In yet under difficult year for the industry, the Group recorded a net profit of RMB707.2 million on a turnover of RMB 4.95 billion, a drop of 37.6% as keen competition in a slowing economy resulted in deep discounting in order to move product.
Gross margin fell by 2.6 percentage points because of lower in-house production volumes in Footwear and higher production costs in Apparel. In July 2012, the Group took the exceptional but precautionary measure to voluntarily cut the Autumn and Winter Trade Fair orders.
This resulted in lower production volumes for Footwear manufactured in-house and consequently a higher absorption cost for overheads. Increased costs of production for Apparel meant that margins had to be reduced in order for products to stay competitive in a market that is grossly over-supplied in products by both sportswear and fast fashion brands.
In view of the difficult market conditions and a changing landscape in consumer tastes, the Group initiated a program to ensure that its better-performing stores remain competitive and profitable. This involved a direct renovation subsidy of RMB203.0 million to qualified stores in order to help the interior lay-out and provide a more pleasant experience for shoppers.
This cost has been included in Selling and Distribution expense. Also included is a higher charge for Advertising and Promotion because of the full impact of recent celebrity athlete endorsements as well as amortization charges for the 2014 2nd Youth Olympic Games to be held in Nanjing, where 361 Degrees will be the official sportswear sponsor. As a result of the above two factors, Selling and Distribution costs rose by 17.9% from last year, equivalent to about 2.7% of sales.
The other exceptional expense in 2012 was that of the financing costs for the US$150 million 4.5% Convertible Bonds that was issued in April of last year. This amounted to RMB56.6 million alone.
Other costs were generally controlled within expectations but with the reduced turnover in 2012, net margin dropped by 6.1 percentage points.
The Group seriously tightened its payment discipline during the year and although it is still unable to collect as quickly as desired from its distributors, the operations generated a net cash inflow of RMB1,659 million and strengthened its liquidity position at 31 December to RMB2.7 billion of cash, cash equivalents and bank deposits.
Noting this strong position, and despite the fall in net profit, the Board of Directors has proposed a final dividend of HK8.7 cents per share, bringing the total for the year to HK17.2 cents (2011: HK28.0cents), representing a pay-out of 41%.
The Group believes that the excessive inventories in the industry have largely been digested following the massive clearances through deep discounting in the last two years. However, the outlook for 2013 remains dim because of weak order books from the Trade Fairs last year, as retailers remain cautious. The Group has had a good history of managing the channel inventories and has not suffered the common problems of having to purchase back stocks from its distributors.
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