Focus On The Third Fiscal Quarter Performance Report Of American Sports Brand ANDMA

At the end of this month, Stephanie Linnartz, the new CEO of the American sports brand ANDMA, will take office. What she has in front of her is a situation that is not optimistic.

On this Wednesday, ANDMA released the third fiscal quarter performance report of fiscal year 2023 as of December 31, 2022. The data shows that:

The quarter's revenue was $1.58 billion, up from $1.53 billion in the same period last year, slightly higher than Wall Street's expectation of $1.55 billion;

Net profit was $120 million, compared with $109.7 million in the same period last year;

Inventories surged 50% to $1.2 billion.

In the first three months of 2022, ANDMA lost nearly 60 million dollars. From April to June, its revenue and net profit were lower than that of the same period last year. By September, although its revenue gradually recovered, its net profit was still low. In the last quarter, Andrea finally took a breather, but the problems facing the company and the new leader are still serious,

Slightly improved performance
Although ANDMA has not been in the vision of Chinese consumers for a long time, this sports brand, which has been established since 1996, has a bright past. Around 2015, the fast-growing Andema once surpassed Adidas and became the second largest sports brand in the US market after Nike. With an annual growth rate of almost 30%, Andema aimed at Nike, the undisputed leader in sports.
However, since 2017, Andrma has slowed down the pace of growth. In 2021, according to the data of CompaniesMarketCap, the market value of Andrma has dropped to the ninth in the global sports brand. In addition to the old giants like Nike, Adidas and Puma, there are two domestic brands, Anta and Li Ning, as well as the new generation brand Lululemon. In 2022, Lululemon will also lose a large part of the sales of Andrma.

The lack of performance growth is a long-standing problem facing Andrma. Although the overall performance of Andrma in the third fiscal quarter of fiscal year 2023 has eased, there are still many problems.

Income of ANDMA product categories | Source: enterprise financial report

First, look at the product category of the brand.

ANDMA's products are mainly divided into clothing, shoes and accessories, of which clothing revenue accounts for more than 70% of brand sales. In the third fiscal quarter of fiscal year 2023, this part of revenue was only $1076 million, down 2.1% from $1.1 billion in the same period last year. In addition, the revenue of accessories products of ANDMA also declined, with a revenue of US $105 million, a year-on-year decline of 1.7%.

The increase of overall sales is made up by the high growth of footwear products. In this quarter, the sales volume of Andema shoes and footwear products was 354 million US dollars, with a year-on-year growth rate of 25%.

For a sports brand, failure to sell products is tantamount to taking drastic measures. Tom Nikic, senior vice president of Wedbush, an American investment institution, who focuses on clothing and footwear, said after the release of the financial report that Andema needs to find its own expertise in the sports industry and understand why people want to buy Andema products, not Nike and Adidas.

At the end of last year, Colin Browne, the interim president of ANDMA, said that ANDMA was observing market changes, adjusting product strategies, and turning the target audience to young athletes aged 16-20. In addition, Andrma will continue to increase its non sports and lifestyle products. Colin Browne believes that if this field develops smoothly, it will triple Andrma's potential market space.

However, in the market environment where product segmentation is becoming more prominent and the product lines of major brands are more complete, it still needs time to test how effective this adjustment can be on the target population. Colin Browne also admitted that many brands in the field of sportswear have begun to compete for this field. "This is a highly competitive field, with many powerful participants."

Income from sales channels of ANDMA | Tuyuan Enterprise Financial Report

Then look at the sales channel performance.

Similar to most sports brands, ANDMA mainly relies on wholesale and DTC channels for sales. In the three months before December 31, 2022, the brand's wholesale channel revenue was $820 million, a year-on-year increase of 6.8%, while its key DTC business declined slightly, with the revenue of $715 million down 1.7% compared with the same period last year.

According to the financial report, the decline in DTC's business income was mainly due to the 6% decline in the revenue of Andema's direct stores, while the e-commerce business, which accounted for 45% of DTC's business income, realized a 7% growth in the quarter, which offset the small decline in DTC's business.

It can be predicted that e-commerce business and digitalization will become the focus of ANDMA's development in the future. At the end of last year, Andrea appointed a new CEO Stephanie Linnartz, who will take office on February 27 this year. Interestingly, the new leader came from across the border. Previously, she was the president of Marriott International. Kevin Plank, the founder and executive chairman of Andrema, explained in an interview that it took them seven months to find a good candidate: "Although it was a great leap from the hotel industry to sportswear, she was selected because of her strength in digital, and she successfully changed the online business of chain hotels."

In ANDMA's view, e-commerce business, which is expected to be high, is an important way for ANDMA to continue to compete with Nike, Lululemon and other brands.

