Dongwu Securities released a research report saying that maintaining the “buy” rating of Taobo (06110), the company is the largest sports shoes and clothing retailer in China. FY25H1 was affected by the sluggish domestic retail environment, and the FY25-26 net profit forecast was lowered from 2.75/3.15 billion yuan to 1.33/1.64 billion yuan, increasing the FY27 forecast value of 1.91 billion yuan. Considering that the company's sports track is still growing in the long run, and the company's cash flow is steady and maintaining high dividends. The current valuation is low.

The main views of Dongwu Securities are as follows:

The company announced FY25H1 results:

FY25H1 (2024/3/1/-2024/8/31) revenue was 13.055 billion yuan/yoy -7.9%, and net profit to mother was 0.874 billion yuan/yoy -34.7%. Revenue declined slightly in a volatile retail environment, and profit declined significantly, mainly due to increased promotion efforts and deepening discounts, and the decline in gross margin. Interim dividend of 0.14 yuan/share, with a dividend ratio of 99%.

Enrich the brand matrix, optimize offline stores, and strengthen member operations.

1) By brand, FY25H1's main brand (Nike & Adidas) /other brands earned -8.1%/-6.5% year-on-year revenue, accounting for 87%/12.3% of revenue respectively. Over the past 23 years, the company has continued to increase cooperative brands such as HOKAONEONE, Glorstone, and the Canadian high-end trail running brand Norda, etc. The revenue decline of other brands was slightly less than that of the main brands.

2) Looking at the sub-model, FY25H1 retail/wholesale revenue was -8.9%/-2.2%, with revenue accounting for 83.7%/15.6% respectively. Retail revenue declined relatively large, mainly due to store adjustments. As of the end of FY25H1, there were 5813 direct-run stores, -6.4% YoY, -5.4% month-on-month, and total sales area -1.9% YoY and -2.7% YoY.

3) Looking at online and offline, ① On the online side, the company continues to use online communities to promote user activity, use WeChat and video accounts to increase traffic exposure, complete transactions, and establish a closed loop in the user ecosystem. The FY25H1 Douyin platform's live streaming sales increased by about 200% year-on-year, and direct online accounts for about 30% of direct sales; ② On the offline side, stores are facing sluggish customer pressure. The company is speeding up the elimination of inefficient retail stores and formulating stricter screening criteria to open and change stores. At the same time, it is deeply involved in the store live streaming business. As of FY25H1, the number of mini program stores has exceeded 2,500, a significant increase over the previous year. The number of live streaming accounts in stores has exceeded 300, which is about double that of the previous year.

4) In terms of membership operations, FY25H1 has accumulated 81 millions/yoy +10.8%. Among them, repeat members contribute about 60-70% of members' overall consumption, while high-value members account for the number of units, but the consumption contribution is close to 40%.

Gross margins are under pressure, and inventory pressure has increased.

1) Gross profit margin: FY25H1 -3.6pct to 41.1% year over year, mainly due to ① increased promotion efforts, both online and offline discounts deepened, ② online discounts were higher than offline, and online share increased; ③ increased share of wholesale with relatively low gross profit.

2) Expense rate: FY25H1 sales and distribution expenses/ general and administrative expenses cost ratios were +0.3 pct/-0.1 pct to 29.3%/3.8%, respectively, mainly due to the negative operating leverage of offline stores due to the decline in customer flow.

3) Net profit margin to mother: FY25H1 -2.7 pct to 6.7% year over year.

4) Inventory: As of FY25H1 inventory 6.12 billion yuan/yoy +6.4%, the number of inventory turnover days increased by 7 to 145 days over the same period last year.

5) Cash flow: FY25H1 operating cash flow of 2.61 billions/yoy +2.5%. As of the end of FY25H1, the monetary capital was 2.84 billion yuan, with sufficient capital.

Risk warning: Domestic consumption continues to weaken and competition intensifies.