HONG KONG -- Li Ning's future will lie in fewer, bigger stores as the Chinese sportswear maker looks to reposition its brick and mortar stores in the face of e-commerce competition.
With a network of some 6,300 stores across China, the Hong Kong-listed company said on Aug. 11 it would expand some existing shops and shut others, including between 200 and 300 selling its core Li Ning brand.
The company plans to add 100 children stores, so the overhaul will result in a net closure of 100 to 200 stores for the year. Li Ning has already closed 110 stores since the start of the year.
"We are putting more resources in remodeling existing stores ... rather than annual openings," chief financial officer Terence Tsang Wah-fung said at an earnings briefing. "We believe the cannibalization from online business did have a negative impact on our offline sales."
Li Ning, founded in 1989 by an Olympic gold medalist in gymnastics with the same name, made losses in the three years to 2015, thanks to fierce competition from local rivals and international competitors such as Nike and Adidas.
Net profit for the first half to the end of June jumped 67% year on year to 189.2 million yuan ($28.4 million), helped by better inventory controls and improving profit margins. Revenue rose 11% to 3.996 billion yuan, driven by stronger e-commerce sales.
With a contribution of 19% of total sales the e-commerce business recorded revenue growth of 58% on the year, outperforming its offline sales growth. Same-store physical retail sales fell by a "low-single digit" percentage over the period.
Li Ning expects traditional retailing to coexist with e-commerce for now, citing the example of Amazon's acquisition of Whole Foods Markets, an organic supermarket chain. "We are not shrinking physical retail, but e-commerce will help to drive efficiency, so we won't need as many stores as before," said Tsang.
The company said that opening bigger stores would improve the shopping experience for its customers. New shops in the cities of Xi'an in northwestern China and Dalian in the northeast have an average size of 400 to 500 sq. meters, significantly above the typical previous size of 80 to 200 sq. meters.
"We are no longer chasing the number [of stores] but how these channels will better showcase our brand and products," said Li Ning, chairman. He added that the company has diversified into new businesses, including the launch of "Li-Ning Young" for children, a female sports brand called "Danskin" and a fast fashion brand.
During the first half, Li-Ning Young opened 20 stores in 14 provinces, mostly in northern China. The unit plans to add 70 stores in the second half. Danskin has been launched to target female sports fans with "fashionable and modern designs," and is scheduled to open three to five shops in the fourth quarter.
Li warned of hefty investment requirements for the new businesses in the short run, suggesting that the negative impact on net profit will be up to 90 million yuan for 2017. The company estimated that annual capital expenditure would reach 350 million yuan.
Li Ning's shares hovered near a two-month low and closed 3.93% lower at HK$5.86 ($0.75) after the results were announced, trailing the Hang Seng Index, which fell by 2%.