361 Degrees’ FY2014 Earnings Up 88%

361 Degrees International Limited is one of the leading sports brand enterprises in China, possessing brand marketing, research and development, design, manufacturing, distribution and retail capabilities. The Group’s products include footwear, apparel, accessories and equipment for sport and leisure uses. The Group has established an extensive supply chain management system through proprietary and sub-contracted manufacturing operations; and an exclusive distribution and retail network inChina through distribution via authorized distributors.

Turnover of the Group grew by only 9.0% in 2014 as the bulk of the orders were taken in the previous year when the prevailing sentiment remained weak in the face of the inventory glut in the industry. Operating profit grew, however, by about 105.6%, primarily because of a fully justifiable write-back in impairment provision as a result of a vastly-improved control on trade debtors, and a generally well-balanced oversight on most of the key operational issues.

There was a general improvement in volumes for all the product groups and despite a reduction in wholesale prices which became effective in the year, average selling prices were on an upward trend; this augurs well for the future as product differentiation and price segmentation become increasingly important in what is still a highly competitive industry. Deserving a special mention is the 361° Kids unit, which reported a 20.7% increase in revenue, buoyed by an improvement in both volume and average selling prices, as it sets a new benchmark in the industry with the launch of «Smart» shoes and consolidates its leading position.

Gross profit margin improved by 140 basis points to 40.9%, as the Group juggled between in-house production and OEM sourcing for the most optimal results, with a higher productivity in the in-house apparel unit also a contributing factor. As there is still an over-capacity in the OEM manufacturing sector, there are good reasons to believe that this level of profitability can still be maintained in the foreseeable future.

Major operating costs in both selling and distribution, as well as in administrative, were generally kept in line with the higher revenue, with a few notable exceptions.

Over the last three years when the industry has been in the doldrums with the overhang of inventories resulting in severe discounting, the Group has quietly implemented a rack subsidy scheme to help retailers improve the store image and shopping experience. In 2014, the Group accelerated on this promotion, bringing a further 2,125 stores into full compliance with the latest corporate and operational standards, which resulted in a charge ofRMB214.1 million, up 25.6% from the previous year. The other exception is staff costs which rose 21.9% as the Group recruited several senior hires to improve internal general management as well as to drive its overseas expansion.

In the year under review, there was net cash generated from operating activities amounting toRMB911.2 million (2013: RMB323.2 million). Given the relative maturity of the Group’s production facilities, not much was required on capital expenditure and there were no other major projects, with the result that the net cash position of the Group (including deposits and other cash equivalents) strengthened toRMB2.6 billion (2013: RMB2.1 billion). This strong financial position places the Group in good stead for any business opportunities that may arise out of the ongoing consolidation of the sportswear industry.

The Board of Directors, noting the excellent results of the Group, have declared a final dividend ofRMB3.0 cents per share, which together with the interim dividend ofRMB5.0 cents (2013: RMB4.0 cents) brings the total dividend for the year toRMB8.0 cents per share. No final dividend was declared in 2013.

Looking ahead, the Group is confident that despite a slowing economy in China, it is generally agreed that the fundamentals of the sportswear industry have never been better, particularly as the Central Government is resolute in its reforms to encourage a fitter and healthier society and to drive domestic consumption as an engine for sustainable growth. With a strong order book on hand for 2015, and a good pipeline of value-for-money products, the Board is confident of another strong year of earnings.