Zuoan Fashion Limited (NYSE:ZA)
Q4 2012 Earnings Conference Call
April 25, 2013 8:30 am ET
James Hong - Founder, Chairman and Chief Executive Officer
Chaoshen Wang - Chief Operating Officer
Chi Hon Tsang - Chief Financial Officer
John Low - Investor Relations
Greetings and welcome to the Zuoan Fashion Limited Fourth Quarter and Full-Year 2012 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
With us today are James Hong, Founder and Chairman of the Board and Chief Executive Officer; Chi Hon Tsang, Chief Financial Officer; Mr. Wang Chaoshen, Chief Operating Officer; and Mr. John Low, Head of Corporate Finance and Investor Relations. John will be translating for Mr. Wang and Mr. Hong during the Q&A session as well.
This call may contain forward-looking statements made pursuant to the Safe Harbor provisions for the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties, and other factors not under the Company's control, which may cause actual results or performance or achievements of the Company to be materially different from the results, performance, or expectations implied by these forward-looking statements.
All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors and details of Company's filings with the SEC. Zuoan undertakes no duty to revise or update these forward-looking statements for selected events or circumstances after the date of this conference call. At this point, I would like to now turn the conference over to Mr. James Hong. Mr. Hong, please go ahead.
Good day, good morning, and thank you for joining us for our fourth quarter and full-year 2012 earnings conference call. We had a good quarter in terms of sales growth, which was driven by strong sales performance from our distributor stores and our direct stores. Fourth quarter total revenue was in line with our guidance forecast, representing a 4% increase from the same period last year, and our fourth quarter net income exceeded the middle point of our guidance forecast by 51%.
The fundamentals of our business remain healthy with our unique stylists and high-quality products and experienced management team. We continue to earn the loyalty of our customers in the fourth quarter. In the fourth quarter, we had continued to focus on several key initiatives, including the expansion of our distributor store network, transition of our direct flagship stores to our distributors, operational improvements to our business, expense management and product design enhancement, which John will discuss in greater detail shortly.
We recently held our 2013 Fall collection sales fair in March and we're pleased that sales orders increased by 5% compared to the same sales fair last year, with average selling prices remaining stable compared to last year. In spite of the market challenges in the second half of 2012, our ability to deliver high-quality fashionable casual menswear products for our customers helped drive results. We continue to focus on delivering products that meet our high customer standards on design, quality, and price. We remain optimistic about our long-term growth prospects and broadening our brand popularity in China's fashion casual menswear market.
Looking ahead at 2013, given the challenging consumer market environment in China, we believe it is prudent to set our guidance conservatively and in line with consumer demand trends we experienced in the second half of 2012. We have a strong balance sheet, remain confident in our long-term development strategy, and expect to maintain operational spending discipline, together which can result in another year of revenue and profit growth for Zuoan.
At this point, I would like to turn the call over to John who will further discuss our operational performance.
Thank you Mr Hong. I'll begin with an overview of our fourth quarter performance and highlight our operational initiatives. Then Chi Hon will review our financial results and outlook in more details. After our closing remarks, we will conduct a question-and-answer session.
Zuoan's fourth quarter was a fitting finish to 2012, with revenue increasing 4% over the prior year during the time in which the consumer spending environment had become more challenging. We continue to be well positioned to serve the market with a nationwide network of more than 1,322 retail locations covering China's 30 provinces along with our seven direct stores in Shanghai. A total of 40 distributor and sub-distributor stores were opened in the fourth quarter of 2012 and 26 self-operated flagship stores were successfully transferred to our distributors in the fourth quarter of 2012, resulting in a total of 1,329 store locations at the end of December 2012 compared to 1,289 store locations at the end of September 2012.
During the fourth quarter, we also successfully added three new distributors, bringing our total distributor count to 16. The regions in which our new distributors operate include Hainan, Shanxi and Guangdong provinces. As announced in last quarter's conference call, we made the decision to transfer 26 Zuoan self-operated flagship stores to our distributors. This move allowed us to better concentrate on our product offering to our growing base of distributor and sub-distributor stores, improved productivity and reduces operating expense. We have spent a lot of time working with our distributors and sub-distributor partners to smoothly transition the stores and better train them on their role as brand ambassadors, which is a sign to the improved customer experience at all of our stores.
As a result of this transition, fourth quarter gross margin decreased slightly to 45.4%, which was expected and was in our 44% to 46% forecasted range. Our gross margin decreased slightly due to the lower gross margin at the distributor and sub-distributor store level compared to higher overall gross margin at the direct store level. As we move forward, the transition of our self-operated flagship stores allow us to concentrate on our core products, improve profitability at our retail locations, as well as further improve our operating discipline, which in turn can result in net margin improvement.
