QKL Stores' CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: QKL Stores (QKLS)

QKL Stores Inc. (NASDAQ:QKLS)

Q1 2013 Earnings Call

May 14, 2013 8:30 am ET

Executives

Zhuangyi Wang – Chairman & Chief Executive Officer

Tsz-Kit Chan – Chief Financial Officer

Mike Li – Investor Relations

Analysts

Peter Siris – Huamei

James Fuld – Fuld Corporation

Operator

Hello, and welcome to the QKL Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note that this event is being recorded.

I now would like to turn the conference over to Mike Li. Mr. Li, please go ahead.

Mike Li

Thank you, Aaron, and welcome to QKL Stores’ first quarter 2013 conference call. On our call today is Mr. Zhuangyi Wang, Chairman and Chief Executive Officer; Mr. Jerry Chan, Chief Financial Officer; and Mr. Mike Li, Investor Relations, who will translate for Mr. Wang.

Before we begin, I would like to remind everyone that except for historical information, statements made during this conference call are forward-looking and made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks and uncertainties which may cause the Company’s actual results in future to differ materially from forecasted and their and expected results. Those risks include, among other things, the competitive environment in an industry in general, and in the Company’s specific market areas; inflation; changes in the cost of goods and services and economic condition in general, and in the Company’s specific market area. Those and other risks are more fully described in Company’s filings with the SEC.

Mr. Wang, and I will discuss the highlights of the Company’s business during the first quarter and Mr. Chan will provide an update on Company’s financial highlights; followed by a Q&A session.

With this said, I would now like to turn the call over to Mr. Wang. Please go ahead, sir.

Zhuangyi Wang

[Foreign Language]

Thank you. Good day, everyone. I’d like to thank everyone for taking the time to join us for today’s conference call.

[Foreign Language]

We made a lot of progress in the first quarter with our store marketing activity related to the Chinese New Year season.

[Foreign Language]

We did not open many stores in the first quarter, and closed two supermarkets in Daqing. The reason for the store close is due to the expiration of the lease contracts.

[Foreign Language]

We finished the first quarter operating a total of 46 stores, comprised of 28 supermarkets, 14 hypermarkets, and 4 department stores.

[Foreign Language]

As we planned to open three new stores in 2013, and we’re trying to open these new stores within our core operating areas around the Daqing City or in the locations in which we already operate.

[Foreign Language]

In doing so, we can improve our scalability and pricing power.

[Foreign Language]

We’ll also continue to focus on improving the performance of our stores through optimizing our product assortment, consolidating labor expenses and further reducing operating costs where necessary.

[Foreign Language]

We also intend to evaluate our competitors more carefully in our core region of operations, which can strengthen our provision with customers in this market.

[Foreign Language]

We were also pleased with the improvement of our operating cash flow in the first quarter, due to a reduction in inventory after the peak Chinese New Year season, and a decrease in other receivables attributable to cash recovery from our vendors after the busy holiday season.

[Foreign Language]

We are pleased with our execution in the first quarter, and remain focused on maximizing profitability for our shareholders.

[Foreign Language]

At this time, I’d like to turn the call over to our Investor Relations, Mr. Mike Li, and Mr. Jerry Chan, our Chief Financial Officer, who will discuss the Company’s first quarter financial highlights, as well as our strategic initiatives.

Mike Li

Thank you, Zhuang, and thank you everyone for joining our call today. I believe our store operation in the first quarter was solid, and we are setting the stage for increased top and bottom line growth in the coming months.

As part of this effort, we remain highly focused on showing solid revenue and margin performance within our existing store locations as we’re adding new stores carefully. Looking first at our existing stores, our same store sales were approximately $93.6 million in the first quarter, a decrease of 5.6% from $99.1 million in the first quarter of 2012.

This reflects the sales of 45 comparable stores, the decrease is due to competition increase, and also the short high sales season period, which is Chinese New Year period, compared with the last year.

As of March 31, 2013, we operate 28 supermarkets, 14 hypermarkets and 4 department stores. The average size of our supermarket is about 2,500 square meters in sales area, while our hypermarket typically average approximately 4,500 square meters in sales area. Each of these store concepts are supported by our 3 grocery distribution centers. 2013 represents another exciting year for QKL Stores. We intend to open three more stores in 2013, and each of these stores are planned for the first quarter, and second half of the year. Our plan is to open these new stores closer to our core area in Daquing City as much as possible.

We continue to believe hereafter significant expansion opportunities in small and medium-sized cities in Northeastern China, many of which do not contain modern grocery store. Demand for supermarket is likely to grow significantly over the next several years in our region as it continues to experience urbanization.

