LN's 1Q26 retail sell-through grew MSD YoY, recovering from the decline in 4Q25. However, mgmt. noted that consumer sentiment remained tepid entering April, while intense industry competition continued to weigh on discount levels. Despite near-term softness, the company maintained its full-year guidance unchanged. In addition, Mgmt. noted that the recent rise in global oil prices is expected to have limited cost impact in FY26, with measures in place to address potential cost pressures from FY27 onwards. Maintain BUY as we see LN’s recovery still ongoing.
Key Factors for Rating
1Q26 sequential recovery in line with our expectations. LN's 1Q26 retail sell-through grew MSD YoY, accelerating from declining LSD in 4Q25. During the quarter, LN’s offline retail sell-through increased MSD YoY, within which directoperated stores expanded low-teens while wholesale channels edged up LSD. Direct retail continued to outperform, primarily driven by stronger momentum in outlets. Besides, e-commerce sell-through recorded HSD growth YoY. By the end of 1Q, LN’s inventory-to-sales ratio stood at 5 months, broadly stable YoY but slightly elevated QoQ due to seasonal factors. In addition, as the competition remained intense, retail discounts deepened slightly by 1ppt YoY. Into April, mgmt. mentioned that the sales trends remained broadly in line with March and the consumer sentiment was still lackluster. Despite near-term softness, mgmt. maintained full-year revenue and NPM guidance unchanged.
Performance was mixed across key categories. Athleisure recovered to LSD growth in 1Q26, led by the apparel segment, with culturally themed products such as the Palace Museum Series outperforming expectations. Basketball continued to decline but at a slower pace compared with prior quarters, supported by IP-driven products including the Way of Wade series. Running saw significant growth deceleration due to a high comparison base, while training achieved slight growth during the period. The badminton business, accounting for c.7% of LN's total revenue, saw 1Q26 growth decelerated to around MSD. While badminton carries a higher OPM, mgmt. does not anticipate or pursue aggressive growth in this segment. Looking into the coming quarters, LN plans to enrich its product portfolio, particularly within footwear and the Gold Label series tailored for the "Dragon Store" concept.
Cost pressures may come into play in 2027. As 4Q26 product orders have mostly been placed, the impact of raw material cost increases arising from surging international price is expected to be limited in 2026. However, should global oil prices remain elevated, the effect is expected to feed through into costs in 1Q27, with footwear projected to see costs rise c.3-4% YoY. To mitigate these pressures, LN will actively manage terminal pricing and discount ranges to limit margin erosion. We hence expect the impact to its GPM should be limited if LN is successful in executing a brand revamp.
Key Risks for Rating
(i) weaker-than-expected retail discounts offered; (ii) deteriorated retail sellthrough; (iii) unexpected spike in promotional spending and other expenses, and (iv) higher store closure and hence higher impairments.
Valuation
We maintain our earnings forecast unchanged at this moment. Our TP of HK$23.9 is based on 16x adjusted 2026E EPS. Maintain BUY.