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Zuoan Fashion Limited Announces Second Quarter 2011 Financial Results

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 second quarter ended June 30, 2011.

James Hong, Founder, Chairman, CEO and Chief Designer, commented, “Our second quarter performance was driven by a combination of sales volume growth and total store growth, both at the distributor level. We opened 7 self-operated flagship stores in the second quarter and expect to open another 18 in the second half of the year. In addition to increasing our future revenue and profit performance, we believe the opening of new flagship locations is important for overall growth as it will also provide greater confidence to distributors and motivate them to open additional stores more rapidly on their own.”

“At our distributor store locations, we experienced double digit increases in several areas. Average wholesale selling prices per unit increased nearly 13.8% to RMB104 compared to RMB92 in the second quarter of 2010, the total number of units sold to our distributors increased 39.8% to 2.3 million compared to 1.6 million in the second quarter of 2010 and average wholesale revenue per distributor-operated store increased 32.3% to RMB198,000 compared to RMB150,000 in the second quarter of 2010. We also recently raised our wholesale prices at the distributor level for our Fall/Winter collection which we expect will result in improved gross profit margin in the second half of 2011.”

“Going forward, we look forward to continuing our efforts with a focus on expanding our distribution network coverage, strengthening our design capabilities, rolling out our flagship store network and furthering our marketing activities. We are confident with our efforts to establish Zuoan as a leading domestic menswear brand in China’s fast growing fashion casual menswear market.”

Second Quarter 2011 Financial Performance

Revenue for the second quarter was RMB239.3 million ($37.0 million), a 53.4% increase from RMB156.0 million ($24.1 million) in the same period last year. The increase in revenue was driven by distributor sales volume. Second quarter distributor sales increased 59.1% to RMB237.0 million compared to RMB148.9 million in the second quarter of 2010. A total of 37 distributor stores and 7 self- operated flagship stores were opened in the second quarter of 2011, resulting in a total of 1,167 store locations at the end of June 30, 2011 compared to 1,123 store locations at the end of March 31, 2011 and 1,026 store locations at the end of June 30, 2010.

Cost of sales increased 53.4% to RMB141.2 million ($21.8 million) in the second quarter of 2011 from RMB92.0 million ($14.2 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 59.0% in the second quarter of 2011 from the second quarter of 2010.

Gross profit in the second quarter of 2011 increased 53.3% to RMB98.1 million ($15.2 million) from RMB64.0 million ($9.9 million). Second quarter 2011 gross profit margin remained flat at 41.0% compared to the same period last year, primarily due to the Company’s efforts to effectively control the unit cost of its products as well as maintaining the same cost-based pricing strategy

Selling and distribution expenses increased 48.8% to RMB19.1 million ($3.0 million) in second quarter of 2011 from RMB12.9 million ($2.0 million) in the same period last year, mainly due to (i) an increase in renovation costs and cost of fittings for the distributors’ existing retail stores and new normal and flagship stores and (ii) an increase in direct flagship stores expenses.

Administrative expenses in the second quarter were RMB15.6 million ($2.4 million), or 6.5% of revenue, compared to RMB5.7 million ($0.9 million), 3.7% of revenue in the same period last year. This percentage increase was primarily due to an 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 second quarter was 27.6% compared to 18.5 % in the prior year period.

Net income for the second quarter of 2011 increased 28.0% to RMB45.6 million ($7.0 million) from RMB35.6 million ($5.5 million) in the same period last year. Second quarter net income as a percentage of revenue was 19.0% compared to 22.8% in the prior year period.

Diluted earnings per share decreased to RMB0.41 ($0.06) in the second quarter of 2011 from RMB0.43 ($0.07) in the second quarter of 2010. The Company’s diluted number of shares outstanding increased 28.4% to 111.3 million in the second quarter ended June 30, 2011 compared to 86.7 million in the 2010 second quarter period.

As of June 30, 2011, the Company had cash, cash equivalents of RMB716.5 million ($110.9 million), compared to RMB734.3 million ($113.6 million) as of March 31, 2011. Net cash used in operating activities was RMB1.2 million ($0.2 million) in the three months ended June 30, 2011, down from RMB44.8 million ($6.9 million) in the three months ended June 30, 2010.
Outlet Type:       2Q2010     2Q2011
Direct Stores 32 0
Distributor and Sub-distributor Stores 994 1,145
Company-Operated Flagship Stores 0 7
Distributor-Operated Flagship Stores 0 15
Total: 1,026 1,167

Financial Outlook

For the third quarter of 2011, the Company currently anticipates revenue in the range of RMB410-RMB430 million ($63.4-$66.5 million), gross margin of approximately 43-44%, net income of approximately RMB80.1-RMB84.3 million ($12.4-$13.0 million) and basic and fully diluted EPS of approximately RMB0.72 ($0.11) - RMB0.76 ($0.12). The Company expects to have approximately 111.3 million number of shares (27.8 million ADSs) outstanding during the quarter ending September 30, 2011.

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