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Li Ning Expects ‘Substantial’ Loss on Cost to Revive Growth

Li Ning Expects ‘Substantial’ Loss on Cost to Revive Growth
The Chinese sportswear retailer, founded by the former Olympic gymnast of the same name, has battled declining sales amid competition from Nike Inc., Adidas AG, and Anta Sports Products Ltd. Photographer: Nelson Ching/Bloomberg

Li Ning Co., the Chinese sportswear retailer whose first-half profit fell 85 percent, forecast a “substantial” full-year loss on costs stemming from a plan to revive growth. The stock dropped.

The plan to boost results by reducing excess inventory, getting newer products into stores and improving the sales network will cost between 1.4 billion yuan ($224 million) and 1.8 billion yuan, Li Ning said in a statement today. It didn’t provide an estimate for the full-year loss.

The Beijing-based sportswear retailer, founded by a former Olympic gymnast of the same name, has battled declining sales amid competition from Nike Inc., Adidas AG, and Anta Sports Products Ltd. Li Ning’s first-half profit plunged as higher prices for materials, labor, rent and discounts for distributors hurt profit margins and the company shut some stores.

“Li Ning’s annual loss will surely exceed analysts’ previous consensus estimates, but I believe the company is taking decisive measures to tackle the inventory problem at once.” Jerry Peng, an analyst at Guotai Junan Securities Co. in Shenzhen, southern China, said by phone. “This should help in improving its operation.”

Peng has a reduce rating on the stock and a price estimate of HK$3.92.

Analysts expect Li Ning to report a net loss of 120.8 million yuan this year, according to the average of 11 estimates compiled by Bloomberg.

Shares Fall

Li Ning dropped 3.9 percent to close at HK$4.70 in Hong Kong trading today.

“This is a follow-up to our transformation plan to clear our inventory,” Jin-Goon Kim, executive vice chairman, said on a conference call today. “We believe this is the best way to overcome the problem with a one-time, decisive action to revive the channel.”

Backlog will be reduced through measures such as inventory buybacks and by allowing wholesalers to swap old stock for new products, Kim said. Expenses for the plan will take the form of account receivable offsets and doesn’t impact the company’s cash position, he said.

The sportswear company in July announced the departure of Zhang Zhi Yong as chief executive officer. In January, Li Ning said it would sell 750 million yuan of convertible bonds to TPG Capital and Singapore’s sovereign fund to raise money for more stores and product development.

Founder Li Ning was the final torchbearer at the opening ceremony of the 2008 Beijing Olympic Games. He won three gold, two silver and one bronze medals in the 23rd Los Angeles Olympic Games in 1984, and founded the company after retiring from athletics, according to the company’s annual report.

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