Shenwan Hongyuan Group: Maintains "buy" rating on XTEP INT'L (01368) as DTC Transformation Steadily Advances

Shenwan Hongyuan Group releases research report stating that XTEP INT'L (01368) continues to optimize its multi-brand matrix by divesting its fashion sports brand after 24 years, focusing on core running business, optimizing resource allocation, and initiating DTC transformation in 25 years to explore more efficient and high-quality channel layout, which is conducive to consolidating its professional sports advantage position, maintaining a "buy" rating. Profit forecasts are maintained with expected net profits of 13.7/14.9/16.0 billion yuan for 25-27 years, corresponding to PE ratios of 11/10/9 times. After divesting its fashion brands, the company's business is more focused on the running track, which helps strengthen its advantage in the running business, leverage brand synergy, and continue to be optimistic about future development. Key points from Shenwan Hongyuan Group are as follows: Steady performance of main brand sales in the third quarter, growth in children and online sales In the third quarter of 25 years, XTEP's main brand achieved a low single-digit year-on-year growth in all channels, continuing the steady trend from the second quarter, in line with expectations. Online sales outperformed offline, with online sales maintaining double-digit growth; children's sales outperformed adults. In terms of categories, running and outdoor products achieved double-digit growth, while lifestyle products experienced slight fluctuations influenced by macro environment, but functional products from XTEP brand accounted for over 60%, maintaining a stable base. Rapid growth of Saucony, continuous optimization of channels and products Saucony brand achieved over 20% year-on-year growth in all channels in the third quarter, with offline sales increasing by over 30%. In the third quarter, 16 new stores were opened, mainly located in core business districts of first and second-tier cities, with a target of opening 30-50 stores for the whole year. The online business has been actively adjusted since the second quarter, reducing low-priced products and tightening discounts to strengthen its positioning as a high-end brand in preparation for the peak sales season in the fourth quarter. In terms of products, Saucony continues to focus on the running scene, expanding its apparel and OG series, receiving positive market feedback. The company maintains confidence in achieving annual growth of over 30% and maintains its medium to long-term plan of doubling revenue by 2027 and an operating profit margin of 15%-20%. Healthy levels of inventory and discounts, stable operating efficiency The inventory-to-sales ratio for the main brand in the third quarter was 4-4.5 months, with discount levels maintained at 7-7.5%, indicating healthy inventory levels and minimal discount pressure, reflecting the company's good supply chain management and terminal sales efficiency. During the same period, Saucony's inventory and discount levels were also within a controllable range, providing flexibility for promotional activities in the fourth quarter. Continued innovation in main brand channels, increasing layout in outlet formats XTEP continues to optimize its channel structure, upgrade store images, with the new image of the 9th generation stores and flagship stores accounting for over 70%. It is also accelerating its presence in shopping centers and outlets. Outlet channels are represented by flagship outlets and selected outlets, with flagship outlets covering an area of over 200 square meters, mainly located in high-end outlet shopping malls, showcasing premium running products. Selected outlets have an area of 600-800 square meters, with significant advantages in product richness and SKU depth. The current monthly store sales can reach million-level sales, with positive feedback. By 26-year, the plan is to expand the number of outlets to 70-100, aligning with the current market trend of good customer traffic and active sales in outlet channels, which is expected to contribute to offline sales growth. Steady progress in DTC transformation, enhancing medium to long-term channel competitiveness In the fourth quarter, the main brand plans to reclaim about 100 stores, with a target of reclaiming 400 stores by the end of 2025, with related capital expenditure of about 400 million yuan. Although the impact on financial statements is small due to the limited number of stores involved, it helps to enhance the channel's medium to long-term competitiveness, enabling the company to timely grasp changes in terminal demand, respond quickly, and follow up on strategies. Risk factors: Consumption recovery lower than expected; increased inventory risk; intensified market competition.