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Text | Qin Nan, Bowang Finance

Once a "fixed label" is placed on a person or a company, it is difficult to remove it.

This is especially true for Heilan Home, which, with the brainwashing of the advertising slogan "A man's wardrobe, visit Heilan Home twice a year", has also given consumers a fixed label for its "rustic" aesthetic. But although it is a bit rustic, in the context of men spending more and more money on themselves, Heilan Home, which is aimed at the male group, is still doing relatively well.

In 2023, Heilan Home's performance returned to growth. Operating income increased by 15.98% year-on-year to 21.528 billion yuan; net profit attributable to the parent company was 2.952 billion yuan, a year-on-year increase of 36.96%. In the first quarter of this year, Heilan Home's operating income and profit attributable to the parent company continued to grow, at 8.72% and 10.41% respectively. Logically speaking, with such performance, the stock price should have been rising steadily, but it was hit hard by the capital market.

Since July, the stock price of Heilan Home has suddenly changed its face, falling for many consecutive days, almost unilaterally. On the surface, the company is calm, with no negative announcements and semi-annual reports.

In the past two years, Heilan Home has increased its dividend amount since 2021, with a dividend of nearly 7 billion yuan in three years, which is in line with the pursuit of funds in the long-term volatility of A-shares since 2022. Heilan Home has also risen from 3 yuan at the end of 2022 to a peak of about 9 yuan before July, a three-fold increase in less than two years. Although the company's performance has increased, it is far from the growth of industry giants such as Anta. This long-term trend that is opposite to the trend of A-shares is accompanied by a continuous decline in the market index in recent times. There is also a certain rationality. But the question is, how big is the reason for Heilan Home's own decline this time? Looking to the future, does Heilan Home still have investment opportunities?

01The second generation takes over, but the style is hard to change

Over the years, as a leading company in the domestic men's clothing industry, Heilan Home has focused its core consumer group on "middle-aged men". Although its product line is mainly men's clothing and there are fewer young styles, it has still achieved remarkable performance results. As of 2023, Heilan Home's total revenue reached RMB 21.528 billion, ranking first in the domestic men's clothing market share for ten consecutive years.

However, behind its brilliant achievements, Heilan Home is also facing a series of challenges. In particular, as the market trend towards younger consumers intensifies, the company has gradually entered a "bottleneck period" of development.

From 2021 to 2023, the company's operating income was 20.188 billion yuan, 18.562 billion yuan, and 21.528 billion yuan, respectively, with year-on-year growth of 12.41%, -8.06%, and 15.98%, respectively. 2019 was the highest point in the past decade, with revenue reaching 21.9 billion yuan. In recent years, it has gradually declined. The data began to rise in 2023, but it still failed to exceed the high point in 2019.

Perhaps knowing that the original style was no longer suitable for market competition, in 2020, Zhou Jianping officially handed over the baton, and his son Zhou Lichen officially became the chairman of Heilan Group.

Facing market changes, Zhou Lichen actively promoted the transformation and upgrading of the company while inheriting his father's business. Since 2021, Heilan Home has launched a group development strategy, focusing on consumer demand and building a multi-level, full-category multi-brand matrix, aiming to achieve brand rejuvenation, differentiation and quality.

To achieve this goal, Heilan Home has made comprehensive adjustments in its brand and product strategies. In addition to continuing to consolidate its brand image as "a man's wardrobe", it has also actively launched young men's clothing brands such as HLA JEANS, women's clothing brand OVV, children's clothing brands HEY LADS and YeeHoO to cover a wider range of consumer groups. At the same time, the company has also expanded its international market and enhanced its brand influence by opening stores overseas, participating in London Fashion Week, and applying for the Metaverse trademark.

In terms of marketing, Heilan Home spares no effort. The company frequently changes popular spokespersons, including first-line male stars, popular young actors, powerful actors, female stars, Internet celebrities, music kings, idols of the times and other idol stars of various styles. By sponsoring popular variety shows such as "Running Man" and "The Brain", Heilan Home has further narrowed the distance with young consumers.

However, despite Heilan Home's efforts in brand rejuvenation and market expansion, it still faces many challenges in improving its performance.

According to iMedia Research data, the current consumers of China's apparel industry are mainly young and middle-aged people and "Generation Z", accounting for a total of 84.8%. This group mainly prefers online shopping and personalized clothing. Among them, consumers who buy clothing from e-commerce platforms account for about 67.9%; and the top three preferences for clothing types are casual style, sports style and styles that follow the fashion of the season.

However, Heilan Home's 2023 financial report data shows that its online channel revenue accounts for only 15.70%, and its product design style is still continuing the "men's wardrobe" style, which naturally makes it difficult to attract young consumers to buy.

In the final analysis, Heilan Home still faces the problem of focusing on marketing and neglecting research and development. Financial report data shows that in 2023, Heilan Home's sales expenses will reach 4.353 billion yuan, a year-on-year increase of 27.12%, accounting for 20.22% of total revenue, a year-on-year increase of 1.77%.

On the other hand, Heilan Home's investment in research and development is relatively small. According to the financial report, in 2023, Heilan Home's research and development expenses were 200 million yuan, a year-on-year increase of only 3.25%, accounting for only 0.93% of total revenue. This is far lower than the 5% to 10% research and development expense rate of international first-line clothing brands.