On the product side, product design and quality have always been a top priority for our Company. Customers responded favorably to our product offerings across our stores in the fourth quarter, driving a healthy sales increase both at distributor and direct store levels.
Fourth quarter distributor sales increased 16% to RMB364.8 million compared to the same period last year and fourth quarter direct store sales grew to RMB4.7 million, up [73%] (ph) from the same period last year. Although the economic growth remained slow in the fourth quarter, apparel companies like Zuoan with top product quality and design strength (indiscernible) ability to challenging market environment into an opportunity to expand market share and the profit at the expense of other competitors.
We are extremely proud of our design team which consistently delivers on innovative designs ideas and the delivery of fresh on-topic customer fashions that meet evolving Chinese customer taste. For example, given the above average cold weather environment in China this past winter, we tailored the design of our products to focus on additional warmth, comfort and durability while maintaining the fashion for a stylish product. We will continue to actively research and develop products in order to meet the evolving needs of our customers going forward.
We are also glad to see ongoing expansion of the China's middle-class resulting in the creation of a large market for mass and middle-class apparel brands such as Zuoan. We believe demand for apparel in the mass and middle market will grow in China over the next few years and we look forward to capitalizing on our growth opportunities that lie ahead.
In March, we conducted our first sales fair of the year and we're pleased with the results. All of our distributors and sub-distributors participated in this event and placed their purchase orders on the latest 2013 Fall collections. The order volume increase by 5% compared to same sales fair last year and average selling prices remained firm.
Our marketing initiatives also played a key role in driving sales and allowing us to reach existent customers and attract new ones to the brand in the fourth quarter. In addition to that, advertising on billboards and print media, we encouraged our distributors to conduct more promotional and marketing activities to boost sales and reduce older inventory in the fourth quarter. Additionally, we cancelled the 15% of discount limit and allowed our distributors to determine the discount level at each store based on local market conditions and customer shopping patterns.
We also continue to sponsor the TV drama called Gorgeous which has been broadcasted nationwide since March 2013 on Hunan TV creating Zuoan brand awareness among our target men's customer group. This TV drama, which features Mr. James Hong and the Zuoan brand prominently, has also big scorings of ratings since its airing and we are quite pleased with the results so far.
Looking at our balance sheet, we ended 2012 with a strong balance sheet that included RMB918 million in cash, 33% increase from 2011 year-end. We also kept working with our distributors and sub-distributors in the fourth quarter to reduce inventory in their store channel. Inventories decreased significantly to RMB24.3 million at the end of 2012 from RMB86.5 million as at the end of September 2012. For the remaining of this year, we expect inventory turnover days will be within 30 days as we have modified our development trends by no longer opening and operating direct flagship stores which can stabilize inventory levels in 2013.
During the second half of 2012, we extended the credit terms of distributors to 120 days from 90 days due to the slowdown of China's consumer market. At the end of 2012, 70% of our accounts receivable were within 90 days and we will adjust the credit terms based on the market conditions in the coming quarters.
We remain optimistic about Zuoan's growth prospects in 2013 and beyond, and believe we will continue to have success in improving operational efficiencies and broadening the popularity of our brand in China's fashion casual menswear market. We continue to maintain our full year 2013 revenue growth target of around 5% in spite of the challenging market environment.
At this point, I would turn the call over to Chi Hon to review our financial results as well as provide an outlook on our business.
Chi Hon Tsang
Thank you, John. I would like to first review our financial performance in the fourth quarter. Revenue for the fourth quarter was RMB369.6 million, a 4% increase from RMB355.3 million in the same period last year. The increase in revenue was driven by both distributor and sub-distributor and direct store sales volume.
Fourth quarter distributor and sub-distributor sales increased by 16.2% to RMB364.8 million, compared to RMB314 million in the fourth quarter of 2011. A total of 40 distributor and sub-distributor stores were opened in the fourth quarter of 2012 and 26 self-operated flagship stores were transferred over to our distributors in the fourth quarter of 2012, resulting in a total of 1,329 store locations at the end of December 2012 compared to 1,259 store locations at the end of September of 2012.
Cost of sales increased 8.7% to RMB201.6 million in the fourth quarter of 2012 from RMB185.5 million in the same quarter of 2011, mainly as a result of the increase in the sales volume. As a percentage of revenues, cost of sales increased to 54.6% in the fourth quarter of 2012 from 52.2% in the fourth quarter of 2011.
