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Zuoan Fashion Limited Announces Third Quarter 2011 Financial Results

“Zuoan is a well-recognized fashion menswear brand with a talented design team, trend-setting product mix, large and growing distribution network and healthy cash position. Such qualities provide us with the opportunity for continued growth. As such we are pleased to raise our full year 2011 revenue and net income outlook.”

Third Quarter 2011 Financial Performance

Revenue for the third quarter was RMB424.8 million ($66.6 million), a 36.6% increase from RMB311.1 million ($48.8 million) in the same period last year. The increase in revenue was driven by distributor sales volume. Third quarter distributor sales increased 33.9% to RMB404.4 million compared to RMB302.0 million in the third quarter of 2010. A net total of 54 distributor and sub-distributor stores, 3 self-operated retail stores and 22 distributor-operated and self-operated flagship stores were opened in the third quarter of 2011, resulting in a total of 1,246 store locations at the end of September 30, 2011 compared to 1,167 store locations at the end of June 30, 2011 and 1,075 store locations at the end of September 30, 2010.

Cost of sales increased 29.3% to RMB236.6 million ($37.1 million) in the third quarter of 2011 from RMB183.0 million ($28.7 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 decreased to 55.7% in the third quarter of 2011 from 58.8% in the third quarter of 2010.

Gross profit in the third quarter of 2011 increased 46.9% to RMB188.1 million ($29.5 million) from RMB128.1 million ($20.1 million). Third quarter 2011 gross profit margin increased to 44.3% compared to 41.2% in the same period last year, primarily due to an increase in wholesale prices to company distributors as well as from higher gross profit margins from Zuoan self-operated retail and flagship stores.

Selling and distribution expenses increased 226.4% to RMB46.6 million ($7.3 million), or 11.0% of total revenue, in third quarter of 2011 from RMB14.3 million ($2.2 million), or 4.6% of total revenue, in the same period last year, mainly due to (i) an increase in renovation costs and cost of fittings for existing distributor retail stores and new distributor retail and flagship stores; (ii) a larger number of self-operated stores opened; and (iii) an increase in design consultancy fees.

Administrative expenses increased 11.0% to RMB15.6 million ($2.4 million), or 3.7% of total revenue, in the third quarter of 2011 from RMB14.0 million ($2.2 million), or 4.5% of total revenue, in the same period last year, primarily due to an increase in the directors’ remuneration, staff salaries, legal professional fees and equity-settled employee benefit expenses related to the Company’s initial public offering offset by the decrease in one-time IPO related expenses and the decrease in exchange losses, which were associated with the convertible loans in third quarter of 2010. Such convertible loans were converted to equity in 2011 in connection with our IPO.

Effective tax rate in the third quarter was 26.6% compared to 27.3 % in the prior year period.

Net income for the third quarter of 2011 increased 30.0% to RMB92.2 million ($14.4 million) from RMB70.9 million ($11.1 million) in the same period last year. Third quarter net income as a percentage of revenue was 21.7% compared to 22.8% in the prior year period mainly due to the higher selling and distribution expenses.

Diluted earnings per share was RMB0.83 ($0.13) in the third quarter of 2011 compared to RMB0.84 ($0.13) in the third quarter of 2010. The Company’s diluted number of shares outstanding increased 28.3% to 111.3 million in the third quarter ended September 30, 2011 compared to 86.7 million in the 2010 third quarter period.

As of September 30, 2011, the Company had cash and cash equivalents of RMB732.8 million ($114.9 million), compared to RMB716.5 million ($112.3 million) as of June 30, 2011 and RMB 367.7 million ($57.7 million) as of December 31, 2010. Net cash generated from operating activities was RMB4.3 million ($0.7 million) in the three months ended September 30, 2011, compared with RMB16.2 million ($2.5 million) net cash used in operating activities in the three months ended September 30, 2010.

Outlet Type:           3Q2010     3Q2011
Direct Stores 31 3
Distributor and Sub-distributor Stores 1,044

1,199

Company-Operated Flagship Stores 0 17
Distributor-Operated Flagship Stores 0

27

 
Total: 1,075 1,246

Financial Outlook

For the fourth quarter of 2011, the Company currently anticipates revenue in the range of RMB310-RMB330 million ($48.6-$51.7 million), gross margin of approximately 43-44%, net income of approximately RMB62.2-RMB66.6 million ($9.8 -$10.4 million) and basic and fully diluted EPS of approximately RMB0.56 ($0.09) - RMB0.60 ($0.09). The Company expects to have approximately 111.3 million number of shares (27.8 million ADSs) outstanding during the quarter ending December 31, 2011.

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