SOKO Fitness & Spa Group Reports Third Quarter Fiscal 2011 Financial Results

HARBIN, China, April 14, 2011 /PRNewswire-Asia-FirstCall/ -- SOKO Fitness & Spa Group, Inc. (OTC BB: SOKF) ("SOKO"), an operator of fitness centers and beauty salons and spas in China, today announced its financial results for the third quarter and first nine months of fiscal 2011, ended February 28, 2011.

Third Quarter Financial Highlights:

• Revenue totaled $10.3 million, an increase of 27% over $8.1 in the third quarter of fiscal 2010.
• Gross profit increased 21% to $7.0 million, compared with $5.8 million, in the same period a year ago. Gross margin was 68.2% for the third quarter of fiscal 2011, compared with 71.6 % for the third quarter of fiscal 2010, and 67.6% for the second quarter of fiscal 2011.
• Net income attributable to SOKO improved 11% year-over-year to $3.0 million, or $0.14 per diluted share based on diluted shares outstanding of 22.0 million shares, compared with $2.7 million, or $0.15 per diluted share based on diluted shares outstanding of 18.2 million shares in the same period a year ago.
• SOKO increased total fitness club members 27% year-over-year and 0.3% sequentially to approximately 23,000 and beauty salon and spa clients 28% year-over-year and 7% sequentially to approximately 27,100.
• Cash and cash equivalents was $15.7 million as of February 28, 2011, an increase of $0.7 million over November 30, 2010. The sequential increase in cash and cash equivalents was related to increased operating cash flow.
• Record deferred revenue of $18.9 million as of February 28, 2011.
• SOKO has affirmed its expected revenue range of $39-$42 million for fiscal 2011, ending May 31, 2011. This represents an increase of approximately 30–40% compared with fiscal 2010.

Third Quarter and Recent Business Highlights:

• Added eight new facilities in the third quarter of fiscal 2011 and 12 facilities year-to-date. Expansion remains on-track to add up to 16 new facilities in fiscal 2011 through new construction, acquisition or operation under management agreements.
• Entered new strategic markets in Eastern and Central China through the opening of two beauty salons and two fitness centers in Hangzhou, Zhejiang Province, as well as a yoga center in Zhengzhou, Henan Province.
• Expanded operations in Northeastern China through the opening of two beauty salons and one fitness center in Harbin and Shenyang

"This was another record quarter for SOKO as we continued to execute on our business plan, growing our top and bottom-line, expanding our geographic footprint and generating increased cash from operations," said Tong Liu, Chief Executive Officer of SOKO. "We delivered robust growth across our fitness and aesthetic businesses in each of our core geographic markets and achieved meaningful growth in our member and client base, with total spa and salon clients at the end of the third quarter exceeding our goal for the full year, supported by growth in both our newly-opened and more mature facilities. While actively signing new members and clients, we have been able to maintain high retention rates, which contributed to a record backlog of $18.9 million at the end of the third quarter."

"Our continued geographic expansion and our emerging position as a national brand in China's growing market for luxury fitness and aesthetic services remains a top focus of our company, and we are making excellent progress against these goals. With the addition of eight new facilities to our portfolio in the third quarter, we have further solidified our presence in our core Harbin and Shenyang markets in Northeastern China, as well as expanded into strategic markets in Eastern and Central China.  Through our ongoing expansion efforts, combined with the maturation of our existing facilities, we believe we can capitalize on the continued growth of China's middle class and desire of our target customers and clients to improve their standard of living.  Through this, we believe we will be able to continue driving revenues, earnings and shareholder value," Mr. Liu concluded.

SOKO currently operates 32 facilities in China, including 17 beauty salons and spas, one non-surgical medical beauty center, 13 fitness centers and yoga studios and one beauty school. 21 of these facilities are wholly owned, six are majority owned, and five are minority owned, and operated by SOKO under a management agreement. Of these facilities, 16 were in their first year of operation, four were in their second year, four were in their third year, and eight had reached maturity, at more than three years old.

Third Fiscal Quarter Financial Summary

Total revenue for the three months ended February 28, 2011 was $10.3 million, an increase of 27%, compared with revenue of $8.1 million for the three months ended February 28, 2010. The increase in revenue was primarily attributable to increased sales from existing members and clients, sales of add-on services to members and clients and SOKO's continued efforts to add members and clients at both new and existing facilities.

During the three months ended February 28, 2011, spa and beauty services and products, including beauty school tuition, accounted for 83.0% of revenue, with fitness centers accounting for 17.0% of revenue for the quarter. SOKO expects its revenue mix to remain relatively stable in future periods.

Gross profit for the three months ended February 28, 2011 was $7.0 million, compared with $5.8 million for the three months ended February 28, 2010. The increase in gross profit was mainly attributable to an increase in the number of SOKO-operated facilities, growth in the number of members and clients at SOKO's existing facilities and the introduction of value added products and services. Overall gross profit margin was 68.2% for the three months ended February 28, 2011, compared with 71.6% in the year-ago period. The year-over-year decline in gross margin was primarily related to an increase in overall cost of sales related to pre-opening expenses incurred during the quarter.

