandemic began in 2020, the sales performance of the running shoe category has significantly outperformed other types of sports shoes.

In recent years, the popularity of domestic marathon events has been rising, with a significant increase in the national participation in long-distance running.

According to statistics from the official website of China Marathon, there were a total of 671 road running events held nationwide in 2024, with approximately 6.56 million participants. iResearch estimates that in the future, there will be nearly 0.3 billion amateur runners and 0.1 billion core runners in China.

Guosen's Research Report suggests that the effect of running shoes driving growth in the sports industry is becoming increasingly evident.

Nike is determined to revitalize its running shoe product line to curb the decline in performance in Greater China. Nike's Chairman and CEO in Greater China, Dong Wei, publicly stated that the potential of the running market in China is enormous and that investments in the running business will be increased.

Leading brands like Anta and LI NING are gearing up, while niche brands such as Hoka One One and Salomon also have their fans.

Xtep, which has 'endured more than a decade of loneliness' in the running shoe niche, may face even more intense competition.

In recent years, Xtep's sales expenses have increased year by year.

From 2021 to 2023, Xtep's sales expenses grew from 1.891 billion yuan to 3.369 billion yuan, with the sales expense ratio rising from 18.8% to 23.5%.

From a long-term perspective, Xtep's choice to focus on the running shoe segment is more to avoid the prominence of giants.

However, over time, the Matthew effect in the industry may become increasingly pronounced.

In the first half of 2024, the cash flow from operating activities (CFO) of Xtep was 0.826 billion yuan, while Anta and LI NING had 8.502 billion yuan and 2.73 billion yuan respectively during the same period.

At the beginning of the year, while the market was hotly discussing the transition of Olympic sponsorship rights between LI NING and Anta, Xtep still lacked exposure at the Olympic event level.

If Xtep wants to further narrow the gap with its competitors, more breakthroughs may be needed.