Gross profit in the fourth quarter decreased 1.1% year-over-year to RMB167.9 million from RMB169.8 million in the same period of 2011. Fourth quarter 2012 gross profit margin was 45.4% compared to 47.8% in the same period last year. Fourth quarter 2012 gross margin decreased mainly due to the lower cost margin at the distributor level, as we transitioned our higher (indiscernible) direct flagship stores to our distributors in the fourth quarter. Gross margin at the Company’s self-operated direct stores and distributor stores was 61.1% and 45.2% respectively.
Selling and distribution expenses in the fourth quarter were RMB45.6 million or 12.3% of revenue compared to RMB60.6 million or 17.1% of revenue in the same period last year. This percentage decrease was relative to the significant decrease in direct store expenses resulting from the transition of our Company’s directly-operated flagship stores to the distributors.
Administrative expenses in the fourth quarter were RMB30.6 million or 8.3% of revenue compared to RMB13.6 million or 3.8% of revenue in the same period last year. This percentage increase was mainly due to the loss on disposal of leasehold improvement after the transition of our flagship stores to our distributors in October 2012.
The effective tax rate in the fourth quarter decreased to 25.6% compared to 26.2% in the prior year period. Net income for the fourth quarter decreased 1.7% to RMB69 million from RMB70.2 million in the same period last year. Fourth quarter net income as a percentage of revenue was 18.7% compared to 19.7% in the prior year period.
Diluted earnings per ordinary share was RMB0.62 in the fourth quarter, equivalent to RMB2.48 per ADS, compared to diluted earnings per ordinary share RMB0.63 in the fourth quarter of 2011, equivalent to RMB2.52 per ADS. The Company’s diluted number of shares outstanding was 111.3 million in the fourth quarter ended December 31, 2012.
Looking at our full-year 2012 results; revenue in 2012 was RMB1.4 billion or 16% increase from RMB1.2 billion in 2011. Full year distributor sales increased 15.4% to RMB1.3 billion compared to RMB1.2 billion of 2011. Average selling price in 2012 increased by 12.5% to RMB176 compared to RMB157 in 2011.
Cost of sales increased by 10.5% to RMB759.3 million in 2012 from RMB686.9 million in 2011. As a percentage of revenues, cost of sales decreased to 53.2% in 2012 from 55.8% in 2011.
Gross profit in 2012 increased 22.8% year-over-year to RMB668.1 million from RMB544 million. Full year 2012 gross profit margin was 46.8% compared to 44.2% in 2011.
Selling and distribution expenses in 2012 were RMB199.2 million or 14% of revenue, compared to RMB136.7 million or 11.1% of revenue in 2011. Administrative expenses in 2012 were RMB70.7 million or 5% of revenue, compared to RMB 56.6 million or 4.6% of revenue in 2011.
Our effective tax rate for 2012 decreased to 25.7% compared to 26.7% in 2011. Net income in 2012 increased 15.5% to RMB295.4 million from RMB255.7 million in 2011. Net income as a percentage of revenue was 20.6% compared to 20.8% in 2011.
Diluted earnings per ordinary share was RMB2.65 in 2012, equivalent to RMB10.62 per ADS, compared to diluted earnings per ordinary share RMB2.37 in 2011, equivalent to RMB9.47 per ADS.
As of December 31, 2012, the Company had cash and cash equivalents of RMB918.5 million compared to RMB690.5 million as of December 31, 2011. Net cash provided by operating activities increased to RMB181 million in the 12 months ended December 31, 2012, compared to RMB76 million in the 12 months ended December 31, 2011.
Accounts and other receivers increased to RMB608.5 from RMB446.9 million at the end of December of 2011, mainly due to the business expansion and longer credit terms of 120 days that we granted to our distributors due to the slowdown of consumer market in China. At the end of December, 70% of our AR was at basically 90 days. Capital spending in the fourth quarter was very low, only [RMB6,000] (ph) compared to RMB2.4 million in the prior year period.
For the first quarter of 2013, the Company currently anticipates revenue in the range of RMB250 million to RMB300 million, gross margin of approximately 44% to 46%, net income of approximately RMB64.4 million to RMB69 million and basic and fully diluted EPS of approximately RMB0.55 to RMB0.62. The Company expects to have approximately 111.3 million shares outstanding during the quarter end March of 2013. Approximately 10 new retail stores are expected to be opened by distributors and sub-distributors in the first quarter of 2013.
This concludes our prepared remarks today. Operator, we are now ready to take some questions.
(Operator Instructions) We have no questions at this time. So I'd like to turn the conference back over to management for additional or closing remarks.
This concludes our conference call, and on behalf of the management team, we want to thank you once again for joining this earnings conference call and look forward to meeting you again in our next quarter's earnings call. Thank you and goodbye.
This does conclude today's conference. Thank you for joining and have a nice day.
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