Xtep wants to catch them young

money-glitz | Caroline Zheng 11 Oct 2021

As China pushes for a fitter nation and weans its children off online games and excessive homework, Xtep (1368) is rolling out plans to cash in on the youth sports market in the mainland.

The popular home-grown sportswear brand aims to grow sales for its kids brand Xtep Kids at a compound annual growth rate of 37 percent to 3.5 billion yuan (HK$4.23 billion) by 2025.

The target makes sense, given that China aims to turn sports into a 5-trillion-yuan market 2025 and has banned after-school tutoring and limited gaming time for kids in the past two months, to "protect the physical and mental health of minors."

The Fujian firm's optimistic outlook also comes amid growing support for home-grown brands called "guochao" - often translated as "China chic" - though how long this trend will last is anybody's guess.

Xtep chief financial officer Ricky Yeung believes rising nationalism among China's youngsters on the back of the Sino-US trade war is likely to have long-lasting and beneficial effects on local brands.

Also, Chinese children today don't admire or desire foreign brands the way their parents did, he points out.

Xtep Kids saw online sales zoom 150 percent during this year's 618 shopping festival while there were around 1,000 retail stores in the mainland for Xtep Kids as of June 30 this year, a 25 percent rise from a year ago.

Sales through online channels - which are more popular among youngsters - are projected to account for 40 percent of Xtep's revenue by 2025, says Yeung, pointing out that online sales contributed 30 percent in the first half of 2021.

However, its adult unit is still the major revenue earner. With a sales target of 16.5 billion yuan for the adult unit, Xtep is targeting sales of 20 billion yuan for its main brand of the same name by 2025, with a compound annual growth rate of 23 percent.

China made up 14 percent of the global sportswear market in 2019, behind the US and Western Europe, but is expected to contribute 34 percent of the industry's growth from 2021 through 2025, according to a report by Bank of America.

Besides, the athleisure trend, which took off in the US long ago, is now taking root in China as well, and this will help local brands grow as mainlanders believe they have better quality, says Yeung.

An athleisure look refers to a style of clothing that is comfortable for doing sports, but also fashionable and attractive.

Yeung expects athleisure clothing will account for 70 percent to 80 percent of sales in its subsidiary K-swiss after the brand is repositioned. Xtep acquired K-swiss and Palladium in 2019 and it also owns Merrell and Saucony together with Wolverine. It is eyeing sales of 4 billion yuan for these four brands by 2025.

In June, private equity firm Hillhouse Capital pumped HK$1 billion into Xtep mainly to grow K-swiss and Palladium in China and the global market. Xtep's stock soared over 30 percent the day after the infusion and as of last Friday, its price was up more than 150 percent this year despite a recent decline.

In a recent report, Credit Suisse revealed sales of sports goods in the mainland fell in September due to recurring waves of the pandemic and it expects that the industry may not see a usual peak season in the fourth quarter due to Covid-19.

But Yeung remains optimistic. He says Xtep has recognized the impact of the pandemic and shipping delays on its overseas businesses for the second half of the year, but believes this will just be a short-term hiccup.

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November 2021

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