Ryan Shi – Investor Relations Manager
Alfred Beichun Gu – Chief Executive Officer and Director
Paul Bang Zhang – Chief Financial Officer and Senior Vice President
Mecox Lane Limited (MCOX) Q1 2013 Earnings Conference Call May 15, 2013 9:00 PM ET
Hello and thank you for standing by for the Mecox Lane’s First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Please note that today’s conference is being recorded. If you have any objections, you may disconnect at this time.
I will now turn the call over to your host for today’s conference, Mr. Ryan Shi, Mecox Lane’s Investor Relations Manager.
Hello, everyone, and thank you for joining us today for Mecox Lane’s first quarter 2013 earnings conference call. The company’s first quarter earnings results were released earlier today and available on our company’s IR website at ir.mecoxlane.com, as well as on the Newswire services.
Today you will hear from our CEO, Alfred Gu, who will speak about our company’s strategies and business operations; and Paul Zhang, our CFO, who will walk you through our financial results. After their prepared remarks, Alfred and Paul will be available to answer your questions.
Please note that today’s discussion will contain forward-looking statements made under the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements involve inherent risks and uncertainties. As such, our future results may be materially different from the views expressed today. Potential risks and uncertainties include but are not limited to those outlined in the forward-looking statements of our earnings release issued today.
Additional information regarding this and other risks and uncertainties is included in the company’s annual report on Form 20-F as well as in its other filings with the U.S. Securities and Exchange Commission. Mecox Lane Limited does not assume any obligation to update any forward-looking statements except as required under applicable law.
Our earnings release and this call includes a discussion of some non-GAAP financial measures. As explained in more detail in our earnings release, the non-GAAP measures mentioned in this call exclude share-based compensation expenses. Our earnings release contains a reconciliation of unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.
As a reminder, this conference call is being recorded. In addition, a webcast of this conference call and presentation related to our results are available on Mecox Lane’s Investor Relations website at ir.mecoxlane.com.
I will now turn the call over to our CEO, Alfred. Please go ahead, Alfred.
Alfred Beichun Gu
Thank you, Ryan and thanks to everyone for joining the call. For the first quarter, 2013 was a year of enormous change for us. With the launch of our new joint venture, Giosis Mecoxlane in January of this year, the ownership and operation of our M18.com website transferred to Giosis Mecoxlane, which is under the control of management of Giosis Private Limited, while we have refocus on our core strength of providing value-for-money, fast-fashion products.
As expected, the change of M18.com impacted the website’s user base and our e-commerce channel sales. The Giosis team has faced a number of challenges, including interface design in a matter of localization. However, we have confidence based on their estimates, overall track records and believe that Giosis team will make good progress with M18.com in the quarters to come.
The intense competition within the e-commerce sector continue to impact overall sales across our e-commerce channel, which we formally refer to our Internet platform and which now includes multiple sales channel, beyond the M18.com. Also, advertising price remains high, but at M18.com it’s no longer directly operated by Mecox Lane. Our online advertising costs are now variable rather than fixed. For example, we pay commission to Giosis Mecoxlane based on how many products we sell through M18.com. This will help us to better manage our e-commerce channel margin going forward.
While the introduction of competing brands, our M18.com, actively impacts our total sales. We are moving ahead by expanding our e-commerce channels to include popular sites like (inaudible) in downtown. In fact, orders through those particular channels increased in the first quarter.
To further lower cost and improve efficiency, we decreased the head count of our staff related to IT, customer service and logistics by approximately one-half, which is inline with the decrease in our online revenue and reflect how much of that work is now handled by Giosis Mecoxlane, our JV. The cost benefits of its downsizing will likely be better reflected in our second quarter results.
Furthermore, we now run a majority of our logistical operations through our modern and centralized Wujiang Logistics Center. In the first quarter, in order to reduce operating expenses and optimize full capacity of our [Changzhou] Logistics Center in Wujiang. We terminated our lease with three sub-warehouses in Beijing, Guangzhou and Chengdu.
We will continue to expand our e-commerce channels and invest in product R&D while at the same time managing costs and improving efficiency. Also we expect the short-term challenges of this transitional period to continue. We are confident in our strategies in place to transform Mecox Lane into a leading multi-channel retail company channel.
I will now turn the call over to our CFO, Paul Zhang, who will discuss our financial results.
Paul Bang Zhang
Thank you, Alfred. I would now like to walk you through our first quarter 2013 financial results. Total net revenue was $21 million in the first quarter of 2013, representing a decrease of 43.5% year-over-year from 37.1% in the first quarter of 2012. The decrease was primarily due to the decrease in net revenues from the e-commerce channel, as well as the decrease in net revenues from the call center.
