Zuoan Fashion Limited Announces Second Quarter 2013 Financial Results

SHANGHAI, Sept. 12, 2013 /PRNewswire/ -- 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, 2013.

Second Quarter 2013 Financial Highlights

• Revenues in the second quarter of 2013 were RMB317.6 million ($51.7 million), an increase of 5.3% from RMB301.6 million in the same quarter of 2012.
• Gross profit in the second quarter decreased 3.7% year over year to RMB140.1 million ($22.8 million) from RMB145.5 million in the same quarter of 2012. 
• Gross margin was 44.1% compared with 48.2% in the prior year period and 45.7% in the first quarter of 2013.    
• Net income was RMB67.6 million ($11.0 million), an increase of 2.2% from RMB66.2 million in the same quarter of 2012.
• Diluted earnings per ordinary share was RMB0.61 ($0.10) in the second quarter, equivalent to RMB2.43 ($0.40) per ADS, compared to diluted earnings per ordinary share of RMB0.60 ($0.10) or RMB2.38 ($0.39) per ADS in the second quarter of 2012.

James Hong, Founder, Chairman and Chief Executive Officer, commented, "We are pleased to announce a healthy second quarter 2013, as our bottom line results exceeded our previous guidance. Our revenue increased from the previous quarter despite a noticeable drop in average selling prices thanks to the strong growth in sales through our distributors and direct stores.  Selling and distribution costs were further reduced, as we continued our store model transition to improve our operational efficiency and infrastructure. During the second quarter, a total of 20 distributor and sub-distributor stores and 1 self-operated direct store were opened, resulting in a total of 1,383 store locations."

"In the back half of the year, we expect to experience more challenging market conditions due to a cancellation of orders by certain distributors, a 3% decrease in wholesale prices offered to our distributors and increased advertising costs as we ramp up marketing efforts to capture greater market share. In spite of these near-term challenges, we remain comfortable with our ability to strengthen our brand presence and grow our profits over the long-term," concluded Mr. Hong.

Second Quarter 2013 Financial Performance

Revenue for the second quarter of 2013 was RMB317.6 million ($51.7 million), representing an increase of 5.3% from RMB301.6 million in the same quarter of 2012. The increase was primarily driven by growth in distributor sales volume. During the quarter, distributor sales increased by 15.3% to RMB312.8 million from RMB271.2 million in the same quarter of 2012. Second quarter 2013 self-operated direct store sales increased to RMB 4.7 million from RMB3.2 million in the same quarter of 2012. A net total of 20 distributor and sub-distributor stores and 1 self-operated direct store were opened in the second quarter of 2013, resulting in a total of 1,383 store locations as of June 30, 2013 compared to 1,362 store locations at the end of the first quarter. 

Cost of sales increased by 13.7% to RMB177.4 million ($28.9 million) in the second quarter of 2013 from RMB156.1 million in the same quarter of 2012, primarily due to the higher quality of raw materials used in the Company's production of its products as well as the increased sales volume.  As a percentage of revenues, cost of sales increased to 55.9% in the second quarter of 2013 from 51.8% in the same quarter of 2012.

Gross profit decreased by 3.7% to RMB140.1 million ($22.8 million) from RMB145.5 million in the second quarter of 2012.  Second quarter 2013 gross margin was 44.1% compared with 48.2% in the same quarter of 2012. The decrease in gross margin was primarily due to higher unit costs the Company was not able to pass on to its customers as well as decreased revenue  associated with the transition of the Company's higher margin, self-operated flagship stores to its distributors at the end of 2012. Gross margin at the Company's self-operated direct stores and distributor stores was 60.7% and 43.9%, respectively.

Selling and distribution expenses in the second quarter were RMB31.1 million ($5.1 million), or 9.8% of revenue, compared to RMB41.0 million, or 13.6% of revenue in the same quarter of 2012.  The percentage decrease was primarily due to the significant decrease in direct store expenses resulting from the transition of the Company's direct-operated flagship stores to selected distributors.

Administrative expenses in the second quarter were RMB15.3 million ($2.5 million), or 4.8% of revenue, compared with RMB14.5 million, 4.8% of revenue in the same quarter of 2012.

Effective tax rate in the second quarter was 26.0% compared to 26.1% in the same quarter of 2012.

Net income for the second quarter increased by 2.2% to RMB67.6 million ($11.0 million) from RMB66.2 million in the same quarter of 2012.  Second quarter net margin was 21.3% compared to 22.0% in the second quarter of 2012.

Diluted earnings per ordinary share were RMB0.61 ($0.10) in the second quarter of 2013, equivalent to RMB2.43 ($0.40) per ADS, compared to diluted earnings per ordinary share RMB0.60 ($0.10) or RMB2.38 ($0.39) per ADS in the second quarter of 2012. The Company's diluted number of shares outstanding was 111.3 million in the second quarter ended June 30, 2013.

As of June 30, 2013, the Company had cash, cash equivalents of RMB1,204.5 million ($196.3 million), compared to RMB918.5 million as of December 31, 2012.  Net cash provided by operating activities was RMB70.1 million ($11.4 million) in the three months ended June 30, 2013, compared to RMB42.9 million in the three months ended June 30, 2012.

Financial Outlook

For the third quarter of 2013, the Company currently anticipates revenue in the range of RMB370-RMB390 million ($60.3-$63.5 million), gross margin of approximately 40-42%, net income of approximately RMB30.8– RMB34.3 million ($5.0 - $5.6 million) and basic and fully diluted EPS of approximately RMB0.28 ($0.05) – RMB0.31 ($0.05), equivalent to RMB1.11 ($0.18) – RMB1.23 ($0.20) per ADS.

Conference Call Information

Zuoan's management will host an earnings conference call on September 12, 2013 at 8:30 a.m. U.S. Eastern Time. Listeners may access the call by dialing # 1-719-325-2354. A webcast will also be available via http://public.viavid.com/index.php?id=105957. A replay of the call will be available through September 19, 2013. Listeners may access the replay by dialing #1-858-384-5517, access code: 9676501.

Exchange Rate

This announcement contains translations of certain Renminbi amounts into U.S. dollars at specified rates solely for the convenience of readers. Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the exchange rate of RMB 6.1374 to US$1.00, as set forth in the H.10 statistical release of the Federal Reserve Board on June 28, 2013.

About Zuoan Fashion Limited

Zuoan Fashion Limited is a leading design-driven fashion casual menswear company in China, and is head-quartered in Shanghai.  Zuoan offers a wide range of products, including men's casual apparel, footwear and lifestyle accessories, primarily targeting urban males between the ages of 20 and 40 who prefer stylish clothing that represents a sophisticated lifestyle.  Through extensive networks of distributors and retail stores, Zuoan sells its products in 31 of China's 32 provinces and municipalities. As of June 30, 2013, Zuoan had 1,383 stores located in China.

Safe Harbor

This news release may contain forward-looking information about Zuoan Fashion Limited, which is covered under the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts. These statements can be identified by the use of forward- looking terminology such as believe, expect, may, will, should, project, plan, seek, intend, or anticipate or the negative thereof or comparable terminology, and include discussions of strategy, and statements about industry trends and Zuoan Fashion Limited's future performance, operations, and products.

Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Actual performance results may vary significantly from expectations and projections. Further information regarding this and other risk factors are contained in Zuoan's public filings with the U.S. Securities and Exchange Commission.

All information provided in this news release and in any attachments is as of the date of the release, and the companies do not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law.

SOURCE Zuoan Fashion Limited