The financial report of the Home of the Waves Group Co., Ltd. (Home of the Waves) for the third quarter of this year showed a significant decrease in net profit to 2.713 billion yuan, down 64.88% compared to the same period last year.
Home of the Waves is one of the top men’s clothing brands in China, known as the “wardrobe for men.” The company recently released its “Home of the Waves Group Co., Ltd. 2024 Third Quarter Report.”
According to the report, the company achieved revenues of 15.26 billion in the first three quarters, down 1.99% year-on-year; and a net profit of 1.908 billion, down 22.19% year-on-year. In the third quarter, Home of the Waves recorded revenues of 3.889 billion, down 11.01% year-on-year, with net profit significantly declining to 2.713 billion, a 64.88% year-on-year decrease.
The company attributed the decline in net profit for the third quarter to a decrease in operating income and reduced sales gross profit.
Specifically, in the second quarter of this year, Home of the Waves saw a 5.88% drop in revenue and a 14.42% decrease in net profit year-on-year. The third quarter showed a more significant decline in revenue and profit compared to the second quarter, leading to a noticeable drop in net profit for the first three quarters.
According to Huaxi Securities research data, the main brand of Home of the Waves had third-quarter revenue of 2.382 billion yuan, down 26.6% year-on-year; and the group purchase customized series revenue was 376 million yuan, a 37.1% decrease. At the end of the third quarter, the inventory scale reached 12.334 billion yuan, reaching a historical high since its listing, a 53.5% increase year-on-year, adding 2.881 billion yuan compared to the end of the first half of the year. Inventory turnover days increased by 71 days year-on-year, reaching 346 days.
A commentary dated November 17 from “Financial Insights” in China noted that from the performance of Home of the Waves in recent years, there is a trend of “increasing one year and decreasing the next” in its accounts receivable. The financial reports indicate that from 2019 to 2023, Home of the Waves had revenue growth rates of 15.09%, -18.26%, 12.41%, -8.06%, 15.98%; and net profit growth rates of -7.07%, -44.42%, 39.6%, -13.49%, 36.96%.
The company’s stock price has also been affected by its performance. The peak market value of Home of the Waves exceeded 60 billion yuan, reaching 44.3 billion yuan in June this year. However, as of the market close on November 15, the company’s stock price was 6.06 yuan per share, with a total market value of 29.1 billion yuan, a decrease of more than 15 billion yuan from the June market value.
Moreover, since the A-share market situation at the end of September, Home of the Waves’ cumulative increase has been only 5.94%, while the index during the same period rose by 17.19%.
“Financial Insights” believes that the decline in the performance of Home of the Waves is related to its operating model (ODM).
In its 2017 financial report, Home of the Waves detailed this model, explaining its procurement segment mainly adopts a retail-oriented purchase on credit, joint development, return of slow-moving goods, and a combination of second purchases with suppliers to form a community of interests. The company mainly purchases finished products directly from suppliers, disclaiming responsibility for the design and production of clothing, and most unsold clothing will be returned to the manufacturer.
On the sales side, Home of the Waves mainly adopts a franchise system. Different from typical franchises, franchisees own the franchise stores but do not engage in their specific operation, leaving internal management of all stores entirely to Home of the Waves. The sales settlement between Home of the Waves and franchisees follows an entrusted sales model, where franchisees do not bear the risk of inventory backlog, and revenue from store operations is settled as agreed upon in the contract.
“Financial Insights” believes that the ODM model ensures Home of the Waves has a stronger voice in production because the company possesses robust sales capabilities, enabling quick realization of production and sales integration. This model constitutes a deeper moat for Home of the Waves. However, its drawback is evident as it excessively relies on sales channels. If sales capabilities weaken, this model could face challenges.
Currently, with China’s economic slowdown, market contraction, and declining consumer spending, Home of the Waves’ revenue decline reflects a microcosm of the broader economic environment in China.
Founded in 1988, the Home of the Waves Group Co., Ltd. is headquartered in Jiangyin City, Jiangsu Province, and is a large enterprise group primarily focused on men’s clothing.