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1
2011 Interim Results Announcement
24 August 2011
2
Disclaimer
Cautionary note regarding forward-looking statements
This presentation material contains certain forward-looking statements with respect to the financialcondition, results of operations and business of the Company. These forward-looking statementsrepresent the Company’s expectations or beliefs concerning future events and involve known andunknown risks and uncertainty that could cause actual results, performance or events to differmaterially from those expressed or implied in such statements. Certain statements, such as thosethat include the words “potential”, “estimated”, “expect”, “anticipates”, “objective”, “intends”,“plans”, “believes”, “estimates”, and similar expressions or variations on such expressions may beconsidered “forward-looking statements”. Forward-looking statements involve inherent risks anduncertainties. Readers should be cautioned that a number of factors could cause actual results todiffer in some instances materially, from those anticipated or implied in any forward-lookingstatement. Forward-looking statements speak only as of the date they are made, and it should notbe assumed that they have been reviewed or updated in the light of new information or futureevents. Trends and factors that are expected to affect the Company’s results of operations aredescribed in the “Business Review and Financial Review”.
Agenda
3
Financial Review
Business Review
Strategies & Future Plans
Open Forum
4
Business Review
1
2
3
4
5
Inventory Buyback
Brand Portfolio
Brand Building and Marketing
Product Portfolio and R&D
Sales Network
Inventory Buyback and Immediate Actions
Inventory Buyback
Inventory Return Reduce Sell-in
Jointly determined return terms/ conditions with customers and sub-franchises
Return amount: RMB614M in wholesale value
Channels to resell
E-commerce Own factory outlets &
supermarkets
Other Kappa licenses
1
6
SalesNetwork
Sales Network
Reformed Trade Term Policies and
Restructuring of Sales Network
Sales Network
Brought in Seasoned Talents
2
Reformed Trade Term Policies and Sales Organization Restructuring
Set up a closer partnership with
customers
Achieve retail excellence with
customers
Conditional rebate based on
KPIs
More targeted incentive scheme at key city level
New trade term policies to establish better control and incentives for retail
• Separate discount and rebate• Interactive target setting and
review by DX and customers
• DX and customers to co-work on improving ST
• Will consider ST an important factor for customer performance evaluation
• Rebate is conditional and based on target achievement of relevant KPIs
• Add city-level rebate for strategic / key cities
Divide functions for
better dedication
Build retail management
capability
Establishkey account
management
Go closer to the field
and customers
• 8 functional divisions based on sales and retail related requirements
• More resources in place for retail development and operation management
• Dedicated key account management to serve and support key customers
• Establish 5 regional teams to support execution of channel, product and retail management
New sales org to enable transformation from SI to ST focus
XinjiangInner Mongolia
Heilongjiang
Jilin
Liaoning
Guangdong
Jiangsu
Taiwan
Hainan
Qinghai
Sichuan
Hebei
Henan
Hubei
Hunan
Yunnan
Gansu
Guangxi
Shanxi
Shannxi
Zhejiang
FujianGuizhou
Anhui
Jiangxi
Tibet
Ningxia
Chongqing
Shandong
Beijing
Shanghai
Tianjin
North
East
South
West
NortheastRedefined 5 sales regions and established 5 regional sales teams to support the execution of account, channel, product and retail management
New sales regions set up to ensure more consistent culture-based grouping
As of 30 June 2011, there were 40 distributors directly or indirectly operating 3,502 retail outlets
8
Sales Network
Brought in Experienced and ProfessionalTalents for Quick Expertise Buildup
Former National Commercial Excellence Director, GSK Consumer OTC & Healthcare China
• More than 20 years experience in sales and distribution management
• Rich and proven track record of business turnaround via sales force restructuring and revitalization
Former VP of Brand Operations, adidas Sourcing, Ltd.
• More than 25 years of progressive responsibilities in the apparel industry
• Demonstrated successes in the areas of sourcing, product development and demand-chain management
Former Senior Manager, Retail Sales & Operation, G2000 (Apparel) Limited
• More than 20 years experience in retail management
• Extensive experience in apparel, consumer goods and retail industries
James Li (李耀)VP of Sales
Alan ChamberlinVP of Supply chain
Dennis Chau (周廣慶)Director of Retail Excellence
10
Product Portfolio and
R&DKappa P-A.C Series & C19 Series
Curves Series & Soccer Series
Extensive Product Portfolio and R&D
Segment Product Range
3
Design and Development
11
Continued to develop products with bothcreativity and functionality by leveraging Japandevelopment capabilities while cooperating withrenowned international design houses in the U.S.(performance footwear), Japan and Europe(trends)
Joined hands with famous footwear designhouses in Portland and Boston (U.S.) to enhanceand bring more innovation to our footwear series(ex: launch of “Curves” in July, 2011)
K-series – first launch of the design team at TheUniversity of the Arts London targeted for youngconsumers
Continued to collaborate with Michael Michalskyin the development of the P-A.C. series
Design and Development
Key contributions in 1H 2011
follower
45
Segment Product Range
12Q1 Apparel Product Strategy
high
middle
low
PRICE classic smartsports inspire
loverparticipant early adaptor
brand driven
SoccerLogo
P.E.