As we evaluate growing our store presence in the top line opportunities, we continue to identify ways in which we can enhance our gross profit margins, reduce operating expenses and improve overall profitability. We believe that our gross margin is likely to be between 16.8% to 17.3% over the next few business quarters.

New stores tend to be less profitable during their early months of operation. In addition, China’s retail industry in general, and supermarket industry in particular are becoming more competitive year-by-year. So in this competitive marketplace, it’s likely as to focus on providing our customers with low prices in order to increase our market share and the long-term share of volume.

We will keep monetary initiatives to reduce operating expenses for the improvement of our logistics and information systems to support our stores. We are also doing our best to keep labor cost in line with our growth. Daqing Denver shelf should further strengthen our overall financial performance and the market position.

At this time, I will turn over the call to Mr. Jerry Chan, our Chief Financial Officer, who will review our financial results with you further.

Tsz-Kit Chan

Thank you, Mike.Revenue in the first quarter of 2013 decreased by 13.4% to $97.1 million from $112 million in the first quarter of 2012. Revenue performance reflected the 45 comparable stores, which are stores that have been open for at least one year before the beginning of the comparison period, or by January 1, 2012, as well as sales from the net opening of one new store since January 1, 2012.

Same store sales were approximately $93.6 million in the first quarter of 2013, representing a decrease of 5.6% from $99.1 million in the first quarter of 2012. One new store opened since January 1, 2012 generated approximately $1.1 million in sales in the first quarter of 2013.

Gross profit decreased by 12.7% year-over-year to $16.6 million compared to $19.1 million in the prior year period. Gross margin for the first quarter of 2013 was 17.1%, compared to 17.0% for the first quarter of 2012. The decrease in gross profit was primarily attributable to a decrease in net sales. Operating expenses decreased by 9.5% to $15.8 million, compared to $17.5 million in the prior year period. This was primarily a result of lower salary, and reduced other operating costs related to the Company’s decreased store count over the past year.

First quarter 2013 net income was approximately $0.4 million, or $0.27 per diluted share, compared with $0.8 million, or $0.54 per diluted share, for the same period in 2012. As of March 31, 2013, the Company had $32.5 million in unrestricted cash with bank loans of $15.9 million, compared to $36.1 million as of March 31, 2012 with bank loans of $9.5 million. The number of weighted average shares outstanding used in the computation of diluted EPS was approximately $1.5 million in the first quarter of 2013.

Net cash provided by operating activities for the 2013 first quarter was $24.3 million compared to $29.4 million in the prior year period. The decrease in cash provided by operating activities for the three months ended March 31, 2013 compared to the same period reflects the decrease in net sales for the three months ended March 31, 2013.

Capital expenditure in the first quarter 2012, $0.4 million and we expect our CapEx spending to trend in $0.3 million to $0.5 million range in the second quarter. For the full year 2013, we plan to open three new store locations, comprised of hypermarket and supermarkets that have in the aggregate of approximately 30,000 square meters of space.

This concludes our prepared remarks for today. We appreciate your listening to our call and look forward to providing you with updates to our business in the weeks and months ahead. Operator, we are now ready to take some questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Peter Siris with Huamei.

Peter Siris – Huamei

[Foreign Language] Jerry, Mike, how are you?

Tsz-Kit Chan

[Foreign Language]

Peter Siris – Huamei

[Foreign Language] I wonder if you could talk about what steps you’re taking to improve your competitive position. What are you doing to, on the store basis in terms of merchandising to improve?

Mike Li

So firstly, we are increasing our private label sales. Now, we had about 400 or some, not reaching 500 SKUs of private label items, some is efficient; some is not as efficient as the top line. So we are doing some consolidations, and also bringing new products in.

So everyone, every category manager in our company have a target, have a burden to develop certain number of SKUs of private label products in this category. In doing that we will be increasing our gross profit overall there.

And as the competitor are more competitive than before, during this economy recession in China, the managed retailers they just did what they were (inaudible), doing promotions to often. I think we did the same strategy as they did before. We also do a lot of promotions, and now we realize that nobody is money, everyone is hurting. So we just reevaluate the marketing expenses more carefully. We have to make sure that every penny we spend to draw the customer, to draw the basket – built before doing that we have to start it carefully and then make right decision.

And also, we were trying to take some flavors of flour and bakery products, which we produced and processed in our stores, and we’re trying to make it unique, and we want to put QKL labels on them, and also we will treat them as a private label item.

