The latest half-year results from XTEP INT'L (1368.HK) reveal an unusual divergence: revenue remained largely flat while net profit saw a double-digit decline, yet the board simultaneously raised the dividend payout ratio to its highest level in nearly five years. On one side, the core brand struggles with growth; on the other, the professional sports segment surges against the trend. While profit faces pressure, shareholder returns have actually increased rather than decreased.

Within this interim report, nearly every key metric conceals a longer narrative about the two strategic priorities XTEP INT'L has pursued over recent years: concentrating on running and shifting from a wholesale model to a direct-to-consumer approach.

Revenue Sees Marginal Rise But Main Brand Declines 2.2% Year-On-Year

Examining the fundamental figures first, the group generated revenue of RMB 6.795 billion in the first half of 2026, a slight year-on-year dip of 0.6%, essentially matching the RMB 6.838 billion recorded in the same period last year. Breaking this down by brand, the mass market sports segment, dominated by the core brand and accounting for 87.1% of revenue, contributed RMB 5.920 billion, down 2.2% year-on-year. Meanwhile, the professional sports segment, encompassing Saucony and Merrell, which represents 12.9% of revenue, grew by 11.4% year-on-year to RMB 875 million.

This half-year report underscores a period of revenue mix adjustment despite a relatively stable overall scale. The changes in profitability are even more pronounced. The gross margin improved by 1.4 percentage points to 46.4%, setting a new high in recent years, but operating profit fell 11.0% year-on-year to RMB 1.161 billion. Consequently, the operating margin slipped from 19.1% to 17.1%.

Delving deeper, net profit attributable to ordinary shareholders decreased by 10.5% year-on-year to RMB 818 million, with the net margin easing from 13.4% to 12.0%. Basic earnings per share came in at RMB 0.30, down from RMB 0.34 in the prior year. Essentially, while gross margins improved, faster expense growth absorbed those gains and pushed the operating margin down by nearly two percentage points.

Cash flow stands out as one of the few bright spots in the report. Net cash generated from operating activities rose 9.5% year-on-year to RMB 847 million, and the net cash balance grew 36.3% from the end of 2025 to RMB 2.326 billion. Reflecting this cash position, the board declared an interim dividend of HK$0.18 per share, consistent with last year, though the payout ratio was passively elevated to 53.8% due to lower earnings per share.

Channel developments also merit attention. As of the end of June, XTEP INT'L operated 6,308 adult stores, a decrease of 49 from the 6,357 stores at the end of last year. The XTEP Kids chain saw a reduction of 33 stores, bringing its total to 1,455, while Saucony boasted 180 stores. Inventory turnover days lengthened from 91 to 105 days, accounts receivable turnover stretched from 118 to 123 days, and overall working capital turnover days expanded from 90 to 112, signaling a slowdown in channel velocity during this half-year period.

What Drives the Structural Revenue Shift?

The rationale behind the revenue mix change is straightforward: the decline in the mass market division and the growth in the professional sports division are two sides of the same strategic coin. XTEP INT'L has consistently emphasized "focusing on running," implementing this by accelerating the closure of underperforming stores under the main brand, pivoting towards shopping malls and outlets, and aggressively advancing its DTC transformation. Such channel restructuring inevitably leads in the short term to fewer stores and a slower pace of wholesale shipments, which directly accounts for the 2.2% revenue drop in the mass market segment.

In parallel, Saucony has pursued a "premiumization" path, concentrating on elite runners and high-end consumers by controlling discounts and enhancing store efficiency. This strategy helped push the professional sports segment's operating margin up to 10.4% from 10.0%, making it one of the few divisions within the group to improve against the broader trend.

The decisive factor for profit trajectory lies in changes to the expense structure. In the first half, selling and distribution expenses surged 13.0% year-on-year to RMB 1.676 billion, raising their share of revenue from 21.7% to 24.7%, a growth rate far outpacing revenue. The report attributes this to two primary causes: elevated platform fees and logistics costs tied to online sales growth, and increased DTC-related expenditures, including right-of-use asset depreciation and employee costs. E-commerce now contributes over one-third of main brand revenue, with growth exceeding 20% on platforms like Douyin and JD.com, marking it as a genuine growth engine. However, the flip side involves persistently rising customer acquisition and fulfillment expenses.

