HONG KONG - Sportswear firm Li Ning Co Ltd warned it will post a substantial 2012 loss as it racks up as much as $288 million (S$350.98 million) in expenses under a plan to buy back inventory from distributors, one of the thorniest problems facing retailers in China.
China's economic slowdown has resulted in inflated stock levels and depressed earnings for retailers including local and foreign sportswear players - a sharp reversal of fortune after an expansion blitz that followed the 2008 Beijing Olympics.
The plan was necessary to ensure that its distributors got back on a path of long-term growth amid fierce competition in a saturated industry, said Li Ning, which competes with the likes of Nike Inc and ANTA Sports Products Ltd.
Shares in Li Ning fell 4 per cent on Monday, with analysts saying that although the plan provided for distributors to begin afresh, the company would still be saddled with the stock.
"They are saying now that we are going to be aggressive (to bring down inventory) and buy back old products," said Huei-Chen Flannery, an analyst at KGI.
"But they still need to resell them at a cheaper price and it is going to take a longer process for them to bring everything back to a healthy level," she said.
Other local competitors like Xtep International Holdings Ltd and 361 Degrees International Ltd have slashed prices to deal with high inventories but it remains to be seen if Li Ning's move will force them to redouble efforts to reduce stock, analysts said.
Buying back inventory and improving Li Ning's sales network would cut its full-year earnings by between 1.4 billion yuan and 1.8 billion yuan (S$350.98 million), the company said.
Founded by former Olympic gymnast Li Ning, and backed by Singapore sovereign fund GIC and US private equity fund TPG Capital, China's best known sportswear firm has tried to bite the bullet. The company said in July that its CEO would step aside, and that Li and TPG's Kim Jin-Goon would lead the firm for the time being.