Inflated Costs And China Headwinds Will Erode Margins

Key Takeaways

• Heavy reliance on the China market exposes Xtep to growth risks from weak consumer sentiment and increasing competition.
  
• Rising sustainability pressures and elevated operational costs threaten profit margins and may hinder international expansion efforts.
  
• Premium product innovation, expanding e-commerce and DTC channels, rising brand equity, and sustainability initiatives position Xtep for stronger margins, profitability, and long-term growth.

Catalysts

Designs, develops, manufactures, markets, and sells sports footwear, apparel, and accessories for adults and children in Mainland China.

• Deteriorating macroeconomic conditions and subdued consumer confidence in China threaten the sustainability of Xtep's recent revenue growth, particularly as the company remains heavily exposed to mainland China for its core brand performance, putting both top-line growth and long-term earnings stability at risk.
  
• Escalating regulatory and consumer expectations around sustainability will impose rising compliance and operational costs on Xtep; failure to achieve rapid ESG adaptation could erode margins and jeopardize the company's positioning in an increasingly eco-conscious market, negatively impacting net profit margins.
  
• Intensifying competition from global sportswear giants and rapidly shifting consumer fashion trends may diminish Xtep's brand relevance and slow sell-through, leading to elevated inventory levels, potential discounting, and pressured gross margins over time.
  
• Xtep's aggressive channel diversification and expansion of direct-to-consumer operations are likely to drive up marketing, logistics, technology, and labor costs, resulting in entrenched expense inflation and further compressing operating margins and cash flows.
  
• The company's mid
• to long-term plans for international expansion and brand-building may be hampered by worsening geopolitical tensions, fragmented supply chains, and protectionist trade barriers, which could limit Xtep's ability to diversify revenue geographically and challenge top-line growth expectations.

Xtep International Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Xtep International Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Xtep International Holdings's revenue will grow by 5.3% annually over the next 3 years.
• The bearish analysts are assuming Xtep International Holdings's profit margins will remain the same at 9.6% over the next 3 years.
• The bearish analysts expect earnings to reach CN¥1.5 billion (and earnings per share of CN¥0.57) by about July 2028, up from CN¥1.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, up from 10.6x today. This future PE is greater than the current PE for the HK Luxury industry at 9.7x.
• Analysts expect the number of shares outstanding to grow by 1.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.24%, as per the Simply Wall St company report.

Xtep International Holdings Future Earnings Per Share Growth

Risks

• Sustained premiumization and innovation in Xtep's product lines, particularly with Saucony's century-old brand heritage and rapid revenue growth (over 100 percent CAGR for five years, hitting over RMB one billion), indicate strong potential for higher pricing power and margin expansion, which could drive both future revenue and net profit growth.
  
• Xtep's strengthening leadership as the number one running brand in China, with increasing marathon event wear rates and synergy across the Xtep, Saucony, and Merrell brands, signals growing brand equity and consumer mindshare, directly supporting robust volume growth and stable to improving net margins.
  
• Rapid e-commerce expansion (accounting for over 30 percent of core brand revenue and over 20 percent annual growth, with even higher growth on key social platforms) enhances sales reach, operational leverage, and customer engagement, all of which can sustain or raise revenue and operating profits even in challenging macroeconomic climates.
  
• The group's increasing focus on direct-to-consumer (DTC) channels, including plans to convert 400 to 500 stores to the DTC model and expand flagship stores, is likely to bolster revenue quality, gross profit, and profitability by improving channel control and customer data utilization.
  
• Commitment to sustainability (with the MSCI ESG rating upgraded to A and a 2030 strategic framework) positions Xtep favorably with increasingly eco-conscious consumers and investors, potentially unlocking premium pricing and margin advantages and creating long-term competitive differentiation, thereby supporting future earnings growth.

Valuation

• The assumed bearish price target for Xtep International Holdings is HK$5.6, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Xtep International Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$12.27, and the most bearish reporting a price target of just HK$5.6.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥15.9 billion, earnings will come to CN¥1.5 billion, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of HK$5.65, the bearish analyst price target of HK$5.6 is 0.9% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.