Earnings Call: H1 2020

Aug 14, 2020

Investors, good morning. Welcome to Li-Ning's 2020 interim results presentation. This meeting is conducted in the form of webcast and conference call, and you will be able to read the PPTs or the webcast as well. We offer simultaneous interpretation as well as the floor channel for your choice. The information will be uploaded to the investor relations section of Li-Ning's website. Let me introduce to you our management, Mr. Li Ning, Chairman and Executive Director, and Joint Chief Financial Officer, Mr. Zeng. First of all, Mr. Zeng, Chief Financial Officer, will go through a financial overview. After that, Mr. Li Ning will talk about the strategic direction, and then our Joint Chief Executive Officer will go through the growth in profits. After that, there will be Q&A. Now may I pass the floor to management? Welcome, everyone. First off, I want to highlight the fact that all discussions we are going to have in this presentation exclude the impact of the one-off non-operating income in the amount of CNY 234 million, recorded during first half of 2019. Financially, while we are not exempted from the negative impact COVID-19 has been created to the business, but as said in our last earning release in March, we are confident of achieving net profit margin improvement even under the impact of COVID-19, because of our scalable cost structure, our continued elevated brand positioning, and what we have done in advance of the COVID-19. Consequently, we were able to achieve a net profit margin improvement of 210 basis points to reach 11.1%, even with our revenues down 1.2%. Such improvement was mainly driven by 1.5 points in expense ratio reduction, as well as increase in government grant and interest income while holding our gross margin relatively flat under a very promotional retail environment. As expected, our operating cash flow declined 65%, but the key is we were able to achieve positive operating cash flow in the amount of CNY 479 million, even with COVID-19 impacting negatively on the retail sell-through. Our net cash increased 22% to CNY 5.76 billion compared to the same period last year. In addition, we were able to maintain a healthy working capital structure even under such time. Our gross average working capital was down 7%, mitigating the negative impact of the 1.2% revenues decline. Our cash conversion cycle improved by 2 days to 30 days. Operationally, the COVID-19 had made its presence felt in all KPIs. Notably, a low teens decline in total platform retail sales, including both online and offline channels for the LI-NING Core Brand. While our channel and company inventory increased low teens and mid-teens respectively, is considered within a tolerable level in view of the negative impact on retail sell-through during majority of first half and the recovery rate is behind expectation. Our offline new product performance impacted by the challenged and promotional retail environment down mid-teens driven by volume decline. Average selling price registered a low single-digit increase as low teens increase in our MSRP or tag price was largely offset by about 6 points heavier discount performance. New product 6-month sell-out rate declined by over 6 points, while 3-month sell-out rate down approximately 5 points as compared to the same period of 2019 on a weighted average basis. Clearly, you can see the impact of COVID-19 had created a very challenging retail environment in the first half. Now, let's take a look at the revenues. During first half of 2020, our revenues declined 1%, impacted by 4% drop in apparel and flat in footwear. Our balanced channel strategy for LI-NING Core Brand between wholesale and the direct-to-consumer channels, which also known as the DTC, has played a very important part at times like this. Specifically, it balanced the risk between channel and financial as well as working capital and P&L. The electronic commerce channel continue its growing trend over the past few years with sales revenue rose 23%, driving its contribution to 28% of the total from the previous 23%. Our wholesales rose 1% and as mentioned in our March presentation, the initiatives we have rolled out since October of last year have put most of our wholesale partners in a better starting position before the COVID-19 impact. Hence, the revenue mix contributed from wholesale has increased from 48% to 50%. Direct retail declined 24%, and its revenue mix dropped seven points to 22% of total Li Ning brand business. Nonetheless, the DTC, which is the direct-to-consumer segment, still accounted for 50% of Li Ning brand revenues, giving us a balanced channel penetration. On the right-hand side of the slide, you can see that our sales from new products category, aged six months or less, improved by two points. As discussed in March presentation, we have taken precautionary measures in Q4 of 2019 to accelerate our inventory clearance rhythm, which in hindsight of the current COVID-19 situation, has proved to be a prudent move. Coming to the same-store sales performance, as there is no offline store that opened all six month during first half of the year, we will just discuss the Q2 performance. Our overall same-store sales decreased mid-single digit during Q2. Our offline SSSG stood at low teens decline, driven by high teens decrease in direct retail and low teens decline in the wholesale channel. Meanwhile, our online