Amid sluggish consumer spending and weakening sales for its core brand, XTEP INT'L (HK: 01368) is pressing forward with its direct-to-consumer (DTC) transformation.

The sportswear group reported a 0.6% year-on-year decline in first-half 2026 revenue to RMB 6.795 billion, with net profit attributable to shareholders falling 10.5% to RMB 818 million. Core brand revenue slipped 2.2% to RMB 5.92 billion, while the professional sports segment, which houses Saucony and Merrell, posted an 11.4% revenue gain to RMB 875 million.

Retail sell-through weakened further in the second quarter, with the flagship brand's retail sales swinging from low single-digit growth in Q1 to a mid-single-digit decline in Q2. Saucony's growth also decelerated sharply, from over 20% in the first quarter to low single digits in the second.

Gross margin improved to 46.4% from 45%, helped by a better product mix and less discounting, but that was not enough to offset the added costs from online operations and the DTC rollout. Selling and distribution expenses climbed 13% year-on-year to RMB 1.676 billion, lifting the expense ratio from 21.7% to 24.7%, driven by higher e-commerce platform and logistics costs, plus DTC-related depreciation and staff expenses.

Including a rise in share-based payment expenses, operating profit fell 11% to RMB 1.161 billion, with the operating margin narrowing from 19.1% to 17.1%.

The DTC plan has been a central strategic focus for XTEP INT'L in recent years. The company previously said it would reclaim distribution rights for roughly 400 to 500 core-brand stores from dealers between the second half of 2025 and 2026, with around RMB 500 million in capital expenditure earmarked for the transition over that period.

Management argued at the time that directly operated flagship stores would allow faster access to consumer feedback, enable quicker adjustments to product strategy and inventory management, and improve store-level efficiency.

Although core-brand sell-through turned negative in Q2 2026, the company has not scaled back its DTC ambitions. The interim report reiterates a "full push" on the transformation and accelerates the expansion of shopping mall and outlet channels.

According to a July research note from CITIC Construction Investment, management said roughly 100 stores were converted in the first half, bringing the cumulative total to over 200, with an expected 400 more in the second half, potentially reaching 500-600 for the full year.

The same note indicated that stores converted to DTC in the second half of 2025 are already outperforming traditional franchise locations in terms of sell-through this year.

The near-term costs of the DTC push are now showing up in the income statement, and working capital metrics are also under strain. Inventories rose 26.1% from year-end to RMB 2.307 billion as of June 30, with inventory turnover days lengthening from 91 to 105. Overall working capital turnover days widened from 90 to 112.

The key question for XTEP INT'L in the second half is not just whether retail sales can recover, but whether DTC stores can lift productivity within an acceptable payback period, and whether the company will adjust the pace of its channel reform based on single-store returns amid a soft consumption environment.