Basic
C19
Sports Casual
PAC…
Spire
GymRunning
Tennis
Coolor
London
Sports StyleSports Performance
INSPIRATION
12
13
Curves Series & Soccer Series
Soccer SeriesCurves Series
14
Michael Michalsky continued to designthe new P-A.C. collection with the theme“back to basics”
Product weight was trimmed by applyinglightweight fabric, while hollow fiber usedmade products more breathable, morewashable and anti-wrinkle
Cooperated with print media such asHotpot, Trends Health and ModernWeekly to launch a series of marketingcampaigns
P-A.C Series & C19 Series
P-A.C. Series C19 Series
Integrated street styles and sportsfunctions through the use of 3D cuttingand innovative application of fabrics
The launching press conference themed“Ride with mind” was organized in July2011
A city cycling tour named “DiscoveringFixed Gear Culture while IntegratingTrendy Cultures” was kicked off inBeijing
15
Brand Building and Marketing
360 Integrated Marketing Strategy
Enhanced GTM Flow
Brand Building and Marketing4
Marketing Campaigns
Sports Sponsorships
16
Brand Strategy
Event Planning, Execution and
Evaluation
Sales
Further defined the matrix of responsibilities of different departments, promotedinformation transparency and efficient communication
Enhanced GTM Flow
Form a complete closed loop to jointly propel products to head to the market more vigorously and effectively
17
360 Degree Integrated Marketing Strategy
Advertisement
PR campaigns
In-store promotion
Entertainment
Online channels
18
Back to the Mainstream of Fashion
Marketing Campaigns
Digital Media Campaign
Soccer series
Curves Series
Sponsorship for Virgin Racing F1
Team
19
Co-sponsorship of German Bundesliga Club Borussia Dortmund
Official Sponsorship of team clothing for Virgin Racing F1 Team
Sports Sponsorships
20
Diversified Brand Portfolio5
21
As of 30 June 2011, there were 22 RDK stores
A trade fair and fashion show for RDK Fall/Winter collection was held in April 2011
Robe di Kappa
Developed the outdoor series which is tomitigate the effects of the high seasonalityof the brand and make it more suitable forthe China market
In February 2011, Phenix made its firstdebut at ISPO China
Extensive marketing activities will becarried out in a comprehensive way in 2H2011
Phenix China
22
To strengthen product and brand differentiation, the Group gradually enhancedshop in shop and concession corners in multi-brand stores, such as Phenix Outdoorcorner in Harajuku standalone ICI in last autumn
Meanwhile Kappa retail network was expanded with the opening of 5 new outletsin STEP (famous footwear mall in Japan)
Kappa Golf also entered Lake Town in the 1H 2011, which is the first retail outletopened in large scale suburban commercial facilities
Japan Business
Business Development in Japan
23
Financial Review
• Results Highlights
• Revenue by Markets and Brands
• Revenue Breakdown by Products
• Gross Profit Margin by Markets and Products
• Expenses Ratio
• Working Capital Management
• Financial Position
• Share Buyback
24
Results Highlights
For the six months ended 30 June2011 2010 Change
(RMB mn) (RMB mn) (%)
Revenue 1,179 2,146 -45.1%Gross profit 722 1,343 -46.2%Operating profit 277 947 -70.7%Profit attributable to equity holders 225 786 -71.4%
Gross profit margin (%) 61.3% 62.6% -1.3%ptsOperating profit margin (%) 23.5% 44.1% -20.6%ptsNet profit margin (%) 19.1% 36.5% -17.5%pts
(RMB cents) (RMB cents)
Basic earnings per share 3.99 13.87 -71.2%
(RMB cents) (RMB cents)
Dividends per share - Interim* 2.78 8.32Payout Ratio 70% 60% +10%pts
* 1H2011 Dividends per share comprises of general and special dividends per share of RMB 1.19 cents and RMB 1.59 cents, respectively.