Selling, general and administrative expenses for the three months ended February 28, 2011 was $4.0 million, compared with $3.1 million for the three months ended February 28, 2010. The increase in SG&A expense was mainly attributable to the increase in the expense associated with the opening of new facilities. Since the third quarter of fiscal 2010, SOKO has added a total of 15 facilities to its portfolio of owned and operated fitness centers, spas and salons, including eight during the third quarter of fiscal 2011. SOKO expects that its SG&A will continue to fluctuate from quarter to quarter, based on the level of facility opening and construction activity.

Net income attributable to SOKO Fitness & Spa Group, Inc. for three months ended February 28, 2011 increased 11% year-over-year to $3.0 million, compared with $2.7 million in the third quarter of fiscal 2010. Diluted earnings per share was $0.14, based on 21.7 million weighted average diluted shares outstanding, compared with $0.15 per diluted share, based on 18.2 million weighted average diluted shares outstanding, for the same period a year ago. The increase in net income for the third quarter of fiscal 2011 was mainly attributable to the aforementioned 27% revenue growth, partially offset by the increases in amortization of leasehold improvement, rental expenses for new facilities and expenses relating to opening new facilities.

As of February 28, 2011, SOKO had cash and cash equivalents of $15.7 million compared with $18.1 million on May 31, 2010 and $15.0 million on November 30, 2010. The sequential-quarter increase in cash and cash equivalents was related to cash flow from operations.

Fiscal 2011 Guidance:

SOKO is affirming its gross revenue guidance for fiscal year 2011, ending May 31, 2011. Revenue for the fiscal year is expected to range from $39 million to $42 million, which if achieved, would represent year-over-year growth of approximately 30-40%.  SOKO expects its revenue growth to be driven by a combination of new facility openings, an increase in the number of members and clients at its existing fitness and spa facilities and an increase in average revenue per customer.

During the fourth quarter of fiscal 2011, SOKO plans to add four new facilities to its portfolio through a combination of new construction, majority acquisition and the establishment of management agreements at minority-owned facilities, bringing the total number of new facilities added in fiscal 2011 to 16.  SOKO expects that capital expenditures associated with these facilities will be fully funded from cash on hand and operating cash flow.

Mr. Liu added, "We believe we have built a strong foundation upon which to continue building our business throughout China.  Consistent with our past practice, we plan to continue our expansion focus on strategically targeted, economically stable tier-two markets in which we can build market share and quickly establish brand equity. The execution of our growth strategy is proceeding according to plan, with 12 new facilities opened during the first nine months of fiscal 2011, and another 4 under construction or engaged in pre-opening activities. In the fourth quarter and into our fiscal 2012, we will continue to target new strategic markets and identify ways to extend our demographic and geographic footprint, increase our customer base, capture market share and continue to grow our business."

Conference Call

SOKO will host a conference call for interested investors and analysts to discuss its financial results for the period on Thursday, April 14, 2011, at 8:00 a.m. Eastern time. To participate in the conference call, please dial 1-877-941-8416 from the U.S. and Canada, or 1-480-629-9808 for international callers.

An audio replay will also be available approximately one hour after the conclusion of the call and will be made available through April 28, 2011. The audio replay can be accessed by dialing 1-800-406-7325 from the U.S or Canada, or 1-303-590-3030 internationally, and entering access ID Number 4432095.

About SOKO Fitness & Spa Group, Inc.

SOKO Fitness & Spa Group, Inc., an OTCBB listed company (SOKF), is an operator of fitness centers and beauty salons and spas in key cities in China. SOKO provides programs, services, and products combined with exercise, education and nutrition to help their members lead a healthy life and achieve their fitness goals. For further information, please go to http://www.sokofitness.com.

To be added to SOKO's email distribution for future news releases, please send your request to [email protected].

Cautionary Note Regarding Forward Looking Statements

This press release and the statements of representatives of SOKO Fitness & Spa Group, Inc. (the "Company") related thereto contain, or may contain, statements that are not historical facts and are therefore "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements involve significant risks and uncertainties. Such statements may include, without limitation, statements with respect to the Company's plans, objectives, projections, beliefs, expectations and intentions and other statements identified by words such as "guidance," "projects," "may," "could," "would," "should," "believe," "expect," "anticipate," "estimate," "intend," "plan," or similar expressions. These statements are based upon the current beliefs and expectations of the Company's management and are subject to significant risks and uncertainties, including those detailed in the Company's filings with the Securities and Exchange Commission. Actual results, including, without limitation, future financial results and results regarding the Company's expansion strategies, service offerings, client, membership and customer figures, proposed new center openings and prospects and strategies for growth, may differ significantly from those set forth in the forward-looking statements.  These forward-looking statements involve certain risks and uncertainties that are subject to change based on various factors (many of which are beyond the Company's control).  The Company does not undertake any obligation to update any forward- looking statement, except as required under applicable law.

SOURCE Soko Fitness & Spa Group, Inc.