SSSG accelerated to mid-20s growth for Q2 from low teens increase in Q1. As far as channel strategy is concerned, the number of stores for total platform decreased by 311 as compared to June of 2019. The decline came from LI-NING Core Brand, as LI-NING YOUNG is up 138 stores during the last 12 months. Due to the COVID-19 impact in the first half, we have accelerated the store closing rhythm and delayed store opening schedule. From the sell-through standpoint, as you can imagine, due to the COVID-19, our offline channels experienced a decline of 16%, and with the positive contribution from consistent e-commerce expansion strategy driving a low 20s growth, the total online and offline sell-through decline narrowed to 11%. Our offline channel decline is all driven by units decreased, as our average selling price, also known as ASP, actually stayed flat even with such heavy promotion environment. As mentioned during March presentation, we have a high single digit to low teens increase in our MSRP or tag price for the 2020 H1 new products, which enable us to mitigate some extent of the deepened discount on both new and old product impact to our sell-through amount. Wholesales of Li Ning brand, excluding international and LI-NING YOUNG, saw a 3% increase with the number of store decreased 309 over the same period last year. Excluding specialty wholesalers for badminton and soccer, our sell-in was up by 1%, as low teens increase in our new product MSRP was largely offset by high single digit declined in units sell-in. On the right-hand side of this slide, you can see our wholesaler sell-through decline has been gradually narrowed, with high teens decrease in Q1 to high single digit decline in Q2. For more current view, I brought up this next slide from appendix 3, which show the Q3 to date trend further narrowed to mid-single digit. Please note that Q3 comparison is on a very high base as third quarter last year registered a mid-30s growth in sell-through. However, I must add that being the sporadic recurrence of the infected cases, the sell-through trend to date can change in a heartbeat. At times like this, sell-through usually trails sell-in trend, as you would need increase in sell-in to drive the sell-through in order to fully capitalize on the recovery. Nonetheless, as we always said, we manage our wholesale business with a sell-through focus, and we will keep striving to maintain the balance between sell-in and sell-through to ensure channel inventory is in a healthy state once the short-term negative impact is worked through the channel. As far as trade fair order concern, orders for the fourth quarter of 2020, excluding LI-NING YOUNG and China LI-NING, reached a mid-single digit growth. This is expected at times like this, as distributors will be committing less upfront and leave more open-to-buy resource at the replenishment level, which is already the trend before the COVID-19. With COVID-19 impact, the order trend will further become irrelevant to what the actual sell-in revenue is trend to be. Hence, starting from 2021 orders, we will not be disclosing the trade fair results. Moving on to retail channel. The revenues of directly managed stores declined by 24%, with 140 stores less in ending store count compared with same period in 2019. Our direct retail sales were impacted heavier versus our wholesale business from the COVID-19. As almost 85% of the store base in direct retail is in the metro and higher-tier cities, which were the most severe impacted part of the country in terms of traffic decline. This is visible from the right-hand side of the slide, where we have plotted the daily footfall decline in our higher-tier and lower-tier city stores, along with the sell-through decline. You can clearly see the higher-tier cities' average daily footfall recovery has been trailing that of the lower tier. Please note that the average daily footfall data is based on the stores where we have installed the traffic tracker system and is for directional purpose only. We try to mitigate the negative impact on store profitability resulted from the 24% sales decline and gross margin erosion due to the heavier discount environment through managing our controllable expense and negotiate on the fixed rental expenses. As a result, our store profit margin reduced from high teens to high single digit in the comparable period. The next slide I brought up from Appendix 4 will give you a sense of the direct retail sell-through direction of third quarter to date. While the road to recovery continue, it is still trailing last year amid the sporadic recurrence of the infected cases in Beijing, Xinjiang, and northeastern part of the country, which still affecting the store traffic. Turning to gross margin. Our gross margin remained relatively flat, notwithstanding a very promotional environment. The 0.2 percentage point decline was driven by improvement in wholesale gross margin that was attributable to a low teens increase in MSRP or tag price of our new product, due partially from a low to mid-single digit increase in our initial markup, which also known as IMU. In addition, the improvement of new and old product mix in our sell-in revenues also drive the increase. Together, they contribute 1.4 percentage point. As said in our prior discussions, our old product clearance is more prioritized in our direct retail channel. Hence, some of the positive margin impact