Is 361 Degrees' Kid Power Losing Momentum?

Key Takeaways:

• 361 Degrees said its kids-branded products business rose by ‘mid-single-digits’ in its latest quarterly business update, down from earlier recent growth rates
• Retail sales for the sportswear maker’s core brand grew 10% year-on-year in the three months to June

By Lau Chi Hang

As one of China’s top four domestic sportswear brands, 361 Degrees International TSIOF, though far smaller than leaders Anta ANPDY and Li Ning LNNGY and even closer rival Xtep (1368.HK), has been on an impressive roll these last few years. Its strong performance owes to a two-tiered strategy of expanding into smaller third-tier cities, while also building up its children’s sportswear brand.

But after a strong run in the kids space, growth for that area appears to be slowing, based on what 361 Degrees said in its latest operational update for the second quarter. In the update, it said sales for its core branded products rose about 10% year-on-year for the three months to June, while its e-commerce sales jumped 30% to 35%. But the company failed to disclose similar specific growth figures for its kids-branded products, saying only the category “recorded approximately mid-teens growth compared to the same period of 2023”.

What Does Mid-Teens Mean?

So, what exactly is mid-teens growth, and why did 361 Degrees use this relatively vague description rather than being more specific? Longtime company watchers many notice the company tends to become vaguer when certain businesses are losing momentum.

That certainly seems to be the case here, since kids products have recorded year-on-year growth rates averaging in the 25% to 30% range during the past two years. So, the “mid-teens” growth from the latest quarter, or around 15%, would mark a significant slowdown from earlier rates.

The company has been expanding into the kids market since 2009 by building its own brand to focus on demand for sporting goods and equipment from children and teenagers. That hard work hasn’t been wasted, as 361 Degrees turned the category into an important new revenue engine. Kids product sales more than doubled over just three years from 930 million yuan ($128 million) in 2020 to just shy of 2 billion yuan last year. It accomplished that feat through a big buildout of its kids specialty store network, which had 2,545 stores by the end of last year, up by 257 year-on-year.

But the kid magic has begun slowing in the last two quarters as Chinese consumers grow more cautious. The category grew between 20% and 25% in the first quarter, down sharply from the turbocharged 40% growth in last year’s fourth quarter. And now the second-quarter growth looks set to fall further still to around 15%.

Still, it’s probably too early to draw conclusions based on just two quarters. After all, any business has its ups and downs over the short-term. 361 Degrees has also logged cases where growth for its individual businesses slowed in a single quarter before picking up again. Thus, we’ll need a bit more time before passing judgment on a potential kids slowdown.

Booming Kids Clothing Market

On a broader basis, China’s kids clothing market is still full of potential, especially as living standards rise and Beijing encourages families to have more children after three decades of strictly enforcing a “one child policy.” What’s more, Chinese parents are often willing to spend lavishly on their children despite reining in spending on themselves in the last two years as they sacrifice their own extra comfort for the sake of their children.

China’s children’s clothing market has been growing steadily in recent years, worth 256 billion yuan in 2021 and expected to growth 15.6% annually to reach 460 billion yuan by 2027, according to market research firm Euromonitor.

361 Degrees’ other businesses are also still performing well despite the kids product slowdown. Its overall retail sales have grown steadily over the past three years, with revenues rising from 5.93 billion yuan in 2021 to 8.42 billion yuan last year. Its profit rose from 600 million yuan to 960 million yuan over that period.

Tapping Undeveloped Areas

Founded in 2003 by Ding Jiantong, 361 Degrees has had to continually seek out areas to differentiate itself in the face of intense competition from both domestic and global rivals, from international giants like Adidas and Nike, to local favorites like Li Ning, Anta, Xtep, Peak and Guirenniao. That led management to carve out a niche by focusing on smaller third-tier cities about a decade into its development.

In its 2013 annual results, the company said it would focus on consolidating and developing such third-tier cities, as well as smaller cities in the low- and mid-end markets for the first time. By last year, 76% of its stores were located in such smaller cities, with only 5.1% in China’s largest first-tier mega-cities like Beijing and Shanghai.

The company has also tailored its marketing campaigns to sync with that smaller-city focus, for example, by launching a “Light Up” campaign aimed at popularizing basketball culture in such centers, often called “sunken cities” in Chinese.

That move to smaller cities saw 361 Degrees follow up by focusing most of its resources on such centers, generating considerable revenue and profit in the process.

The approach of the 2024 Paris Olympics, set to start on July 26, could lift sporting stocks in the days and weeks ahead, which could give a short growth spurt to tickers like 361 Degrees. The company’s current price-to-earnings (P/E) ratio of 7.8 trails major sports brands Anta and Li Ning, with ratios of 19 and 12, respectively. Even closer peer Xtep trades at a higher 12. That means 361 Degrees might be able to narrow the gap if it can continue to grow its profits, even if its kids category loses some momentum.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.