Continued anxiety in the Chinese market
In terms of regional revenue, the Asia Pacific region, where the Chinese market is located, has become the largest drop in the quarter of ANDMA.
In the last three months of 2022, the two regions that used to rely most on the revenue of Andrma experienced declines. The revenue of North America in the quarter decreased by 2.4% year on year to USD1038 million. The Asia Pacific region, which ranked second in terms of revenue in the same period last year, was surpassed by the EMEA (Europe, the Middle East and Africa) region this quarter, with revenue of less than 200 million US dollars, a year-on-year decline of 8.8%.

Speaking of the decline in the performance of these two regions, Colin Browne explained in the conference call that the demand in North America was strong, and the decrease in revenue was mainly caused by discount promotions. The performance of the Chinese market is relatively weak, which has dragged down the income of the Asia Pacific region - specifically, the wholesale business has increased in Asia as a whole, but the e-commerce business has shown a positive momentum only outside the mainland of China.

Income of each region of Andema | Source: Enterprise financial report

Although executives of enterprises said in the teleconference that they had seen signs of improvement in the United States, Mexico and China, this linguistic optimism did not seem to be enough to cover up the anxiety of ANDMA in the Chinese market.

In the nine months from the 2023 fiscal quarter to now, the revenue of the Asia Pacific region is just over 600 million dollars, down 3.4% year on year. The "constant failure" in the Asia Pacific region has made Andrea operate on the store frequently. In the second half of last year, about 1/8 of the stores in Shanghai, the city with the largest number of physical stores in Andema, were adjusted. An employee of Andema said in an interview with the media that some stores were closed because business was difficult.

At the peak of 2021, the number of Andrma stores in mainland China once reached 540, but now when we check Andrma's official Chinese website, the number of stores is only 462.

Serious inventory problems
Of course, the biggest problem facing Andrma at present is undoubtedly inventory.
Despite the implementation of a wide range of discounts and promotions, the inventory of Andrma increased by an astonishing 50% year on year, reaching $1.2 billion. And the company expects that its inventory level will remain high for the rest of the fiscal year, and then peak at the end of the year.
The most common way to clean up the inventory is to discount and promote, and the CFO of Andrma also admitted on the conference call that the inventory pressure will last for a period of time, and the promotion will also last for a longer period of time. From the perspective of financial data, the large-scale promotion of inventory clearing will directly affect the company's profit margin performance. In this quarter, the gross profit rate of ANDMA was 44.2%, down 650 basis points (one basis point equals 0.01 percentage point), and the gross profit rate in the same period last year exceeded 50%. For the whole year's expectation, Andrma said that the gross margin would continue to decline by 3.75% to 4.25%.

Although the problem is very serious according to the data performance, the senior management of Andrma performed surprisingly "calmly". Colin Browne insisted that he was satisfied with the company's inventory, "50% growth is a big number, but when you actually look at the inventory we currently hold, the inventory level we hold is suitable for enterprises worth $6 billion, and our inventory scale is suitable for the way we expect our business to develop next year."

The reason why Andrma is not overly anxious may be that the entire sports shoes and clothing industry is facing serious inventory problems.

This wave of sports brand inventory backlog has a long history. In 2021, the logistics situation was bad, shipping congestion, container shortage and other problems. In addition, Indonesia and Vietnam, where sports brand OEM factories are concentrated, frequently shut down, resulting in delayed delivery of orders in 2022. In the second half of 2022, consumers' consumption desire will decline, which has created the situation of goods accumulation today.

Not only Andema, but also Nike and Adidas, the two giants, suffer from inventory. According to the enterprise financial report data, Nike's inventory in the first quarter of fiscal year 2023 is as high as 9.7 billion dollars, and in the second quarter, although it has declined, it still has as much as 9.3 billion dollars; Adidas is even worse. As of September 2022, the inventory growth rate has exceeded 70%. In addition to the termination of the contract with Kanye, Adidas has accumulated a large number of once popular coconut shoes.

There are two ways to reduce inventory. One is discount. Last year, consumers could see that the discount intensity and frequency of Adidas and other brands increased significantly. The second is production reduction. The US media Front Office Sports reported that sports brands such as Nike and Adidas are expected to reduce orders by 30-40% from the summer of 2023. No matter which of the two methods is used, it is a shock and damage to the enterprise operation.

2022 will not be a good year for most enterprises. For the performance of this year, enterprises can also find "excuses" that seem to be very tenable, and blame the poor data on the external environment. However, as we enter 2023, the old "excuse" will no longer work, and enterprises really need to fight for internal power and resilience.