from our new, old mix in our wholesale sell-in is offset in our direct retail channel. Speaking of retail, heavier discounts on both new and old product sell-through for our direct retail negatively impacted 0.6 percentage point. Dilution in channel mix due to higher decline in revenues from direct retail, which has the highest gross margin, deducting 0.6 percentage point. Additions in inventory provision due to higher inventory, deducting 0.4 percentage point. Before moving on to next slide, I just want to comment on the increase in our IMU as it plays an important part of the channel economics. IMU basically represents the markup from our cost to tag price or MSRP. Under a normal discount environment, increase in IMU, if driven by brand and product elevation, as in our case the past two years, basically expand the gross profit chain in the channel. Simply put, it increases the sell-in revenues and gross margin rate for us, as well as increasing the gross profit per unit for the distributors. Under a very promotional environment, as seen in the first half, it still gives a better starting position for our partners to mitigate some extent of the deepened discount. Now, let me walk you through the profitability analysis. Driven by small decrease in revenues and gross margin rate, we saw a CNY 51 million decline in gross profit. As far as expenses are concerned, we carry out disciplined cost control on variable cost to ensure better leverages. This is even more important when revenue experience decline. As you can see from the slide, the total sales-related variable cost, such as commissions, direct store expenses, as well as logistic cost, decreased a total of CNY 27 million, offsetting more than 50% of the CNY 51 million decline in gross profit. With the cost control initiatives we put in place, the platform expenses decreased CNY 91 million, driven by staff cost, travel and entertainment, as well as consultant fees reduction. Our advertising and promotion expenses basically stay flat and stayed at 9% of revenues, literally unchanged to an 8.9% of revenue in H1 of last year. As you can see, our cost reduction initiatives focus mainly on non-brand related expenses, as we want to make sure we are well-positioned to capitalize on the recovery trend. Other income and interest increased CNY 93 million, mainly due to increase in government grant and increase in interest income due to higher net cash during the comparable period. As a result, our operating margin improved from 11.4% in 2019 to 14.5% in 2020 after adjusted for the one-off non-operating goodwill provision in 2019. Consequently, our net margin improved by 2.1 percentage points to 11.1% from the 9% last year. Moving on to channel inventory. Our channel inventory increased low teens in relative to low teens decrease in retail sell-through. Consequently, as expected, our inventory turnover cycle exhibited a negative comparison. On the left-hand side of the slide, the red line you see is based on our traditional rolling 12-month average sell-through calculation, which would not reflect the negative impact because of a very strong retail sell-through experience during second half of last year. Therefore, we have inserted a gray line this time to show the short-term impact, which is based on a six-month sell-through calculation. As expected, the inventory month comparison has increased to 5.4 months, compared to a revised 4.6 months in the first half of 2019 under this method. While this is the first time we saw an increase since four years ago, we believe we have mitigated some extent of the epidemic impact affecting heavily on the channel retail sell-through during first half, while we tried to balance the protection of brand positioning. With the COVID-19 impact affecting the sell-out performance for our Q4 products, the proportion of inventory aged between seven to 12-month category increased to 17% from 14% a year ago. We have set up strict inventory initiatives with the goal to further mitigate the impact by the end of the year without limiting our ability to capitalize on the recovery trend. At the company level, our gross inventory rose 14% compared to a 1% decline in revenues. The proportion of inventory aged less than six months declined 3 percentage points to 69% from 72% in the comparable period last year. As you can see, this aging structure trend resembled the channel inventory, which reflected the short-term impact from the COVID-19. As far as trade receivables are concerned, our gross trade receivable increased by 3%, which correspond to the 3% revenues increase from the wholesale business as seen before. Notwithstanding the negative impact of the COVID-19, our day sales outstanding continue on the improving trend, shortened by two days. Particularly when you look at the aging structure. Our current mix improved from 61% a year ago to 73%. As I said back in March presentation, while no one is exempted from the negative impact from the epidemic, what we have done before the COVID-19 has made the difference to the starting position of ourselves as well as our distributor partners. We will be monitoring the wholesaler sell-through recovery trend the next few months and make sure enough support is granted. As you can see, we have sufficient resource, both financially and operationally. As far as working capital efficiency is concerned, our working capital remain at a very healthy