This explains why, despite the mass market division's gross margin improving from 43.6% to 45.1%, its operating margin fell from 20.0% to 18.9%. The benefits from gross margin improvement were partially offset by faster expense growth. The extended working capital turnover days are also a typical consequence of the channel adjustment period. The 14-day increase in inventory turnover reflects slower sell-through at the terminal level, while the 5-day rise in accounts receivable days may be linked to distributors' delayed payment cycles during the channel optimization process.

The corporate segment swung to a loss, moving from a RMB 18.6 million profit in the prior year to a RMB 49.8 million loss, primarily due to share-based payment expenses under a new share award plan, which shifted from a net reversal of RMB 21.1 million to an expense of RMB 42.9 million. This is a one-off accounting effect rather than an operational issue.

Long-Term Pressures and Challenges for 'China's Running Pioneer'

Evaluating this half-year report within the industry context clarifies the pressure points. During the same period, Anta Sports saw revenue grow 12.9% year-on-year to RMB 43.51 billion, with its core brand itself achieving 4.8% growth. Li Ning reported a 2.8% year-on-year revenue increase to RMB 15.235 billion, alongside a gross margin improvement to 50.9%. In contrast, XTEP INT'L stands out as the only one among the three leading sportswear companies with both total revenue and main brand revenue declining.

Data from the National Bureau of Statistics indicates that domestic retail sales growth for clothing, shoes, and hats has decelerated to single digits in the first half, even turning negative in July. The ceiling effect in the mass sportswear market is becoming increasingly tangible. XTEP INT'L's choice to counter this slowdown with its "running focus" strategy is logically sound, but the consecutive revenue declines in the main brand suggest that the strategy's effectiveness will require more time to validate.

Heightened reliance on e-commerce constitutes another layer of pressure. E-commerce revenue now exceeds one-third of the main brand's total and continues to rise, yet online channels inherently carry higher expense ratios. Platform commissions, traffic acquisition costs, and logistics fulfillment all inflate selling expenses as online penetration grows. A similar scenario unfolded for Anta's FILA brand during the same period, where faster online growth relative to offline dragged down FILA's overall gross margin. This highlights a common industry issue: the marginal cost of e-commerce-driven revenue growth is climbing, and transitioning from offline to online does not automatically translate into better margins. Unless XTEP INT'L can differentiate its online operational efficiency, selling expense ratios may climb further.

The DTC transformation itself represents a sustained investment battle that will strain the income statement in the near term. Costs such as right-of-use asset depreciation, store renovations, and increased employee expenses do not decline linearly along with store closures; instead, they crystallize during the transition. With store numbers already falling, if revenue growth fails to keep pace with channel optimization, the financial toll of this transition could persist longer than anticipated.

Saucony has been XTEP INT'L's most talked-about second growth curve over the past two years, and the current half-year data supports this narrative. The professional sports segment's 11.4% revenue increase, 55.5% gross margin, and 15.5% operating profit growth are among the most favorable figures in the group. However, its scale is insufficient to offset the main brand's decline: the segment's operating profit stands at just RMB 90.8 million, roughly one-twelfth of the mass market division's operating profit.

Additionally, the premium running shoe segment where Saucony competes faces direct competition from international brands like HOKA and On in the Chinese market. The sustainability of the premiumization strategy and the ability to maintain store efficiency gains will require several more reporting periods to verify.

Finally, a financial signal worth noticing: despite both operating and net profit declining, XTEP INT'L maintained its interim dividend of HK$0.18 per share, passively pushing the payout ratio to 53.8%, the highest in five years. This is shareholder-friendly, but if the trends of main brand revenue decline and rising expense ratios are not reversed in coming periods, balancing a high payout ratio with transformation investments will become increasingly challenging.

Conclusion

This interim report from XTEP INT'L delivers a "structure is right, rhythm is difficult" performance. The strategic direction of focusing on running is sound, marathon enthusiasm remains strong, and Saucony's premiumization path has produced tangible data. Yet, the simultaneous transitions from the mass market to professional sports and from wholesale to DTC have placed dual pressures on this half-year's income statement.

On the revenue side, the key to success hinges on whether the main brand can halt its decline and whether e-commerce can improve efficiency rather than merely pursue scale. For profit, the critical variable is when the one-off costs of the DTC transformation will be fully absorbed. For XTEP INT'L, the next few reporting periods will carry more weight than the current one, as they will answer a fundamental question: whether the observed slowdown is a transitional pain or a symptom of growth stagnation.