EXEC: Mainland Headwear H1 Revenues, Profits Fall Double

Posted by SGB Media | Aug 30, 2023 | Exec Apparel, Exec Outdoor, Exec Sports/Fitness, Exec Sportsmans, SGB Executive

Mainland Headwear Holdings Limited is apparently feeling the same pressure of heavy retail inventories as other sectors of the vendor and manufacturing sectors. The manufacturer and seller of headwear and accessories products said in its interim report for the first half of 2023 that global manufacturers and traders faced the “challenges of built-up inventories waiting to be consumed, weakened new demand and stagnant production and sales.” The company said it continued to implement strategies to stabilize prices and maintain the gross profit margin of its operations to address an oversupply of headwear during the first half.

Supported by quick headwear production and delivery capabilities, the company said it has secured a considerable number of quick-turn orders with higher selling prices at a time when the market was clearing goods that were over-purchased during the pandemic.

The company saw consolidated revenue fall 17.2 percent in the first half to HK$780.3 million. Gross profit decreased 9.8 percent to HK$273.9 million, but gross margin was said to increase “modestly” as a result of the company’s “effective cost control measures.” Gross margin rose 290 basis points to 35.1 percent of sales for the first half. Profit attributable to shareholders decreased 23.0 percent to HK$65.1 million.

Manufacturing BusinessFirst-half revenue from the Manufacturing business declined 16.5 percent to HK$469.2 million, accounting for approximately 60.1 percent of the company’s total revenue. The decrease was said to be mainly attributable to built-up inventories still being offloaded by customers in Europe and the U.S., a result of the port congestion, and logistics and transportation chaos from last year.

In particular, shipping fell notably in the second quarter as customers had started to reduce procurement since the beginning of the year. The decline in sales, coupled with traditional festivals in Bangladesh where workers took holidays which resulted in lower production volume, has pushed up average operating costs. The depreciation of the Bangladesh Taka helped to partially offset the increase in production costs during the Period.

The Manufacturing segment’s operating profit decreased by 9.0 percent to HK$129.1 million.

During the first half, cost control at the Bangladesh factory was reportedly strengthened by improving management and adding new production capacity to optimize the operation layout. After the scheduled completion of the construction of a new plant, the Bangladesh factory has a bigger production space for headwear production and commenced production of accessories, such as wallets and belts, for sale via its trading business. The Shenzhen factory continued to focus on the design, development and production of high-end products.

Trading BusinessThe Trading business was also affected by customers still offloading overbought stock levels from last year and declining sales. Revenue from the trading business decreased 18.1 percent to HK$311.0 million, accounting for 39.9 percent of the company’s total revenue.

The company said the Trading segment actively promoted budget management, streamlined structure and manpower, and strictly controlled sales and distribution costs and administrative expenses during the six-month period. However, the decrease in sales revenue was still greater than the reduction in costs.

The trading business recorded an operating loss of HK$28.0 million in the first half, up from an operating loss of HK$23.1 million in the 2022 first-half period.

OutlookLooking ahead to next year, Mainland said the global economy will still be affected by geopolitical tensions and uncertainties surrounding interest rate hikes. However, the European and American retail markets are expected to gain support from falling inflation and rising actual income and see improvement in consumer confidence. Sales prospects for consumer goods such as headwear and apparel remain cautiously optimistic.

De-stocking adjustments in major markets including the US have begun to show signs of improvement. Although major retailers are still facing significant inventory pressure, inventory levels have continued to drop in the past few months and are expected to return to healthy levels in the fourth quarter of this year. Orders will also rebound with recovering demand.

As one of the few manufacturers in the headwear market capable of quick production and delivery, the company said it has established solid and long-standing business relations with many leading retail brands, ensuring stable prices for customers and maintaining the high-quality image of Mainland Headwear. The company believes that stable selling prices are conducive to maintaining a healthy gross profit margin and are essential to the sustainability of enterprises. Therefore, the company still continues to focus on sustainable development despite fluctuations in market supply and demand.

As the factory has more production space after the completion of the new plant, it is currently expanding its production lines for accessories such as belts and wallets, and the finished products will be delivered to the company’s trading segment for sales. Such an arrangement will support the factory in achieving better resource utilization, while the trading segment will also be able to reduce external procurement costs and achieve faster delivery, thus realizing synergies between the company’s manufacturing and trading businesses.

Furthermore, the company is adding another production base in Mexico. Associated construction is expected to be completed by the end of this year, with operations to be undertaken in phases. Since the production base is located in an area that is less than two kilometers away from the U.S. border, it will help to strengthen the company’s rapid order production capacity, greatly shorten the order delivery time to the U.S., and reduce the logistics costs and import tax expenses for sales to the US after commencement of operation, thus further demonstrating the company’s quick production advantage.

As for the trading business, the company said it will continue to optimize its product mix and operational efficiency. With the factory in Bangladesh becoming the production arm of the trading segment’s subsidiary, overall operational efficiency is set to improve. The subsidiary will flexibly adjust products, specifications and delivery time in response to changes in different markets, effectively seizing opportunities arising from the anticipated recovery by the end of this year.

To overcome operational challenges brought by soaring raw material prices and freight rates, the company said it will continue to implement various cost control measures while strengthening its supply chain and procurement localization strategy to mitigate rising cost pressure and diversify supply risks.

Photo courtesy Mainland Headwear Holdings Limited/New Era

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