It seems that Heilan Home’s brand positioning has changed, but in reality, it has not increased its investment in research and development.

Such empty slogans without any truly youthful, differentiated and high-quality products will naturally have no appeal to consumers, and it is normal that performance will be difficult to improve continuously.

02 Unique inventory model

In the field of domestic clothing brands, Heilan Home is well-known for learning the light asset model of Japan's Uniqlo.

Traditional brand apparel companies usually adopt a supply chain strategy of self-developed fabrics and OEM or full-line independent production, and then reach consumers through self-operation, franchising or a combination of both channels. However, Heilan Home has taken a different approach and created a novel operating path:

At the supply chain level, Heilan Home abandoned its reliance on large OEM factories and did not build its own factories. Instead, it worked with many small clothing companies to enrich its product lines through diversified procurement channels. But the most important thing is that Heilan Home signed procurement contracts with some small clothing companies that included return clauses for unsalable goods, and purchased clothing products on credit.

This measure effectively reduces its own inventory risk, because after the sales season ends, unsold products can be returned to the supplier as agreed, and the supplier will bear the loss of unsold products.

On the sales side, Heilan Home adopts a consignment sales model, that is, franchisees are responsible for displaying and storing clothing in stores, and the ownership of clothing always belongs to Heilan Home. After the franchisees successfully sell clothing, they will settle accounts with Heilan Home. Heilan Home confirms revenue based on the settlement price (not retail price). This consignment sales model ensures that franchisees do not need to bear inventory pressure.

In short, Heilan Home has formed a light-asset, high-efficiency operating model by spreading risks to both sides, integrating upstream small businesses, and leveraging the channel advantages of downstream franchisees.

This business model is reflected in the balance sheet as high inventory and accounts payable. For many years, the scale of Heilan Home's inventory and accounts payable has remained between 8 billion and 10 billion yuan. Taking 2023 as an example, its total inventory is 9.337 billion yuan.

How big is the risk of high inventory? In fact, it is both big and small.

Heilan Home implements two purchasing modes, namely the non-returnable mode and the returnable mode. In the returnable mode, if the product is still unsold after the end of the sales season, it can be returned to the supplier by cutting the label, and the supplier will bear the risk of unsalable products. In contrast, in the non-returnable mode, the company will bear the risk of unsalable products.

By the end of 2023, the total value of returnable merchandise reached 7.2 billion yuan, while that of non-returnable merchandise was 1.3 billion yuan.

For goods under the returnable model, Heilan Home adopts a policy of not making provisions for impairment. However, under the non-returnable model, the company will determine the proportion of inventory impairment provision based on the actual market sales of different brands and different inventory age segments. Specifically, for the largest Heilan Home series, its sales cycle is 24 months. No impairment provision is made for goods with an inventory age of less than 2 years, 70% of the impairment provision is made for goods with an inventory age of 2 to 3 years, and the full amount is made for goods with an inventory age of more than 3 years.

Currently, less than 10% of its inventory is more than two years old, which looks relatively healthy.

However, although no impairment provision is made for returnable goods, this does not mean that Heilan Home does not face related risks. Given that returnable goods account for more than 75% of the company's revenue, the company is highly dependent on suppliers. Therefore, once suppliers get into trouble due to inventory backlogs, Heilan Home will also be difficult to stay out of it and may be affected.

03 Turning to heavy assets?

After adopting the operating model of transferring inventory to upstream and downstream, Heilan Home successfully reduced costs such as factories and designers, achieved light asset operation, and promoted a significant increase in the number of franchise stores.

However, with the changes in the clothing industry, the profitability of franchisees has generally declined, and major brands have turned to the direct sales model. According to the analysis of Heilan Home's annual report data by Time Weekly, from 2017 to 2022, Heilan Home's average single-store sales fell by 29.37%, from 3.2771 million yuan to about 2.3145 million yuan (regardless of whether the store has been open for 12 months).

To meet this challenge, Heilan Home adjusted its business strategy and optimized its channel structure by closing some franchise stores and increasing the number of directly-operated stores. According to Heilan Home's first quarter 2024 financial report, the company has a total of 6,846 stores, of which directly-operated stores increased to 1,267, and franchise stores and other stores decreased to 4,687.

This adjustment reflects Heilan Home's emphasis on the direct sales model, as the gross profit margin of direct sales stores is as high as 62.61%, far exceeding the 40.26% of franchise stores. The advantage of the direct sales model is that it is easy to unify management, strategic layout and consistency of products and services, while franchise stores need to share profits with franchisees and have less flexibility in adjustment.

However, the strategy of strengthening direct sales and weakening franchising has also brought about the problem of rising costs. In 2023, Heilan Home's sales expenses reached 4.353 billion yuan, an increase of nearly one-third year-on-year. Among them, rental and property management fees increased significantly to 864 million yuan, and physical store-related expenses also increased.

Therefore, Heilan Home is currently faced with the following questions: how to transform itself into a younger brand, and how to utilize the new sales brought by directly-operated stores. Whether this change can become a new engine for Heilan Home's growth remains to be seen. But from now on, after a long period of rising stock prices, investors have voted with their feet.