level. Gross average working capital was down by 7% to support a 1% down revenue. The working capital as a percentage of our revenue declined by one point to 10%, giving us sufficient resource to weather through the epidemic as well as capitalize on the full recovery. The COVID-19 negative impact on our retail sell-through has taken a toll on our operating cash flow. Nonetheless, while declined 65% compared to same period last year, we managed to achieve positive operating cash flow of RMB 479 million. Consequently, our net cash improved by RMB 1.04 billion to RMB 5.76 billion, compared to RMB 4.72 billion at the same period last year. This cash balance not only has given us a strong buffer in facing the current COVID-19 situation, it also allow us to better prepare to capture the business rebound once the virus situation is totally under control. Looking back on the first half, we are encouraged with our financial performance, notwithstanding with such a severe impact to the retail landscape. As seen in the closed-loop slide, majority of our important KPIs has been negatively impacted, ranged from sell-through, sell-out, and sales efficiency. Nonetheless, as we said during March presentation, there are a couple things that we had done before the COVID-19 impact that allow us to weather through the negative impact in the retail landscape and delivered an improved financial results. First, we have started and funded the inventory optimization initiative last October, putting our channel inventory and our distributor partners in a better starting position before the virus. Second, capitalizing on our brand elevation, we have continued to increase our IMU as well as elevating our product pricing structure, giving us a low teens increase in our MSRP or tag price, if you will. Third, our scalable cost structure also gives us the ability to implement productive cost-cutting in a very short, responsive timeframe. Fourth, our more than healthy working capital structure has come in handy during these times. Collectively, these factors allow us to deliver a satisfactory profit and loss statement, reasonable balance sheet with good working capital and ample net cash. More importantly, while we cannot control the COVID-19 impact, we have mitigated the severe impact to a controllable challenge. Of course, the recovery has been slower than most people expected, and there are still lots of uncertainty because of the recent sporadic outbursts in various cities in China as well as the rest of the world. Hence, we are taking a very cautious approach for the full year of 2020. We are looking at a flat to mid-single digit growth in top line and a baseline net profit margin of 10.5%, which represents at least 140 basis points improvement over 2019. Now, Chairman will walk you through our strategic direction. Xie xie. Ladies and gentlemen, greetings to you. Let me now give you an introduction about our company's strategic operation. In the first half of the year, because of the epidemic, it had impacted negatively the economy. However, at the same time, the national health awareness had been strengthened and heightened. Also, the epidemic had created the stay-at-home economy, bringing on a bonus to the e-commerce operators. Therefore, our company had been actively exploring the new retail business. As the epidemic situation stabilized and with the support of the state policies, we believe the sports industry in the long term is continue to be positive. For our corporation, we have adhered to the strategy of single brand, multi-categories, and diversified channels. We have been focused on professional sports brands. At the same time, we have been exploring into casual and fashion to strengthen our core competency for our products and also for our brand name. During this period, there had been challenges brought on by external environment. Our five core categories in terms of retail sell-through compared to same period last year had dropped by 11%. During the epidemic, there had been great restrictions in terms of going out and also in doing sports for the people. As a result of that, functional and professional category sales were greatly affected. However, for sports casual and fashion, there had been good resilience, recording a 12% retail sell-through. With the situation of the epidemic now, it is still fluctuating, and it will take time for the channels to recover. We are fully confident for our Li Ning brand in the long term. Now let's talk about the different categories. First of all, for basketball, we continue to focus on our functional technology, leading the basketball culture. We continue to strengthen our products and also the competitiveness. We also focus on looks and design, which is also important for the professional basketball shoes. For marketing, we continue to work together with the CBA games and also the signed players for NBA to increase our sales and also to fully utilize our cross-sector resources so as to increase the exposure for our basketball products. For basketball culture, we continue to utilize the BADFIVE and redefine the street basketball image. At the same time, create what's fashionable and cool to make it highly popular and relevant to our young consumers. Now for running. For the longest time, we have been focused on the runners' demands and needs with the aim of providing excellent product experience for our professional runners. All