Investment & Financing – Xtep Raises 1 Billion, Aiming to Break Through the Growth Bottleneck

Focusing on the Running Segment

In recent years, Xtep (1368.HK) has continuously adjusted its strategy to focus on the running sector, aiming to drive sustained brand growth through further expansion of its running shoe category. On February 10, Xtep announced that it would allocate 90.909 million existing shares—priced at HK$5.5 per share—using a “pre-existing before new” method, and also plan to issue HK$500 million worth of convertible bonds with an initial conversion price set at HK$6.325. Through these two financings, Xtep expects to raise approximately HK$985 million, which will be primarily used to further develop its main brand and the Direct-to-Consumer (DTC) model for Saucony, while also strengthening Saucony’s brand promotion and product portfolio.

Strategic Shift to a DTC Model

In its announcement, Xtep noted that the significant success Saucony has achieved in retail network management has prompted the company to extend the DTC model to its main brand. Xtep plans to gradually reclaim distribution rights from dealers willing to exit, thereby optimizing its retail channel structure to ensure a swift and accurate understanding of market demand and to achieve better sales growth.

Globally, the Saucony brand is highly regarded—often dubbed the “Rolls-Royce of running shoes.” In 2019, through a joint venture with Wolverine Worldwide, Xtep secured the operating rights for the Saucony and Merrell brands in Mainland China, Hong Kong, and Macau. After four years of effort, Saucony finally turned profitable in 2023 and is set to accelerate its development in 2024. Xtep intends to apply the successful DTC experience from Saucony to its main brand, thereby driving overall performance growth.

Despite Xtep’s relatively healthy financial status, its stock price fell by as much as 8.73% after the financing plan was announced—sparking market skepticism over its refinancing needs. After all, in recent years, Xtep has consistently paid dividends and maintained strong cash flow. According to Wind data, Xtep’s dividend payout ratio has remained above 50%, and it distributed HK$380 million in dividends in 2024. Nonetheless, even with robust cash reserves, Xtep has opted to continue financing. Industry insiders believe this move is aimed at offsetting the slowdown in growth experienced in recent years. In an increasingly competitive market, the key challenge for Xtep is to achieve higher market share and stronger brand competitiveness through strategic adjustments.

Creating a New Growth Engine by Focusing on Running

Since 2019, Xtep has built a diversified brand matrix through the acquisition of international brands. In addition to its collaborations with Saucony and Merrell, Xtep acquired the K-Swiss and Palladium brands for US$260 million. However, the outbreak of the pandemic and subsequent economic shifts disrupted the localization process for these brands, limiting the market penetration of K‑Swiss and Palladium—stores in the domestic market did not start opening until 2022.

After several years of effort, the revenue growth of these brands remained underwhelming. In 2024, Xtep opted to sell the K‑Swiss and Palladium businesses in order to mitigate losses and free up resources for future development. At the same time, Saucony has emerged as the core asset in Xtep’s pursuit of new growth. In January 2024, Xtep acquired 100% of the China operations for Merrell and Saucony, further accelerating Saucony’s expansion in the Chinese market. That year, Xtep opened 48 new Saucony stores—nearly doubling its growth rate compared to previous years. Additionally, Saucony announced that actor Eddie Peng would serve as its new spokesperson, and several concept stores have been launched in multiple cities.

Fashion industry analyst Cheng Weixiong pointed out that although Saucony’s retail footprint in the domestic market remains relatively limited, its precise positioning in the running shoe market and Xtep’s marketing experience in marathon events offer enormous market opportunities. According to official data, Xtep has sponsored over 1,000 marathon events in total—making it the sports brand with the most marathon sponsorships in China—an advantage that is expected to rapidly boost Saucony’s brand exposure.

In the first half of 2024, the professional sports division, which includes Saucony, posted a gross margin of 56.8%—a year-on-year increase of 14.8 percentage points—demonstrating robust profitability. In contrast, the gross margin for Xtep’s main brand stood at 43.9%. These figures indicate that Saucony not only excels in revenue growth but also plays a significant role in enhancing Xtep’s overall profit margin.

Facing Market Challenges, Xtep Must Enhance Its Core Competitiveness

Xtep’s “running” strategy is undoubtedly a key initiative to counteract its slowing growth. In 2019, Xtep’s total revenue surpassed the 10-billion mark, marking one of its best performances in recent years. Subsequently, the company set a strategic goal to achieve over 20 billion in main brand revenue by 2025. However, in recent years, Xtep’s revenue growth has gradually decelerated—with a growth rate of only 11.08% in 2023, far below the approximately 30% seen in 2022.

The challenges facing Xtep arise not only from shifts in the economic environment but also from intensifying market competition. In the footwear and apparel sector, the continuous expansion of leading brands such as Li Ning and Anta means that Xtep must increase its investments to capture a larger market share.

In the first half of 2024, Xtep’s overall revenue growth dropped to around 10%, with the main brand growing by only 6%. Prolonged inventory turnover cycles and a lengthening of the average accounts receivable period indicate that Xtep still needs to optimize its management of funds and inventory.

However, in the running shoe segment, Xtep still maintains strong growth potential. According to a report by market research firm NPD, although the global footwear market’s growth has slowed, the high-end running shoe market continues to trend upward. With the rising popularity of domestic marathon events, the demand for running shoes is gradually increasing. Xtep has made proactive moves in this segment and is expected to further expand its market share by seizing this opportunity in the future.

Enhancing Brand Competitiveness: Future Breakthroughs Are Still Needed

Although Xtep has achieved certain successes in the running shoe field, it still faces fierce competition from leading brands such as Li Ning and Anta in order to achieve higher growth. In the first half of 2024, Xtep generated a net operating cash flow of 826 million yuan, which still lags significantly behind Anta’s 8.502 billion yuan and Li Ning’s 2.73 billion yuan.

Moreover, Xtep’s relatively low exposure in major international events such as the Olympics has left its brand awareness trailing that of competitors like Anta and Li Ning. Moving forward, if Xtep wishes to further narrow the gap with its rivals, it will need to increase investments in brand promotion and event marketing, while continuously enhancing its product innovation capabilities and market penetration.

Overall, Xtep’s DTC transformation, running shoe strategy, and efforts to expand brands like Saucony are all important initiatives to address market challenges and drive growth. However, whether Xtep can reverse its growth slowdown will depend on its ability to overcome operational bottlenecks, increase investments, and boost brand influence to maintain its leading position in an intensely competitive market.