On 8 July, 2011, the Group announced that the revenue and net profit margin for 1H2011 is estimated to decrease by 45% and 17%-19%, respectively, as compared to 1H2010
25
For the six months ended 30 June
2011 2010 Change
(RMB mn) As a % oftotal revenue (RMB mn) As a % of
total revenue (%)
China 990 84.0% 1,957 91.2% -49.4%
– Kappa brand 979 83.1% 1,952 91.0% -49.8%
– Others 11 0.9% 5 0.2% 120.0%Japan
– Phenix, Kappa andother brands
189 16.0% 189 8.8% -
Total revenue 1,179 100.0% 2,146 100.0% -45.1%
Revenue by Market and Brands
Decrease in revenue in China segment was due to the Group’s initiative to solve the problem ofaccumulation of inventory faced by our distributors by reducing their volume of sales orders in1H2011 as well as making a one-time repurchase offer to distributors, in a bid to scale theirinventory back to a reasonable level for laying a good foundation for subsequent healthy growth.
In spite of the impact of 9.0-magnitude Japan earthquake on the Japan economy this year, revenuefrom Japan segment remains stable primarily due to the combined positive effects of channelsdevelopment, branding and sales promotion by Phenix.
Kappa Brand in China MarketKappa Brand in China MarketKappa Brand in China MarketKappa Brand in China Market
–– Revenue Breakdown by ProductsRevenue Breakdown by Products–– Revenue Breakdown by ProductsRevenue Breakdown by Products
Accessories FootwearChange in Product Mix
Accessories
4.0%(3.5%)
Footwear
25.2%(21.3%)RMB mn Apparel 4.4 %pts
Change in Product Mix
4.0%(3.5%) 25.2%(21.3%)
1952
RMB mn Apparel
Footwear
4.4 %pts
3.9 %pts
2,000 69
1952 Footwear
Accessories
3.9 %pts
0.5 %pt
2,000 69Accessories 0.5 %pt
1H2011 416
1H2011 1,500
1,467
979
1,000 1,467 39
247
Apparel
500 693
Apparel
70.8%(75.2%)2010 70.8%(75.2%)20102011
For the six months ended 30 June Remarks: Comparable figures for 1H 2010 are shown in bracketsRemarks: Comparable figures for 1H 2010 are shown in brackets
Revenue of footwear constituted 25.2% of total revenue of the brand, a 3.9 % pts increase compared to 1H2010.Revenue of footwear constituted 25.2% of total revenue of the brand, a 3.9 % pts increase compared to 1H2010.
The substantial increase in footwear revenue was mainly due to our gradual expanded efforts in research, The substantial increase in footwear revenue was mainly due to our gradual expanded efforts in research,
development and design of footwear since 2010 to responsively fulfill customers’ demand.
2626
Gross Profit Margin by Markets and Products
For the six months ended 30 June
2011 2010 Change(%) (%) (% pt)
China 64.4 64.3 0.1– Kappa brand 64.5 64.3 0.2– RDK Brand 56.0 N/A N/A– Others 44.5 38.6 5.9
Japan 45.0 45.2 -0.1The Group overall 61.3 62.6 -1.3
27
For the six months ended 30 June
2011 2010 Change(%) (%) (% pt)
Apparel 66.7 67.0 -0.3Footwear 58.1 55.0 3.1Accessories 66.8 63.7 3.1
Overall 64.5 64.3 0.2
China - Kappa brand
Overall GP margin of China market remained relatively stable. Excluding the impacts on accounting adjustments on inventory repurchase, the GP margin of apparel dropped by 1.9% pts, whilst that of footwear and accessories increased by 0.7 % pt and 1.3 % pts , respectively.
For the six months ended 30 June2011 2010 Change
(%) (%) (% pt)
– A&P expenses * 11.0 7.4 3.6
– Staff cost* 8.7 4.2 4.5
– Product R&D cost* 4.4 2.8 1.6
Expenses ratios
28
A&P expenses reduced by RMB 29 mn to RMB 129 mn for 1H11 from RMB 158 mn in 1H2010, but overall % to total revenue increase due to decrease in revenue, resulting from stock repurchase.
The Group has recruited experienced senior management talent with capabilities in international management for enhancement on strategies of retail management as well as support to our ‘Recharge for Growth’ program, leading to an increase in staff costs.
* As a % of revenue
Working Capital Management Working Capital Management -- China MarketChina MarketWorking Capital Management Working Capital Management -- China MarketChina Market
Inventory TurnoverInventory Turnover A/R TurnoverA/R Turnover A/P TurnoverA/P TurnoverInventory TurnoverInventory TurnoverDay Day Day
A/R TurnoverA/R Turnover A/P TurnoverA/P TurnoverDay Day Day
150 125150
150 150 125
102
150
100
100 100 100
58
100
33 26
100 58
50
33
50
26
50
0
2010 2011
0
2010 2011
0
2010 2011For the six months ended 30 June For the six months ended 30 June For the six months ended 30 June
2010 2011 2010 20112010 2011
As at As at Inventory turnover days As at
30 June 2011
As at
31 December 2010A/R Ageing ProfileA/R Ageing Profile
Inventory turnover days
Increased due to the impact of inventory 30 June 2011 31 December 2010
% %
Increased due to the impact of inventory
repurchase% %
Current 50 75
repurchase
Expect to decrease gradually to a reasonable
level when inventory return are re-sold in the Current 50 75
1 - 30 days 33 21
level when inventory return are re-sold in the
future. 1 - 30 days 33 21
31 - 120 days 17 4
future.
