Ryan Shi – IR Manager
Alfred Gu – CEO
Paul Zhang – CFO
Mecox Lane Limited (MCOX) Q2 2013 Earnings Call August 13, 2013 9:00 PM ET
Hello and thank you for standing by for the Mecox Lane’s Second 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. Please go ahead, sir.
Hello, everyone, and thank you for joining us today for Mecox Lane’s second quarter 2013 earnings conference call. The company’s second quarter earnings results were released earlier today and available under company’s IR website at ir.mecoxlane.com, as well as on the Newswire services.
Today you will hear from our Chief Executive Officer, Alfred Gu, who will speak about our company’s strategies and business operations; and Paul Zhang, our Chief Financial Officer, 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 section 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.
Hello everyone and thank you for joining us today. In the second quarter, we continued our conservative strategy of preserving cash. China’s macroeconomic traditions continued to be a challenge and have negatively influence the fast-changing and hyper-competitive e-commerce sector, particularly apparel and accessories.
In the second quarter, we decreased our inventory and overhead costs to preserve cash and increase our operating efficiency. Despite lower revenue compared to the year ago period, net loss from operations was relatively constant reflecting the effectiveness of our cost-cuttings.
Although our e-commerce continued to be negatively impacted by the transformation of M18.com to a non-exclusive, multi-channel platform, we saw increased sales on independent e-commerce platform such as TMall.com in the second quarter.
Our sales of such platforms are still a small part of our overall revenue but offer good brand exposure and should create additional opportunities as we refine our business model. Overall we continue to refocus on our core strength of providing value-for-money fast-fashion products to consumers.
Looking forward, we will remain prudent with regards to our cost and cash expenditures and we will continue to make efforts to position ourselves as a multi-brand and multi-channel fast fashion apparel company. I’ll now turn the call over to our CFO, Paul Zhang who will discuss our financial results for the quarter. Go ahead, Paul.
Thank you, Alfred and hello everyone. I will now walk you through the company’s second quarter results. The total net revenues were $21.8 million in the second quarter of 2013, representing a decrease of 44.1% from $39 million in the second quarter of 2012. The decrease was primarily due to the decrease in net income from our e-commerce channel, as well as the decrease in net revenues from our call center and physical stores.
Net revenues from the e-commerce channel were $6.7 million in the second quarter of 2013, a decrease of 65.8% from $19.6 million in the second quarter of 2012. The decrease was primarily attributed to a decrease in our sales on M18.com during the period after the website which to joint venture control and the Giosis Mecoxlane and re-launched as a brand-neutral open platform.
That decrease was partially offset by the increase in our sales on independent e-commerce platform including TMall.com and JD.com. Net revenues from the call center were $10.5 million in the second quarter of 2013, a decrease of 7.8% from $11.4 million in the second quarter of 2012. The decrease was primarily due to a decline in orders placed through the call center since the decrease in and later the discontinuation of our catalogue circulation in January, 2013.
Net revenues from directly operated stores were $3.1 million in the second quarter of 2013, a decrease of 36.8% from $4.9 million in the second quarter of 2012. The decrease was primarily due to the decline in the number of directly operated stores from an average of 109 stores in the year ago period, to an average of 60 stores in the second quarter of this year. This decrease was partially offset by the increase in average store sales.
Net revenues from franchised stores were $1.5 million in the second quarter of 2013, a decrease of 51.7% from $3.2 million in the second quarter of 2012. The decrease in net revenues was primarily due to the decline in average store sales and the decline in a number of franchise stores from an average of 267 stores in the year ago period, to an average of 256 stores in the second quarter of this year.
Cost of goods sold which excludes amortization and depreciation expenses was $13.7 million in the second quarter of 2013, a decrease of 46.5% from $25.6 million in the second quarter of 2012. The decrease was consistent with the overall revenue decrease.
Gross profit was $8.1 million in the second quarter of 2013, representing a decrease of 39.6% from $13.4 million in the second quarter of 2012. Gross margin was 37.2% in the second quarter of 2013, compared to 34.4% in the second quarter of 2012. The increase in gross margin was mainly due to the increase in the waiting of the call center in total net revenues, which generated a higher margin than those of other segment, that increase was partially offset by an inventory provision of $900,000 for our physical stores as we tested new brands and products.
Total operating expenses were $13.8 million in the second quarter, representing a decrease of 26.7% from $18.8 million in the year ago period, primarily due to a decrease in selling, general and administrative expenses.
SG&A expenses was $13 million in the second quarter of 2013. Representing a decrease
of 13.1% from $18.6 million in the year ago period, primarily due to a decrease in head count and related labor costs. The termination of certain warehouse leases on a shift of our JD Giosis Mecoxlane of advertising costs and IT expenses related to M18.com.
Loss from operations was $5.7 million in the year ago period, compared to the loss from operating of $5.4 million in the second quarter of this year. Loss from equity in our affiliates specifically Giosis Mecoxlane was $1.2 million in the second quarter of 2013.
Net loss was $6.2 million in the second quarter, compared to net loss of $4.9 million in the year ago period. Non-GAAP net loss, which excludes share-based compensation, was $5.2 million in the second quarter, compared to non-GAAP net loss of $4.3 million in the year ago period, also excluding share-based compensation. Basic and diluted loss per American depositary share or ADS attributable to Mecox Lane shareholders was $0.53 in the second quarter, one ADS represents 35 ordinary shares.
Cash and cash equivalents as of June 30 of this year totaled $7.2 million, compared to $13.3 million as of December 31, 2012. Restricted cash as of June 30 totaled $17.9 million, compared to zero as of December 31, 2012. Short-term investments on June 30 was $10.5 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 June 30, 2013 was $15.4 million, compared to zero as of December 31, 2012. All of which was secured by restricted cash of $17.9 million.
Now turning to our financial outlook. We do not anticipate a stronger third quarter giving the seasonality slow sales of that time of year. And we will remain prudent with regard to our cost and cash expenditure as we invest in product R&D to prepare for the fourth quarter which is historically a stronger quarter of retail apparel sales in China.
We expect a decrease in total net revenue of approximately one-half compared to the third quarter of 2012. Please note that the above estimates of the company’s preliminary view and are subject to change. This concludes our prepared remarks; we will now open the call to questions. operator?
Thank you very much, sir. Ladies and gentlemen, we will now the question-and-answer session. (Operator Instructions). Our first question is from the line of Alex Liu [ph] from Greenpeace [ph] ask your question.
[Foreign Language – Chinese]
[Foreign Language – Chinese] Shall we speak English or Chinese? Is it okay?
[Foreign Language – Chinese] Okay.
Okay. [Foreign Language – Chinese] We’re actually repositioned ourselves after establishing the JV with Giosis Mecoxlane as an online platform. So we are actually done repositioned ourselves as a brand company. So we are focusing more efforts on launching new brands and etc. so that’s a quite different approach to a platform, so that’s basically the efforts we are making, was fine to transform our business model to more brand focused company.
Thank you very much. [Operator Instructions] There is no further question at this time. I will hand the conference back to Mr. Ryan Shi for his closing remarks.
Thank you all for joining us today. Please don’t hesitate to contact with any questions. this concludes the company’s earnings call. Good day.
Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.
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