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Inventory uncertainty at Scott Sports

1Q24 review: Scott Sports swings to red on revenue contraction

Youngone Corp. (Youngone) reported somewhat disappointing 1Q24 results, with revenue of W709.7bn (-16% YoY) and operating profit of W71bn (-58% YoY). In the OEM business, US dollar-based orders declined 9% YoY, and OP margin slumped 10%p YoY to 18% due to decreased orders and cost pressures resulting from wage hikes in Bangladesh. That said, the rate of decline (YoY) in OEM inventories (including raw materials) continued to slow (from -13% in 3Q23 to -6% in 4Q23 and -3% in 1Q24). Going forward, orders should gradually pick up as OEM business conditions improve.

Meanwhile, Scott Sports (subsidiary) reported a 35% plunge in revenue and an operating loss of W16.1bn. Inventory assets expanded 29% YoY to W741.5bn amid softening demand for high-end bicycles. With price discounts likely to continue to reduce inventories, we expect the subsidiary to remain in the red for the time being.

Scott’s inventory burden to continue; strength of OEM rebound to be key

In 2022, Scott Sports delivered revenue of W1.4tr and operating profit of W180bn (contributing 36% and 21% of consolidated results, respectively), aided by surging bicycle demand amid the pandemic. However, demand gradually diminished in 2023, causing revenue and operating profit to fall to W1.2tr and W60bn, respectively, and weighing on Youngone’s consolidated earnings. With the subsidiary likely to report a loss for 2024, Youngone’s consolidated earnings are set to decrease again.

Meanwhile, the core OEM business is likely to rebound in 2H24 amid a recovery in market conditions. However, the strength of the rebound should depend on apparel demand. Restocking demand is somewhat uncertain, as inventory assets at the firm’s major buyers (Lululemon, The North Face, etc.) remain elevated relative to the overall US apparel market and low-end brands. In addition, the business faces a tough comparison due to last year’s strong OEM OP margin (26%).

We lower our target price to W46,000 (from W65,000), as we revised down our earnings estimates. At a 12-month forward P/E of 4x, the stock is cheap in absolute terms. however, share price momentum is weak. We advise a cautious approach until inventory-related uncertainty at Scott Sports eases.