• H1 net income up 2% to HK$352m (US$45.3m)
  • Sales rose 2% to HK$2.7bn
  • Gross margin dowm 1.7 percentage points to 58%

Hong-Kong based clothing retailer Giordano has posted an increase in first-half net income, but admitted that gross margin was down due to rising costs and heavy promotions.

The company booked a 2% increase in net income to reach HK$352m (US$45.3m), as sales also rose 2% to HK$2.7bn. Gross margin declined 1.7 percentage points to 58%, which the group attributed to an extensive stock clearance programme, changes in its product mix, and slower-than-anticipated supplier price reductions.

"The effect of reduced prices for imported cotton has been diluted by increases in domestic cotton prices in China," the company said, adding that average costs increased 11% in the second quarter on the back of higher Chinese cotton costs and improved quality.

"During the first half of 2012, conditions in our mainland China market have been tough, with intense competition and competitor discounting across the country," said chairman and CEO Peter Lau Kwok Kuen.

"Appropriate price promotions at our self-managed stores have delivered 4% sales growth in first half of 2012 with a modest reduction in gross margin.

"Our franchisees have been slower to implement price promotion in their stores, particularly to clear slow moving inventory. The price discipline exercised in these stores has however, in the current price sensitive market, contributed to a total 12% decline in sales by our franchisees compared to the first half last year."

Lau said the company expects sales in mainland China to grow in the second half of the year, particularly when it introduces its autumn/winter collection, which will have "competitive pricing based on lower product costs than last year".

On the back of slower sales growth, the group has implemented a cost control programme, which has meant that despite opening 149 new stores over the past year, it has reduced its headcount by approximately 400 staff.

Giordano remains focused on expanding in mainland China, Lau said.

"We will focus on building our local branding through our "fast marketing" concept by the adoption of local celebrity partnerships and crossover campaigns with local organisations.

"Our design centre in Dongguan is now developing products directly aimed at the China market.

"Despite weaker demand and intense price competition, we remain confident that we can face down the headwinds in this major market and deliver steady profitable growth going forward."