Net revenues from the e-commerce channel were $5.7 million in the first quarter of 2013, a decrease of 66.8% from $17.1 million in the first quarter of 2012. The decrease was primarily attributed to a decrease in our sales on M18.com during the period when the website was transferred to Giosis management and relaunched as a brand-neutral open platform.
Net revenues from the call center were $9.7 million in the first quarter of 2013, a decrease of 12.7% from the first quarter of 2012. The decrease was primarily attributed to a decline in orders placed through the call center as a result of a reduction in our catalog circulation.
Net revenues from directly operated stores were $3.1 million in the first quarter of 2013, a decrease of 37.3% from $5 million in the first quarter of 2012. The decrease was primarily due to the decline in the number of directly operated stores from an average of 115 stores in the first quarter of 2012 to an average of 65 stores in the first quarter of 2013, partially offset by the increase in average store sales.
Net revenues from franchised stores were $2.4 million in the first quarter of 2013, a decrease of 37.2% from $3.9 million in the first quarter of 2012. The decrease in net revenues were primarily due to the decline in average store sales and the decline in a number of franchise stores from an average of 275 stores in the first quarter of 2012, to an average of 263 stores in the first quarter of 2013.
Cost of goods sold which excludes amortization and depreciation expenses was $12.9 million in the first quarter of 2013, a decrease of 43.9% from $23.0 million in the first quarter of 2012. The decrease is consistent with the overall decrease in revenues.
Gross profit was $8.1 million in the first quarter of 2013, representing a decrease of 42.8% from $14.2 million in the first quarter of 2012. Gross margin was 38.6% in the first quarter of 2013, compared to 38.2% in the first quarter of 2012.
Total operating expenses were $11.7 million in the first quarter of 2013, representing a decrease of 37.5% from $18.7 million in the first quarter of 2012. The decrease was primarily due to a gain of $6.0 million in connection with the partial disposal of contributed intangible assets to our JV Giosis Mecoxlane, and the decrease in selling, general and administrative expenses.
Selling, general and administrative expenses were $16.3 million in the first quarter of 2013, representing a decrease of 11.5% from $18.4 million in the first quarter of 2012, primarily due to a decrease in head count and labor costs related to IT, customer service and logistics, partially offset by severance packages paid to departing employees.
Loss of operations was $3.6 million in the first quarter of 2013, compared to the loss from operating of $4.6 million in the first quarter of 2012. Loss from operations includes a non-recurring gain of $6 million in the first quarter of 2013.
Net loss was $4.2 million in the first quarter of 2013, compared to net loss of $4.2 million in the first quarter of 2012. Net loss includes a non-recurring gain of $6 million in the first quarter of 2013. Non-GAAP net loss, which excludes share-based compensation, was $3.2 million in the first quarter of 2013, compared to non-GAAP net loss of $3.5 million in the first quarter of 2012, also excluding share-based compensation. Basic and diluted loss per American depositary share or ADS attributable to Mecox Lane shareholders was $0.36 in the first quarter of 2013, one ADS represents 35 ordinary shares.
Cash and cash equivalents as of March 31, 2013 totaled $11.2 million, compared to $13.3 million as of December 31, 2012. Restricted cash as of March 31, 2013 totaled $0.9 million, compared to zero as of December 31, 2012. Short-term investments on March 31, 2013 were $23.9 million, compared to $20.7 million as of December 31, 2012, all of which were structured term bank deposits. Secured short-term borrowing as of March 31, 2013 was $13.6 million, compared to zero as of December 31, 2012, all of which was secured by restricted cash of $0.9 million and short-term investments of $16.0 million.
Now turning to our financial outlook. We expect the joint venture transition to further impact our second quarter 2013 results. For the second quarter of 2013, we expect a decrease in total revenues of approximately one-half compared to Q2 2012. Over time, we expect to overcome the short-term challenges were provided by our recent change to be a sustainable multichannel retail business with strong logistical capacities. Please note that the above estimates are the company’s preliminary review and are subject to change.
This concludes our prepared remarks. We will now open the call to question. Operator?
(Operator Instructions) We are now approaching the end of the conference call. I will now turn the call over to Mecox Lane’s Investor Relations Manager, Mr. Ryan Shi for his closing remarks.
Thank you all for joining us today. If you have any further questions, please don’t hesitate to contact. This concludes the company’s earnings call. Good day.
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.
[No Q&A session for this event]
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!