And also we are consolidating the catalog program. Before we did a biweekly catalogs and one-week catalog, three day mailer, sometime one day flyer, that we believe this is not as efficient, and also store kind of less competitive at the store level. So we now changed to only one standard, which is biweekly catalog. So one month, we will have two catalogs, I mean.

That is more efficient, and the sales promotion being, and sales provisions to our suppliers. And also we are finishing the 2013 merchandizing contract negotiation, it’s not finalized, but we believe we can get more, higher gross profit of it. And some major supplier already shared their whole year marketing plan with us, and also we asked them to input some good advice in the projection, and actions in our marketing plan through the whole year.

And I think, I’m saying – there’s too many competitors over there who lose a share, market share and keeping our results also compete with them, but we are trying to protect our gross profit, and I think we were doing it fine.

Peter Siris – Huamei

And Mike, do you see the competitors doing the same, in other words, do you see – is the competition getting stronger or because the competitors are losing money as well are they doing some of the same things you’re doing?

Mike Li

I think it’s – they are losing money also, and they are losing customer transactions also. So that’s why they put more marketing expenses, put more promotions than before. So customers are confused sometime to have the price war here and there.

So that’s why we’re trying to, we will compete with their price, that’s for sure, but we’re also trying to add some values to the customer, but we’re trying to be a good neighbor of the customer, and also I think we should have a more branding power with domestic or local players compared with our major suppliers in China.

Peter Siris – Huamei

Thank you, Mike. And I appreciate you having a conference call. Thank you very much.

Mike Li

Yeah, thanks.

Operator

Thank you (Operator Instructions) And the next question comes from James Fuld from Fuld Corporation.

James Fuld – Fuld Corporation

I apologize that I missed the beginning of the conference call, but talking about the competitive landscape, are there two many stores in China, and are your competitors continuing to expand the number of stores?

Mike Li

I think there are many players in China, but I’ll not believe that they’re too much penetrated in the Northeast of China. But we also, QKL also from the last stores during the past couple years in tier-four, tier-five cities which has nobody there, I mean no, no more than one supermarket there. But sometime – only at some store we believe, it’s too early to set a modern grocery store in the city. So sometime we spend money and doing the marketing and trying to bring a customer in our store, but they just don’t get it. They just feel it’s too good for them.

James Fuld – Fuld Corporation

So, it’s actually the opposite problem that, the stores you opened in the tier-four cities were too early? It’s not that there was too much competition? You said that you were too soon to open?

Mike Li

Yes, that’s why some of the stores, we tried to close and lease.

James Fuld – Fuld Corporation

And are your competitors opening a lot of new stores or not in your developed markets?

Mike Li

We feel that pressure in Daqing area. We have about 20 stores in here and we plan to open another hypermarket in the core area, but the national player (inaudible) they had one store in the eastern part of the city, and they plan to open two more in the west side. And we have Carrefour (inaudible) already came in, and also we have one Carrefour in Shuangcheng. Shuangcheng is like tier-four city, but their Carrefour is about 10,000 square meters of sales floor, and put us in that target, and they also moved money. I mean Carrefour has moved money in Shuangcheng, but they did try to move in and tried to compete with us.

James Fuld – Fuld Corporation

So is it…

Mike Li

(Inaudible) entities and also there’s new market stores coming in east side of the city.

James Fuld – Fuld Corporation

So in the United States, when this occurs, a consolidation occurs?

Mike Li

Yes.

James Fuld – Fuld Corporation

Which means some stores sellout to other companies, and as a result, the competition becomes more reasonable?

Mike Li

Yes.

James Fuld – Fuld Corporation

Is there any signs of consolidation in China in this field?

Mike Li

Yes, I understand what you’re coming, but it’s near several strategic – I would say there are strategic partners, some of them important, but I don’t think our company is in that [five years].

We still have confidence to come in this core area, and I think we just moved through fast in the last couple of years. And during this China economy recession, we believe we will open stores more carefully. Gradually, we’re just trying to protect our core areas, our team in Heilongjiang and expand carefully.

James Fuld – Fuld Corporation

Would you extend my best wishes to Mr. Wang and everybody at the company please?

Mike Li

[Foreign Language]

Operator

Thank you. (Operator Instructions) All right there are no more questions at the present time. I’d like to turn the call back to over to management for any closing remarks.

Mike Li

Thank you. If you’d like to ask a question, I mean this is the whole – this is the whole for today. So we are glad to having you to support us and we will try to give you more communication and the report in the coming quarters. Thanks.

Operator

Thank you. Conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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