Revenue zooms 26% at apparel firm Zuoan Fashion in Q2 (China)

Zuoan Fashion Limited, a leading design-driven fashion casual menswear company in China, announced its financial results for the second quarter ended June 30, 2012.

James Hong, Founder, Chairman of the Board and Chief Executive Officer, commented, "We had another strong quarter of top line revenue and bottom line earnings growth, exceeding our  financial second quarter forecast.  Our growth was primarily fueled by an increase in wholesale prices implemented last year as well as higher revenue derived from direct and flagship stores."

"We experienced elevated inventory positions at the end of the second quarter by our distributors and sub-distributors compared to last year due to a general slowdown in the Chinese consumer market.  We are actively working with our distributors to clear through any excess inventory so our fall/winter collections can be prominently displayed throughout our distributor and sub-distributor Zuoan stores in the second half of the year. 

We look forward to improving our inventory channels through the implementation of our ERP system which is scheduled for October.  The installation of this system will initially benefit our company-owned stores but are expected to be deployed in our distributors' warehouse and logistic systems within the next 12 months."

"As the consumer market in China becomes more challenging, we are taking all relevant actions to manage our cost structure and maximize operational efficiency.  As part of this effort, we have applied additional cost and quality controls to our supply chain, reduced our total number of suppliers to obtain more favorable pricing and implemented stricter requirements on quality to ensure customer loyalty.  Despite slower market conditions, we continue to believe that 2012 will result in respectable revenue and net profit growth for Zuoan. 

Our brand recognition in China continues to grow through our domestic marketing efforts and international design collaborations and trade show participation.  We continue to build on this momentum through our upcoming involvement in China Fashion Week, one of China's largest fashion events."

Second Quarter 2012 Financial Performance

Revenue for the second quarter was RMB301.6 million ($47.5 million), a 26.0% increase from RMB239.3 million ($37.7 million) in the same period last year.  The increase in revenue was driven by both distributor and direct store sales volume.  Second quarter distributor sales increased 14.5% to RMB271.2 million compared to RMB237.0 million in the second quarter of 2011. Second quarter 2012 self-operated direct store and flagship store sales were RMB 30.3 million. A net total of 30 distributor and sub-distributor stores, 2 direct stores and 4 Company self-operated flagship stores were opened in the second quarter of 2012, resulting in a total of 1,331 store locations at the end of June 30, 2012 compared to 1,295 store locations at the end of March 2012.

Cost of sales increased 10.5% to RMB156.1 million ($24.6 million) in the second quarter of 2012 from RMB141.2 million ($22.2 million) in the same quarter of 2011, primarily as a result of the increase in sales volume. As a percentage of revenues, cost of sales decreased to 51.8% in the second quarter of 2012 from 59.0% in the second quarter of 2011.

Gross profit in the second quarter increased 48.3% year over year to RMB145.5 million ($22.9 million) from RMB98.1 million ($15.4 million) in the same period of 2011.  Second quarter 2012 gross profit margin was 48.2% compared to 41.0% in the same period last year.  Second quarter 2012 gross margin increased primarily due to an increase in wholesale prices to distributors implemented in the third quarter 2011 and the higher margin contributed by sales of the Company's self-operated direct stores and flagship stores. Gross margin at the Company's self-operated direct stores was 68.0% and 76.6% at its flagship store, respectively.  Combined gross margin at Company self-operated locations was 75.7%.

Selling and distribution expenses in the second quarter were RMB41.0 million ($6.4 million), or 13.6% of revenue, compared to RMB19.1 million ($3.0 million), or 8.0% of revenue in the same period last year.  This percentage increase was primarily due to the increase in store expansion related rental charges and direct store expenses, advertising and promotion expenses, and costs of renovation and fittings of distributors' new and existing stores.

Administrative expenses in the second quarter were RMB14.5 million ($2.3 million), or 4.8% of revenue, compared to RMB15.6 million ($2.5 million), 6.5% of revenue in the same period last year. This percentage decrease was primarily a result of the decrease in equity-settled employee benefit costs.

Effective tax rate in the second quarter increased to 26.1% compared to 27.6% in the prior year period.

Net income for the second quarter increased 45.3% to RMB66.2 million ($10.4 million) from RMB45.6 million ($7.2 million) in the same period last year.  Second quarter net income as a percentage of revenue was 22.0% compared to 19.0% in the prior year period.

Diluted earnings per ordinary share was RMB0.60 ($0.09) in the second quarter of 2012, equivalent to RMB2.38($0.37) per ADS, compared to diluted earnings per ordinary share RMB0.41 ($0.06) in the second quarter of 2011, equivalent to RMB1.64 ($0.26) per ADS. The Company's diluted number of shares outstanding was 111.3 million in the second quarter ended June 30, 2012.

As of June 30, 2012, the Company had cash, cash equivalents of RMB1,013.6 million ($159.5 million), compared to RMB690.5 million ($108.7 million) as of December 31, 2011.  Net cash provided by operating activities was RMB42.9 million ($6.7 million) in the three months ended June 30, 2012, compared to RMB1.2 million ($0.2 million) used in operating activities in the three months ended June 30, 2011.

For the third quarter of 2012, the Company currently anticipates revenue in the range of RMB490-RMB510 million ($77.1 - $80.3 million), gross margin of approximately 46-48%, net income of approximately RMB99.9 - RMB104.1 million ($15.7 - $16.4 million) and basic and fully diluted EPS of approximately RMB0.90 ($0.14) - RMB0.94 ($0.15).  The Company expects to have approximately 111.3 million number of shares (27.8 million ADSs) outstanding during the quarter ending September 30, 2012.

Zuoan expects to open approximately 25 self-operated flagship stores in the full year 2012.  Approximately 175 new retail stores and 25 flagship stores are expected to be opened by distributors and sub-distributors in of the full year 2012.