Can Xtep achieve new growth by raising 1 billion Hong Kong dollars to invest in DTC?

Wen Pengyingyu

At the beginning of the year, Xtep has released an important piece of news to the capital market.

On February 10, Xtep International announced in the Hong Kong Stock Exchange that it intends to place 90,909,000 existing shares on a top-up placing and subscription basis at HK$5.5 per share. The company also proposes to issue RMB500 million convertible bonds with an initial conversion price of HK$6.325, which can be converted into a maximum of 79,051,400 shares.

The announcement stated that the net proceeds from the share placement and bond issuance are approximately HK$985 million, which is intended to be used for the further development of Xtep's main brand and Saucony's Direct-to-Consumer (DTC) business model, as well as to further strengthen the promotion and product portfolio of the Saucony brand.

The significant investment demonstrates Xtep's determination in the DTC layout and the development of the Saucony brand. Saucony can also be regarded as a pioneer for Xtep International in exploring the DTC model.

According to public information, since Xtep acquired Saucony in 2019, this international jogging brand with a history of more than a hundred years has finally been "revived" in the Chinese market, and its business in China has always relied on the DTC model to achieve rapid growth. While operating Saucony, Xtep has also gained valuable experience in the DTC model, which undoubtedly has a profound significance for the entire group to comprehensively promote the DTC transformation.

01 Reviving Saucony, What Has Xtep Done Correctly?

Compared to the national brand Xtep, Chinese consumers may not be familiar with Saucony.

Saucony was founded in 1898 and is one of the "World's Four Major Jogging Shoe Brands", on par with Asics, Brooks, and New Balance. In 1965, the first American astronaut to walk in space, White, wore Saucony to the moon, which greatly enhanced Saucony's global popularity and also boosted its steps towards diversification and internationalization.

However, in the Chinese market, Saucony has always been lukewarm. It was not until 2019 that Xtep International signed a joint venture agreement with Wolverine Company to jointly develop and operate Saucony in the Chinese mainland, Hong Kong, and Macau.

In December last year, Xtep International finally acquired a portion of the equity in the joint venture where Saucony is located at a price of US$61 million (approximately RMB434 million), thereby obtaining 100% ownership of Saucony's China business. Behind the continuous investment in Saucony, perhaps Xtep hopes to create its own FILA or Arc'teryx.

Compared with its own brand Xtep, Saucony's advanced sports technology, running concepts, and brand value can feed back to the Xtep Group. After successfully operating in the Chinese market and focusing on the high-end market, Saucony is also expected to further upgrade the brand power and channel power of Xtep's main brand.

In more media reports, Xtep's acquisition of Saucony is compared with Anta Group's acquisition of FILA. However, unlike Anta's acquisition of FILA for diversification, when Xtep International acquired Saucony, it paid more attention to the consideration of the brand's "running value", which is also in line with Xtep's concept of "Born for Running".

From the results, Xtep's acquisition of Saucony is a vertical extension in the running field - that is, the main brand is for the mass market, while Saucony extends to the high-end market, focusing on running elites and urban elites, forming a differentiated formation with the Xtep main brand to meet the needs of different consumers. With Xtep's excellent operation, Saucony's design and excellent product performance have received high attention in the Chinese market.

In 2023, Saucony became the first new brand of Xtep International to achieve profitability, and it has only been more than four years since Xtep acquired Saucony.

In this process, Xtep actively expanded and strengthened Saucony's retail network in the Chinese region. After successfully opening its first third-generation image store in Zhengda Square, Shanghai in June 2023, Saucony continued to expand its retail business in first-tier cities and opened retail stores in high-end shopping centers in second-tier cities.

Judging from the latest financial report released, Xtep's operation of Saucony has achieved significant results.

In the fourth quarter of 2024, Saucony's retail sales increased by approximately 50% year-on-year, and the annual retail sales growth exceeded 60%. In the past year, Saucony has accelerated the opening of stores, with the net increase in the number of stores reaching about 48, nearly doubling compared to the average of previous years.

The remarkable data is sufficient to prove that Saucony has become the "Second Growth Curve" other than Xtep International's main brand. The success of Saucony has also strengthened Xtep Group's determination to comprehensively deepen the DTC business model.

02 DTC Becomes the "Best Solution" in the Industry

Unlike the traditional dealer agency model of "ordering twice or four times a year", DTC aims to directly face consumers. Enterprises, through online and direct sales methods, focus on consumers' needs and reverse-guide the design, production, product selection, and marketing of manufacturers.

In fact, for leading shoe and apparel enterprises, the reform of the retail end that directly faces consumers started earlier than people imagine.

Around 2014 and 2015, Li-Ning and Anta, which had recovered from the previous inventory crisis, took the lead in initiating adjustments to the transformation of the retail terminal. After the arrival of a new wave of inventory cycles in 2020, Anta Group comprehensively promoted the DTC channel reform, carrying out a mixed operation model in 11 regions in China, involving 3,500 stores, of which approximately 60% are directly operated by Anta, and approximately 40% are operated by franchisees in accordance with Anta's new operation standards.

Judging from the current development and gross margin level of Anta Group, the DTC model has become a necessary choice for enterprises. It should be mentioned that in the past few years, Xtep International's investment in DTC has always been relatively moderate.

Xtep Group Chairman and CEO Ding Shuibo once said that Xtep attaches great importance to DTC, but it will not take back the agents for direct operation in the short term. At the same time, it will provide training to agents and operate in this way.

Undoubtedly, in the process of the brand's DTC transformation, it needs to balance between safety and risk. After all, there is a "pendulum effect" in the business world.

Although in the long term, vigorously promoting the DTC transformation on the basis of the agent model is the best solution for increasing revenue and profits, maintaining the healthy and sustainable growth of the brand, and also an effective solution to ensure that the brand does not fall into an inventory crisis. However, in the short term, the DTC transformation will inevitably increase the additional cost expenditures of the enterprise, and the operation and management difficulty of the stores will also increase.

Perhaps for this reason, for a relatively long period of time, the online platform seems to be the main battlefield for Xtep to exert its strength in DTC. According to the previous plan, the membership scale of Xtep's main brand will exceed 65 million by 2025. And while Xtep is vigorously developing Saucony, the main brand is also gradually taking back the distribution rights from distributors who intend to retire to optimize the retail channel structure.

In August last year, the championship version running shoes with Xtep's two core technologies - the 160X 6th generation series, officially made their debut. In many previous international-level marathon events, more runners wore the 160X series to reach the podium. Some people believe that Xtep's main brand is reshaping brand perception and achieving brand upgrading through the 160X series.

It is certain that both Xtep's many years of online digital layout and the support of core technologies for the product end have paved the way for Xtep Group's comprehensive DTC transformation. Before this fundraising of HK$1 billion, Xtep has been accumulating strength for this transformation for a long time.

After fully initiating the DTC transformation, Xtep has also started its own marathon.

From the perspective of the capital market, within the past 90 days, a total of 14 investment banks have given a buy rating. Institutions including Haitong International Securities believe that Xtep is rated better than the market. It is believed that in the future, through the joint drive of Xtep's main brand and Saucony, Xtep International can achieve continuous breakthroughs in the brand and market, accelerate growth in the performance end, and create sustainable profitability.