AR turnover days 31 - 120 days 17 4
Total 100 100
AR turnover days
Increased also due to impacts of inventory Total 100 100
Increased also due to impacts of inventory
repurchase
An extension of credit to distributorsAR Balance (RMB mn) 582 514
An extension of credit to distributors
Expect to decrease towards end of December, 29
AR Balance (RMB mn) 582 514Expect to decrease towards end of December,
2011 when stock return completed 292011 when stock return completed
For the six months ended 30 June
2011 2010(RMB mn) (RMB mn)
EBITDA* 295 966
As at 30 June 2011
As at 31 December2010
(RMB mn) (RMB mn)
Cash & bank deposits 4,820 5,028
Investment in treasury products** 902 1,522
Bank balance and treasury products held 5,722 6,550
Maintain Strong Financial Position
30
* EBITDA: Earnings before interest, taxation, depreciation and amortization** Included investments in treasury products issued by MOF, PRC and principal-guaranteed treasury products issued by majorcommercial banks in the PRC
Continues to maintain a solid cash position
No outstanding bank loans or other borrowings.
31
Subsequent to the profit warning announcement on 8 July and before the blackoutperiod, the Group bought back 30 Mn DX’s shares (representing 0.53% of its issuedshare capital), at a total consideration of HK$52 Mn.
To reaffirm our commitments to enhancing shareholder value and
our confidence in the long-term growth of the Company
Share Buyback
32
Strategies & Future Plans
33
Overview of Strategies
Geographical expansion(Optimize and expand network)
Retail management(Develop some retail capabilities which almost all sports players lack)
Supply chain(Improve supply chain
efficiency)
Process, org and others(Strengthen process/mgmt
discipline)
Brand(Define brand positioning and build equity)
Product excellence(Leverage Phenix platform)
Customer(GX relationship)
management(Basic customer
mgmt)
Improve basic competency Build advantages
1
2
3
Organization(Activate people developmemt)
While Kappa boasts special assets to potentially build advantage, it also needs to improve some basic competency
Sets of growth initiatives are in position for rebound
New businessesStore / geo
expansion & optimization
Existing stores productivity
improvement
Brand and product
improvement
41 32
2.1
Direct vs. SF
Store / geo expansion
2.2
Retail operation management improvement
3.1
3.2
Initiatives driving
revenue growth
Internal competency
enablers
• Customer management (policy design)
• Supply chain management
e-Commerce
RDK4.1
4.2
Store network upgrade
Retail inventory management improvement
• Improvement of operation standard
• IT service platform improvement
• HR and organization building
Specific targets have been defined for each initiative towards 2015
3.3
1.1
R&D capabilities
1.2
Product positioning
Enhanced marketing
1.3
34
35
Main Initiatives included in Product and Marketing
1
Brand and product improvement
1.1
R&D capabilities
1.2
Strengthen Product positioning
Enhancedmarketing
1.3
Back to sports roots
Strengthen women business
Internal : Japan R &D
Footwear sales & market shares
External :Footwear
Trend
360 Degree Integrated Marketing
Pioneer in new media and digital marketing
Strengthen retail marketing
36
Main Initiatives included in Retail Operation Management
2
Existing stores productivity improvement
2.1
Improve Retail Operation
2.2
Enhance Assortment
Build Own Retail Capability
2.3
Right brand image and product mix
Establish systematic retail operation monitoring
Prioritize efforts of assortment planning and execution
Ground team to support and monitor customers
Develop own retail in selected key locations
Build brand and retail experience
Detect market pulse through own retail network
37
Main Initiatives included in Store Network Optimization and Geo Expansion
3
Store / geo expansion & optimization
3.1
direct customer stores
3.2
Expansion in existing & new cities
New store format & image
3.3
Strengthen top tier markets
Better channel control
Penetrate into lower tier cities
Direct customer stores
New store format at all new openings
Stores Upgrade: all existing stores in tier 1-3 cities50% stores in tier4-7 cities by 2015
Optimize store portfolio
Sub-franchises Higher retail improvement execution
38
Continue Drive Growth in New Business4
New Business
4.1
E-commerce4.2
Build high-end sports casual image
Improve brand awareness
Build Kappa’s own e-commerce platform
Develop customized online products
Gradually develop retail network
Fully leverage Taobao and other sales platform
Develop customer database and feedback system
39
Open Forum