along, we have been focused on building a world-first-class running shoes matrix. We have been focused on strengthening the awareness and the knowledge of consumers for our running shoes image. Recently, for our running shoes, we have added one more member. That is to say, if you look at the PPT on the left-hand side, you see a photo there, and this is Shadow, our professional protective grade running shoes. It, on the one hand, we have the double technology of Li Ning Beng. At the same time, we have the new technology platform of Li Ning Jiang. These together greatly increase the shock absorption and also the bounce for our running shoes. It is really a heightening of the performance of the shoes. As for the mass market, we continue to extend the Classics, the Super Light, and also the Linlan. These are the classic running shoes. At the same time, we develop and showcase fashionable and young series. Also to increase our exposure during the fashion week so as to further increase exposure of our product image. As for training category, we continue to provide as a core our sports functionality. Also through technological innovation, we resolve multiple sports scenarios needs. Also we raised the product experience as well. We also engage the women sector. We haven't done enough, even though we have continued to communicate with our women consumers. In the future, we will want to raise the competitiveness in this area so as to focus on the women sector to create an all-position product exposure. As for sports casual, in this category, we pursue a trendy taxonomy so as to interpret the younger and also trendier sports value. Our sports gene of Li Ning and Chinese culture elements and also fashion and trendy, we want to be able to organically integrate all these so as to express the characteristics and idiosyncrasies of the Li Ning brand. We have also worked together on the rhythms of the time. That is, at different times, such as the Chinese New Year, revival of work, et cetera, we have come up with story packages to attract the consumer's attention for our brand names on a continued basis. We have deeply cultivated our fan economy with signed stars. We have signed up new and young spokesperson and also cooperated with a number of quality young artists to further extend our influence and also our brand name volume. Further, we continue to focus on the women sector and also on international resources exploration so as to strengthen our Li Ning brand among the different consumer groups and also to increase our influence in the fashionable and trendy realm. As for brand marketing, we continue to focus on the professional, working together for the longest time with CBA. The cooperation had been good. In the first half of the year, because of the epidemic and with the cessation or suspension of competitions and events, we have explored new ways of marketing. For example, in badminton category, we mobilize star players to form champion teams, and also we have staged live streaming performances so as to very flexibly use digital methods to continue to attract attention of the consumers and to strengthen our brand name in exposure and influence. For brand marketing crossover, we continue to be creative and explore diversified resources. In the first half of the year, together with QQ Dance, we have created an AR idol to promote our products. Also this year, we are working together with the Dunhuang Museum to provide e-commerce products, and this is individualized product designs with historical elements, and it's widely well acclaimed by the consumer community. This year is also the 30th anniversary of our brand, and along with this theme, we have this year for Digital Paris Men's Fashion Week, we have this short video that we have shown. If you are interested, you are able to click on the right-hand side, right-hand bottom of the screen, and you'll be able to see this video. It's been 30 years for our brand. There have been various challenges, and we have grasped opportunities and we have overcome major challenges. Our brand name, in our DNA, it is a competition and sports gene. We are stemmed from sports. We love sports. This passion allow us to dare to think and dare to compete, and we never say die. This is the spirit. On the competitive grounds, the fields, we continue to bring on gold medals and further performance. Next, I will ask our CEO to further share with you about our future. Thank you very much. Good morning to you. I'm Qian Wei. Because of the epidemic situation, I'm not able to come to the venue to communicate with you, and I am only able to report to you on the phone. Please accept my apologies. Today, I want to report on two areas. The first area is still about the epidemic and its impact on the company and some of the measures that we have taken. The second area is about in March, we have talked about some strategic measures. I would like to talk to you about the progress of the execution of these measures. These are the two areas. First of all, as you all know, because of the epidemic which broke out in the early part of the year, it had impacted a number of industries. As the epidemic came under control in May, our performance had significantly recovered. However, after June, because of the fluctuations of the epidemic situation in certain cities, the traffic recovery had slowed down. Therefore, we are looking at uncertainties