【Zhenzhuo Institutional View】Topsports (06110.HK): Cycle recovery opportunity under Nike's strategic adjustment

$TOPSPORTS(06110.HK)  Retail sales from September to November recorded a high single-digit year-on-year decline, mainly due to store area contraction and weak foot traffic, but the decline has narrowed compared to the first half of the year, reflecting that amid sluggish demand, the company is gradually stabilizing overall sales performance by optimizing store structure and increasing online channel penetration. During the same period, online business growth slowed due to a high base, and the increase in online share led to an expansion in the overall discount rate year-on-year. However, management's inventory balance at the end of the third fiscal quarter has declined year-on-year, indicating that destocking progress is in line with expectations, which is conducive to a gradual improvement in gross margin in the coming quarters. Management also expects the net number of store closures this fiscal year to be significantly lower than the 1,124 in the previous fiscal year, with the pace of closures slowing further in the second half, supporting the mid-term recovery of sales per square meter and single-store profitability.

However, retail sales performance in December was "significantly" weaker than in September-November, mainly dragged down by short-term factors such as weak industry demand, unusually warm temperatures, and the delayed Lunar New Year season. Management has indicated that the original guidance of flat year-on-year net profit in FY26 is under pressure. In terms of the discount environment, benefiting from the base effect, overall retail discounts in December were roughly flat year-on-year, indicating that industry prices have not deteriorated significantly, with pressure shifting more to the demand side rather than the price side. Amid macro and weather disruptions, short-term earnings expectations may need to be revised downward, but the greater risk at this stage lies in the pace of industry recovery rather than the company's operational quality, and investors need to be prepared for more volatile quarterly data.

In the medium to long term, the core logic still lies in the structural improvements brought about by the deep cooperation with Nike and the strategic adjustments: Nike is providing higher wholesale discounts to Chinese retailers, accelerating the recovery of obsolete inventory, and extending accounts receivable periods, which will help Topsports improve gross margin, inventory structure, and cash flow while reducing front-end ordering risks.

Source: KGI Securities