Sportswear firm Li Ning warned it will post a substantial 2012 loss as it racks up as much as $288 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.
Shares in Li Ning fell 4 percent 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 and 361 Degrees International 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 ($288 million), the company said.
Founded by former Olympic gymnast Li Ning, and backed by Singapore sovereign fund GIC and U.S. 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.
Adding to the uncertainty, the company is still looking for a new chief executive, as well as chief financial officer after its previous CFO left in October.
At the time of the July announcement, Kim, who has a strong track record in driving change at consumer and retail companies in South Korea and China, said it could take 6-12 months for inventories to return to normal and that it may be three years before the group's earnings rise steadily.
The company's stock is now down 23 percent for the year to date, underperforming a 22 percent gain in the blue chip Hang Seng Index and coming on top of a more than 60 percent decline in its shares in 2011.
Founder Li Ning sold a 25 percent stake in the company in October to his talent management firm Viva China Holdings for $175 million.