Disappointed Geox ends distributing license with Belle

More global brands may follow suit, says CIMB.

Geox has announced that it will not be renewing its distribution licence with Belle when this expires at the end of 2012. While earnings contributions from its distribution business are only in the single digits, CIMB views this negatively as more global brands may follow suit.

Here's more from CIMB:

Geox said Belle has not met its expectations in terms of brand-building and will be ceasing its co-operation at year-end. We maintain our EPS, as the earnings impact is negligible for the moment, and TP at 13x CY14 P/E (16x CY13), the sector’s average.

Maintain Underperform with de-rating catalysts expected from margin dilution from discounting and increasing sportswear sales.

What Happened
Geox plans to end its 5-year distribution agreement in China with Belle at the end of 2012. Belllemanages 340 Geox POS. Geox will be restructuring these when their agreement ends. It aims to open 80 self-operated POS within five years. 

Geox has signed on Ri Qing, a local but experienced high-end brand distributor to distribute its products in second/third-tier cities while it will operate independently in Beijing, Shanghai and Tianjin. Mr. Mario M. Polegato, founder and CEO of Geox, said the company will manage part of its retailing business in Asia, to better keep up with market trends.

What We Think
We think more global brands may follow suit as Belle doesn’t seem to have the incentive to focus on brand-building for its distribution brands. Belle carries about 10 distribution brands and these only accounted for 5-6% of its revenue in 1H12. Also, it is quite common for foreign brands to end their distribution agreements with Chinese partners as their brands gain traction in the market. Converse ended its agreement with Pou Sheng (3813 HK, NR) in Dec 11, with the latter subsequently issuing a profit warning. Dickson Concept (113 HK, NR) lost its licence from Polo Ralph Lauren in 2009 and from Tommy Hilfiger in 2011.