Zuoan Fashion enjoys meaningful double digit growth

Zuoan Fashion Limited, a leading design-driven fashion casual menswear company in China, announced its financial results for the fourth quarter and full year ended December 31, 2010.

James Hong, Founder, Chairman of the Board and Chief Executive Officer, commented, “We were pleased with our results for the fourth quarter and 2010 fiscal year. We enjoyed meaningful double digit growth over the prior year as measured by store count, revenue, gross profit, operating profit and net income. Our growth was primarily driven by distributor sales volume and the expansion of our sales network.”

“In order to accelerate the expansion of our successful distributor model, we plan to open direct flagship stores which we believe will motivate distributors to expand their distributor store network at a faster rate, stimulate distributor store sales in the nearby regions as well as to strengthen Zuoan’s brand equity. In order to focus on the opening of our flagship stores, we successfully transferred all 31 of our direct normal stores to our distributors in January 2011. In addition, we appointed three additional distributors in January 2011 in order to continue our sales network expansion efforts.”

“We have built an excellent platform for future growth through our initiatives including expanding our distribution network coverage, building our flagship store network and enhancing our marketing activities as well as strengthening our design capabilities. We are excited to continue to build our brand and improve our revenue and profit growth this year and beyond,” concluded Mr. Hong.

Fourth Quarter 2010 Financial Performance

Revenue for the fourth quarter was RMB258.2 million ($39.1 million), a 26.9% increase from RMB203.4 million ($30.8 million) in the same period last year. The increase in revenue was driven by both distributors and direct stores sales volume. Fourth quarter distributor sales increased 23.6% to RMB238.7 million compared to RMB193.2 million in the fourth quarter of 2009 while fourth quarter direct store sales increased 91.3% to RMB19.5 million compared to RMB10.2 million in the prior year period. A total of 26 distributor stores were opened in the 2010 fourth quarter resulting in a total of 1,070 distributor locations at the end of 2010 compared to 978 distributor locations at the end of 2009. There were no direct stores opened in the 2010 fourth quarter as the Company made plans to transition its 31 direct stores to its distributors in January 2011.

Cost of sales increased 31.3% to RMB154.4 million ($23.4 million) in the fourth quarter of 2010 from RMB117.6 million ($17.8 million) in the same quarter of 2009, primarily as a result of the increase in sales volume. As a percentage of revenues, cost of sales increased to 59.8% in the fourth quarter of 2010 from 57.8% in the fourth quarter of 2009.

Gross profit in the fourth quarter increased 21.0% year over year to RMB103.8 million($15.7 million) from RMB85.8 million ($13.0 million). Fourth quarter 2010 gross profit margin was 40.2% compared to 42.2% in the same period last year and 41.2% in the third quarter of 2010. Fourth quarter 2010 gross margin decreased primarily due to the Company’s efforts to effectively manage its inventory by reducing out-of-season inventory at prices discounted below the Company’s general wholesale price range as well as clearing shop level stock as it transitioned direct stores to its distributors.