with regards to the epidemic situation. Because of this, the company will continue to be steadfast in controlling our costs, exploring new streams of income, and also controlling our inventories. In opening up new sources, we continue to use every opportunity presented to us online and offline to maximize our business opportunities, and at the same time, control our costs. For each item of cost, we continue to reassess and adjust them so as to effectively control costs. In the second half of the year, there will still be fluctuations and the epidemic will become a normalized situation. We will be very cautious in making full preparation for this uncertainty and maximize on our business opportunities. At the same time, control every item of our costs and expenses. For inventory control, as we have said in March, we will, with good timing, control our inventory to a controllable level. In the first half of the year, cost control had been effective. For inventory control, it is still in progress. We will try our best to ensure that within this year, our inventory will be effectively controlled. The epidemic had given us an opportunity to reexamine ourselves. This is a very good opportunity in terms of reassessing our cost control and inventory control. Even after the epidemic, we'll continue to do so to raise our efficiency of operation and lower risk. Overall this year, there are still uncertainties in the market, but we will continue to be steadfast to raise the operation efficiency to be higher than that of last year. Also, we will try our best for the entire year to achieve net profit margin of over 10.5%. Next, I would like to talk to you about the past few months. What we are doing to pave the way for our future development, some of the progress we have achieved. As we have mentioned in March, we want Li Ning to become a fit and muscle type corporation so that we are able to continuously develop and raise our profitability. This is the direction of our transformation. We will continue to focus on the market, on consumers, on products, and also on sales venue, so that we, while in 6 areas, continue to raise our efficiency in operation, in inventory, in store operation channel, cost control, and also in our organization structure. Now, let us talk about different areas. First of all, for product strategy initiatives. We will continue to raise the efficiency of our product operation. We will have planned sales planning and also rational our product inventory. Also to achieve efficient operation. In the past few months, we have in a number of areas effected integration in product planning and development, in sales planning, in sales venue marketing, and also in inventory control. We have built our headquarters platform for product sales. Also the scale of business optimization and improvement had also been done. We have developed a month and week units for our planning to support our wholesale and also direct sales business. For our products operation, we have compressed 20% of our styles. Also we have increased 10% of our single style depth, so as to increase the product operation efficiency. This is to improve the efficiency of our product operation and also to integrate our product architecture. Also in the period, we have also developed our products to raise the supply chain efficiency. Also in terms of our fabric types and patterns and also the color, they were integrated. Also for our major brand patterns, there had been integration for sizes as well to 50%. Also there had been cross-sectors maximization so as to optimize our size and also our patterns. We have lowered to 10% our fabric types and also integrated our colors, et cetera, so as to lower to over 30% of our colors, so as to increase the accuracy and also the efficiency of our products. This effort will continue. Now let us talk about channel expansion strategy initiatives. We continue to focus on single store sell-through, profitability, efficiency, and to extend our profit-making shops. In the past period of time, we have continued to develop our business through store design. Also we have increased the consistency and integration of our channel business. For wholesale and direct retail at different levels of the market, we did planning. For each new store, we did profit and loss assessment to make sure the profitability and efficiency of single store. For store design, we also focus on business and business-oriented stores. So we have done some preparation for the early stage. In the first half of the year, there was impact from the pandemic. So in relation to channel development, we had been very prudent. For the low-efficiency, loss-making stores, we accelerated store closing. For new stores, we conducted very careful assessments. There was deferment of new store opening. So in the first half of the year, number of store closures was higher than expected. For new openings, it is lower than our expectation. If you look at last year on comparable channel, there was also a decline. There is still a growth of 10% in the single store average area for our operation floor area. In the future, we will continue to develop high-quality stores. That will be our channel development direction. That is my report on channel expansion strategy. Now let me turn to omni-channel strategy. As we said in March, we integrated online and offline, and we continued to develop e-commerce business. This