Xtep’s 2025 results slightly missed market expectations as 2H25 recorded a 6% YoY OP decline, reflecting the keen competition in the overall retail environment. We expect Xtep brand would still face intense competition in 2026, as its competitors also stepped up efforts in promoting running products. The Company has turned its efforts into three areas: DTC transformation; overseas expansion, and Saucony “Phrase 2”. We expect Xtep may therefore see slower profit growth in 2026 as it has to dedicate resources into these segments, but this could be the necessary short-term pain for longer-term growth. While we expect investors’ sentiment may remain weak in the nearterm even after the share price correction post-earnings release, we now see the valuation, especially dividend yield, more attractive.
Key Factors for Rating
2025 overall NP in-line but 2H25 revenue missed. Despite achieving a 2025 NP of RMB1,372m (+11% YoY), in-line with market consensus and its previous guidance, Xtep’s results have missed market expectations as 2H25 OP declined by 6% YoY to RMB785m, while revenue from core Xtep brand also declined by 1% YoY to RMB6,463m in 2H25. The results mainly reflected issues such as: (1) competition intensified in 2H25, hurting retail discounts and margins; (2) DTC transformation of core Xtep brand where c.100 franchised stores were involved and there were buybacks of inventories from franchises, offsetting revenue, and (3) low group OP growth after loss-making K-Swiss and Palladium were disposed in 2024 (NP growth was achieved by a low base).
Expect some drag from core Xtep brand will still last in 2026. We expect Xtep brand will still face keen competition in 2026, given competitors have ramped up running product lines, thus Xtep’s GPM may still be under pressure. Also, as business landscapes now favour more prompt response from HQ, Xtep will take over 5-600 more stores from distributors in 2026 as part of DTC strategy, which could imply more cost incurred and weigh on OPM, in our view.
Betting on fast-growing business as the next move. The performance of 2H25 reflected a keener competition but also proved some new business lines successful. For core Xtep brand, despite weaker performance in China, its overseas revenue nearly doubled with strong e-commerce growth. In 2026, Xtep will ramp up its overseas operations and will expand its proven model of running club to build consumer awareness. In the meantime, for Saucony, after the successful launch of wool apparel collection supporting segment revenue to grow 30% YoY in 2025, Xtep will double down its premiumisation strategy in 2026. We expect this could pay off in 2026 as its existing stores become more mature and profitable, allowing room for further brand investment.
A conservative guidance in 2026 as expected. Mgmt. expected that for the full year of 2026, group revenue to grow by MSD YoY, driven by: (1) +ve growth from core Xtep brand, and (2) 20-30% YoY growth from Saucony. For group NPM, it will achieve a HSD level. While we see the revenue target to be reasonable and expected, we view that the NPM target may draw some concerns from investors, as 2025 NPM is already 9.7%. Given there are more investments in 2026, such as DTC transformation, overseas expansion of core Xtep brand, and also building a team of talent via share option scheme, we expect Xtep’s NPM may narrow 0.3ppt to 9.4%, which is a level where overall NP will still achieve +ve growth but may disappoint investors seeking growth. Nonetheless, Xtep will still have the room to maintain 50% dividend payout ratio in 2026, which could still provide a backstop to the overall share price considering it offers a dividend yield of close to 6% as of 26 Mar 2026.
2027 may be a better year after some frontloaded investment in 2026. We expect Xtep may be able to demonstrate stronger growth potential in 2027 if its growth strategy plays right in 2026. Apart from stronger expected growth from Xtep’s overseas business and Saucony, we also expect the Company could ramp up its outdoor product lines via Merrell in late 2026 when it develops more suitable products for Chinese consumers. This could drive stronger growth than our current assumption if the trend of outdoor products remains strong in 2026
Key Risks for Rating
Downside risks: (1) unsuccessful multi-brand strategy; (2) deteriorated retail sell-through for core brand, especially under DTC; (3) unexpected spike in advertising spending; and (4) higher costs related to new brand expansions.
Valuation
We revised our 2026-2027 EPS forecast by 10% to mainly factor in: (1) weaker core Xtep brand revenue assumption as we now expect the competitive landscape will be worse; (2) impact from DTC transformation where Xtep will have higher inventory buybacks and offsetting its wholesale revenue, and (3) higher assumptions on SG&A, especially on higher share option scheme expenses being frontloaded in 2026.
Our TP is lowered to HK$5.50, based on 10.5x 2026E P/E (unchanged).
Despite a weaker growth outlook in 2026, we now see Xtep’s valuation has turned more attractive with 2026/2027 P/E now reaching 9x/8x respectively, offering a dividend yield of close to 6%. While we expect near-term share price may still be under pressure, we now see this valuation level may draw more patient investors, and should provide some backdrop to its share price.