Belle International: Fashion Footware Gets Stomped

Shoes Belle

Belle International, HK 1880, a 21,000+ retail store operator concentrated in footwear and sportswear, reported an annual net profit drop of 38%.  This occurred despite a small revenue increase of 2%. As seen below, a major reason for the decline was an impairment in the footwear segment on goodwill and intangibles, exacerbated by a drop in margins.

Belle fs

Without the impairment charge, the drop in net to shareholders would have been about 10.7%, despite the store increase and sportswear increase, due to worsening margins for footwear.

belle no impair

*Impairment Charge – applied to  Goodwill and Intangible Assets related to footwear:

Belle gw

The impairment was blamed on weakened demand for their brand purchases of Mirabell, Millie’s, SKAP and others.

The impairment is hopefully a one-time occurrence.  However, the change in segment revenues, profits and same store sales for footwear is a worrying trend which the company doesn’t project ending.  As reported in a prior review, same store sales for footwear have been steadily declining while  the lower margin sportswear and apparel segment may have stabilized and still show gains.

Belle chart

HK Filings

The footwear segment, dominated by company-owned brands,  is where the company has made its biggest sales and profits. Belle  blamed the weakening economy for the same store sales declines in footwear. Ironically, it states that demand is strong in the sportswear apparel segment. In sportswear apparel, outlets sell licensed brands including Nike, Addidas, Puma and  Converse.  The company states that footwear in department stores is under pressure as department stores are over-saturated while sportswear outlets offer a more flexible placement option.  It also concludes that sportswear has become more popular than fashion brands due to changing consumer appetites toward athleisure and away from more formal wear. With the impairment in footwear due to weak demand and discounts, the popularity of their proprietary brands is definitely declining, whatever the reason.

At the end of the year the company operated 21,017 stores on the Mainland, China and Hong Kong, showing a slight increase of 1.5% from the year before.  The company only operates stores, it doesn’t own them.  This enables them to change the mix and downsize in reaction to market conditions.  Store outlet growth  has declined significantly while the mix has favored growth in the lower-margin sportswear segment.

belle outlets hist

From 2015 to 2016 – the increase in total stores was only about 2%.

RMB Millions

belle outlets

(Source -hk filings)

This slowdown in outlet growth shows the company’s limits to revenue and profit growth in a weakened demand environment.  While the combined outlets increased by only 1.5%, the revenue increased by 1.95% thanks to a growth in revenue in sportswear partially offsetting the revenue decline in footwear.

(In rmb Millions, from HK Filings)

belle rev segm

Unfortunately for Belle, the sell of licensed sportswear results in a lower operating profit margin, although reportedly due to inventory controls and demand it has improved and possibly stabilized. While Sportswear income before tax margins against segment revenue is improving, Footwear is declining significantly, and this is shown before the impairment.

belle rev

Despite the impairment and decline in margins, Belle is still profitable with a low debt/equity ratio.  However, after issuing a special dividend in 2015 the company chose to severely drop its full year dividend reportedly to conserve cash for market moves.

Belle dividend

For growth, at this point in time Belle cannot rely on new stores with a saturated market, and competition from other brands as well as E commerce.  The annual report mentions internet shopping but no details for online sales are given.  The company’s recent history on buying new brands has proven poor with the goodwill and intangibles write down.  The annual statement mentions recent agreements with Baroque of China and Replay of Italy but gives no results and states that it must be patient.

Belle’s stock has felt the brunt of these trends.  It’s recent performance, particularly the rapid decline in same store sales for footwear, hardly warrants the trailing p/e of over 11, despite its size and mainland presence.

Belle stock




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