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TheStreet Open House

Zuoan Fashion Limited Announces First Quarter 2011 Financial Results

Stock quotes in this article: ZA

Zuoan Fashion Limited (NYSE: ZA) (“Zuoan” or the “Company”), a leading design-driven fashion casual menswear company in China, today announced its financial results for the first quarter ended March 31, 2011.

James Hong, Founder, Chairman of the Board and Chief Executive Officer, commented, “The first quarter was another strong performing quarter for Zuoan as we beat our quarterly revenue and net income forecast. We continue to gain traction in the China market with our unique design concepts and our ability to expand our sales network. Despite a traditionally slower quarter for the apparel industry due to the Chinese New Year, we expanded our store base by 22 locations, completing the quarter with 1,123 locations, and added three additional distributors to our base in the first quarter bringing our total number of distributors to thirteen. We also successfully transferred 31 of our direct stores to our distributors in January 2011 in order to focus on the development and opening of our flagship stores. Our Company completed a major milestone event during the first quarter with its successful IPO on the New York Stock Exchange. This was a major accomplishment for Zuoan that will assist with certain marketing and branding initiatives going forward.”

“We opened our first self operated flagship store in May and are on plan to meet our store opening plan of 25 flagship stores by year end. We believe the opening of direct flagship stores will motivate distributors to expand their distributor store network at a faster rate, stimulate distributor store sales in nearby regions as well as to strengthen Zuoan’s brand equity. We are off to a good start in 2011 and look forward to generating additional revenue and net profit growth for our shareholders in the coming quarters.”

First Quarter 2011 Financial Performance

Revenue for the first quarter was RMB211.5 million ($32.3 million), a 44.1% increase from RMB146.8 million ($22.4 million) in the same period last year. The increase in revenue was driven by distributor sales volume. First quarter distributor sales increased 51.7% to RMB211.5 million compared to RMB139.4 million in the first quarter of 2010. A total of 22 distributor stores were opened and 31 direct stores were transferred to the Company’s distributors in the first quarter of 2011, resulting in a total of 1,123 distributor locations at the end of March 31, 2011 compared to 990 distributor locations at the end of March 31, 2010.

Cost of sales increased 44.1% to RMB123.6 million ($18.9 million) in the first quarter of 2011 from RMB85.8 million ($13.1 million) in the same quarter of 2010, primarily as a result of the increase in sales volume. As a percentage of revenues, cost of sales remained at 58.4% in the first quarter of 2011 from the first quarter of 2010.

Gross profit in the first quarter of 2011 increased 44.0% to RMB88.0 million ($13.4 million) from RMB61.1 million ($9.3 million). First quarter 2011 gross profit margin remained flat at 41.6% compared to the same period last year, primarily due to the Company’s efforts to effectively control the unit cost of our products as well as maintaining the same cost-based pricing strategy.

Selling and distribution expenses in the first quarter were RMB10.4 million ($1.6 million), or 4.9% of revenue, compared to RMB17.1 million ($2.6 million), or 11.6% of revenue in the same period last year. This percentage decrease was primarily due to the higher advertising and promotion expenses in the first quarter of 2010.

Administrative expenses in the first quarter were RMB11.8 million ($1.8 million), or 5.6% of revenue, compared to RMB8.1 million ($1.2 million), 5.5% of revenue in the same period last year. This percentage increase was primarily due to the increase in the directors’ remuneration, staff salaries, legal professional fees and equity-settled employee benefit expenses since the Company’s U.S. IPO.

Effective tax rate in the first quarter was 26.7% compared to 38.2 % in the prior year period.

Net income for the first quarter of 2011 increased 125.8% to RMB47.8 million ($7.3 million) from RMB21.2 million ($3.2 million) in the same period last year. First quarter net income as a percentage of revenue was 22.6% compared to 14.4% in the prior year period.

Weighted average basic earnings per share increased to RMB0.50 ($0.08) in the first quarter of 2011 from RMB0.26 ($0.04) in the first quarter of 2010. The Company had 95.5 million weighted average number of shares outstanding during the quarter ended March 31, 2011.

Weighted average diluted earnings per share increased to RMB0.49 ($0.07) in the first quarter of 2011 from RMB0.26 ($0.04) in the first quarter of 2010. The Company had 97.9 million weighted average diluted number of shares outstanding during the quarter ended March 31, 2011.

As of March 31, 2011, the Company had cash, cash equivalents of RMB734.3 million ($112.1 million), compared to RMB178.3 million ($27.2 million) as of March 31, 2010. Net cash provided by operating activities was RMB125.7 million ($19.2 million) in the three months ended March 31, 2011, up 604.5% from RMB17.8 million in the three months ended March 31, 2010.

   

Outlet Type:

1Q10

1Q11

Direct Stores 32 0
Distributor and Sub-distributor Stores 990 1,123
 

Total:

1,022

1,123

 

Financial Outlook

For the second quarter of 2011, the Company currently anticipates revenue in the range of RMB205-RMB215 million ($31.3-$32.8 million), gross margin of approximately 41-42%, net income of approximately RMB42-RMB43 million ($6.4-$6.6 million) and diluted EPS of approximately RMB0.38-RMB0.39 ($0.06). Approximately 25-30 new retail stores are expected to be opened by distributors in the second quarter of 2011. The Company expects additional gross margin and average selling price growth in second half of 2011 due to an expected increase in wholesale prices to the Company’s distributors.

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