is a very important goal for us. In order to ensure integration of online channels in the past few months, various departments, categories, online channels that were spread over different places, they were consolidated onto one e-commerce business system. We are able to have effective resource sharing, and we are able to operate with a consistent and unified plan. Now we are already able to integrate and unify online and offline business. In the first half of the year through online-offline synergy, omni-channel strategy, O2O business, and also our membership system, we have seen increase and improvements in the number of members. In the future, by means of online-offline integrated product pricing, marketing channels, membership system, and service, with this complete online-offline integration, we hope to be able to enhance operating efficiency of e-commerce, and at the same time, we can grow the scale of e-commerce business. Now let me turn to store operation strategy initiatives. Regarding store operation, our goal is to establish high efficiency, high effectiveness, single store operating model with high productivity. We hope that this system can be replicated to all channels so as to improve operating efficiency on the whole. In the past few months, we put in place some initiatives. We adjusted the operating architecture of sales system. We separated wholesale and direct retail business, and we built a wholesale team and direct retail team. We will continue to strengthen and optimize our wholesale business, and we will focus on single store operation model for direct retail at the same time. There are different functional departments at the head office. We want to motivate the first-tier salespeople's participation in the business. Every week there is business presentation proposal and business review. We shortened the distance between the frontline salespeople and the headquarters so that various departments can grab business opportunities as soon as possible and identify business solutions. In other words, our focus is on the sales floor. With the frontline people taking active part in business building, we hope to be able to identify more business opportunities and to maximize single store productivity. In the first half of the year, our direct retail business accounted for 80% of business in super tier 1, tier 1, and tier 2 markets. These markets were more affected by the pandemic. Comparing with the same period of last year, there was a big decline in footfall, in sell-through rate, as well as conversion rate. We hope to be able to improve the situation. Right now, in our weekly KPIs and business review, we are trying our best to improve the results. We focus on single store operation efficiency and operation. At the same time, the store managers will have to change their functional focus more towards business building. These are some initiatives that we have put in place in terms of store operation. Now let me turn to supply chain strategies. Regarding supply chain, we achieved the transition from passive to proactive production. That is our goal. We already made that point in March. In order to enhance supply chain efficiency in the past few months, first of all, we integrated the supply chain system structure, from a decentralized to a centralized arrangement. It has been a cross-product, cross-category integration of our supply system. That is, for the categories of shoes, clothes, et cetera, we have been more planned. With the integration, we have been able to increase the efficiency of operation. For example, for supply chain, for a number of areas, including for e-commerce and other business units, we have been able to integrate our supply chain so as to lower our cost and to provide the platform. After integration for our supply, in terms of the quality, the certainty of delivery, and also cost, we will be further optimizing this. We will continue to work on this. On the supplier structure and matrix, it is further being optimized. We want strong and flexible suppliers. That is our goal. For existing suppliers, we evaluate them and we optimize them. We bring in new entrants and there are exits. There is this system so as to ensure that the company's products can be raised in the quality and also be supplied on a consistent and stable basis. Compared to the same period of last year, we have exited 30% or over 30% of our suppliers. We have exited the small scale, small resources, unstable delivery suppliers so as to optimize our core suppliers. At the same time, we have extended our resources for continued strategic cooperation with the suppliers. We continue to raise and optimize this. We continue to strengthen our product research and development. We have, in the area of shoes and also clothes, set up our new and innovation development center to strengthen our capabilities in new products research and also to focus on the services for our consumers and to provide better products. As I have mentioned, we continue to work on the basis of the past few months. Because of the epidemic, the market is uncertain, so we will continue to be cautious and serious in our attitude in meeting with the situation. We would want to be well prepared for the future to open up new sources of income, to increase our operation efficiency, and to cut costs. These are very important for the second half of our operation. This ends my report. Xie xie.