Source: Bloomberg

China is the world’s largest footwear manufacturer, accounting for more than 60 percent of global production. The country also boasts the world’s biggest footwear market, with estimated sales of more than 2.4 billion pairs, representing 13 percent of global footwear sales. Ladies’ footwear represents 60 percent of the market, men’s footwear accounts for 30 percent of total sales and children’s footwear makes up the remaining 10 percent.

Research house Euromonitor International estimates that China’s ladies’ footwear sales will grow at a compound annual growth rate of 11.7 percent, to reach USD15.3 billion by 2014. The company controls 46 percent of the market, well above the second player’s share of 6.5 percent.

The company operates about 10,000 footwear stores and 5,000 sportswear stores in China and racked up a solid year in 2011. Belle registered 22 percent growth in sales and 24 percent growth in profits last year, with same store sales growing by 17 percent for the footwear business and five percent for the sportswear segment.

Belle recently released its first-quarter 2012 operational data showing that footwear same-store sales growth (SSSG) was 2.8 percent. Although this number is along the lines that management had projected, it’s far below the 8 percent growth in the last quarter of 2011. The company also opened 477 new stores in the first quarter of 2012.

During the first quarter, the company had to deal with a generally weaker demand environment and higher inventories. The latter also was a result of warm weather, which resulted in higher inventories for some winter models, especially boots. 

Consequently, Belle had to offer serious discounts to push merchandise leading to weaker margins for the quarter. Nevertheless, inventory levels seem to be again under control and the discounts have stopped. SSSG and operating margins should jump during the rest of the year.

The sportswear division has been the weaker link for the company but management has been gradually turning it around. Its main brands Nike and Adidas are better positioned in China than local sportswear brands. That said, the sportswear market in China is very competitive but Belle’s premium brands are establishing themselves and should prove the winners in the longer term.

Notice that the sportswear division is still relatively small for the company, contributing a little over 30 percent of revenue and around 12 percent of profits.

The company recently bought Big Step, a regional sportswear retailer, selling mainly Nike and Adidas branded products with approximately 600 stores and annual sales of USD317 million. Belle paid around USD140 million for the acquisition which should boost its presence in the sportswear market. Belle already is the largest Adidas and second largest Nike customer in China. The acquisition is expected to further improve the company’s economies of scale.

Belle boasts one of the industry’s most efficient supply chains, which allows for a shorter production and delivery cycle and substantially lower inventory costs. Belle outsources about 15 percent of its footwear production—representing about 600 million pairs—to third-party suppliers in Zhejiang and Guangdong, two Chinese provinces known for leather shoe manufacturing.

Belle’s market leadership and core advantages remain intact. The company remains the undisputed leader of footwear in China and is strategically positioned to accommodate all shopping formats including street shops and online retail. The latter in particular could prove another driver for the company’s growth.

Belle launched its online business in 2009 and online sales account for about 1 percent of total revenue. However, the online division is profitable and focuses on sales of items that are sold exclusively online and are generally cheaper than what’s found in the brick and mortar stores.

Last summer Belle launched its official retail website (www.yougou.com) which already ranks third among all of China’s footwear retail websites. Belle has budgeted between USD200 million and USD250 million of total investment for its online business for the next three to five years.

The company has also been expanding its brick and mortar presence with multi-brand “Map by Belle” stores in shopping malls in China’s largest cities. These stores offer customers the opportunity to find all of Belle’s footwear and sportswear brands in one location.

Given the company’s deep pockets and strong brand, mall operators have been more than willing to negotiate rents with Belle. The company’s “Map by Belle” stores have been sought out as anchor stores for malls. More than 100 shopping malls will open in China this year, and Belle has a good chance to secure prime retail space at a good price in many of these new malls. Belle International Holdings remains a buy up to HKD17.