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Mecox Lane Limited (NASDAQ:MCOX)

Q3 2013 Earnings Conference Call

November 18, 2013 08:00 PM ET

Executives

Alfred Beichun Gu - Director, CEO

Paul Bang Zhang - SVP, CFO

Ryan Shi - IR Manager

Analysts

Operator

Hello and thank you for standing by for Mecox Lane’s Third 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’ll now turn the call over to your host for today’s conference, Mr. Ryan Shi, Mecox Lane’s Investor Relations Manager.

Ryan Shi

Hello, everyone, and thank you for joining us today for Mecox Lane’s third quarter earnings conference call. The Company’s earnings results were released earlier today and are 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 discuss our financial results. After their prepared remarks, they 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.

The Company’s earnings release and this call includes a discussion of some unaudited 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 the unaudited 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 IR website at ir@mecoxlane.com.

I’ll now turn the call over to our CEO, Alfred. Alfred, please go ahead.

Alfred Beichun Gu

Hello and thank you for joining us. In the third quarter, we move forward as a brand oriented, multi-channel retailer. Overall, we have remained prudent in our spending and careful in management of our costs. That approach helped to narrow our net loss in the third quarter and also reduce our operating cash flow outflow significantly compared with the last several quarters.

e-commerce remains a key element of our overall strategy. Our e-commerce revenue declined in the third quarter, which again reflected the re-launch of our M18.com of the brand-neutral and open platform by our JV Giosis Mecoxlane. That decrease in revenue was partially offset by an increase in our sales, our independent e-commerce platform such as TMall.com and VIPshop. And our self on such third-party platforms are becoming a major portion of our e-commerce revenues. We are encouraged by this steady results and momentum we’re seeing in this area and are exploring ways to maximize our returns in this regard.

Our call center business continued to be stable in the third quarter. We will continue to work on the settlement to maintain its current trend with respect to revenue and margin. We saw average store sales growth in our directly operated stores and we also opened some new directly operated stores. And our franchises close some of their stores in the third quarter to offset our total retail revenue growth. In the coming quarters, we will focus our operating and opening more directly operated stores for this channel.

We will continue to monitor our results closely as we seek to optimize our multi-channel retail model. At this stage, we will not provide a timeline for when we expect to achieve profitability as we continue to fine tune our business model and evaluate our margins and inventory management. However, we believe that our cash flow position and operating margin will be further improved by remaining prudent in our spending and careful in management of our costs.

Lastly, we know that in our earnings release, Paul Zhang, our Chief Financial Officer will leave Mecox Lane at the end of this year due to personal reasons. Our Vice President of Finance, [ph] Michael Lu will serve as acting CFO. I want to thank Paul for his tireless leadership and dedication. Our entire team wishes him the best in his future endeavors.

I will now turn the call to Paul, who will discuss our financial results for the quarter in great details.

Paul Bang Zhang

Thank you, Alfred and hello everyone. I’ll now walk you through the Company’s third quarter results. In the third quarter, total net revenue was $21.4 million, down 40.5% from $36 million in the third quarter of 2012. The decrease was primarily due to a drop in net revenue from our e-commerce channel as well as a decrease in net revenues from our critical stores.

Net revenues from our e-commerce channel were $5.1 million in the third quarter, a decrease of 70.2% from $17.2 million in the third quarter of 2012. The decrease was primarily attributed to a decrease in our sales on M18.com since the site was re-launched as a brand-neutral by Giosis Mecoxlane.

Net revenues from our call center were $10.8 million in the third quarter, a decrease of 1.6% from $11 million in the third quarter of 2012. The decrease was primarily due to a decline in orders placed through the call center as a result of discontinuation of our catalog circulation at the beginning of this year.

Net revenues from directly operated stores were $3.4 million in the third quarter, representing a decrease of 12.3% from $3.8 million in the third quarter of 2012. The decrease was primarily due to the decline in number of directly operated stores from an average of 85 stores in the third quarter of 2012 to an average of 58 stores in the third quarter of this year, partially offset by an increase in average store sales.

Net revenues from our franchised stores were $2.1 million in the third quarter, a decrease of 47.2% from$4.0 million in the third quarter of 2012. The decrease in net revenues was primarily due to the decline in average store sales and the decline in the number of franchised stores from an average of 265 stores in the third quarter of 2012 to an average of 217 stores in the third quarter of this year.

Cost of goods sold, which excludes amortization and depreciation expenses was $11.9 million in the third quarter, a decrease of 47.9% from $22.9 million in the third quarter of 2012. The decrease was in line with the overall decrease in revenues.

Gross profit was $9.5 million in the third quarter, a decrease of 27.6% from $13.1 million in the third quarter of 2012. Gross margin was 44.3%, compared to 36.4% in the third quarter of 2012. The increase in gross margin was mainly due to our improved management of inventory turnover across our e-commerce channels, along with an increase in the weighting of our call center in total net revenues, which generated a higher margin than that of other segments. The increase in gross margin was partially offset by an inventory provision of $0.7 million recorded in the third quarter of -- for our physical stores as we tested new store models, along with new brands and products.

Total operating expenses were $13.3 million in the third quarter, a decrease of 31.9% from $19.6 million in the year-ago period, primarily due to the decrease of selling, general and administrative expenses in the period.

SG&A expenses were $11.9 million in the third quarter, representing a decrease of 36.7% from $18.8 million in the year-ago period, primarily due to a decrease in headcount and the related labor costs, and a shift to our joint venture Giosis Mecoxlane, of advertising costs and IT expenses associated with the day to day operation of M18.com.

Loss of operations was $3.9 million in the third quarter compared to a loss of $6.5 million in the year-ago period. Loss from equity in our affiliate, specifically Giosis Mecoxlane, was $1.4 million in the third quarter compared to zero in the year-ago period.

Net loss was $5 million in the third quarter, compared to net loss of $6.1 million in the year-ago period. Non-GAAP net loss which excludes share-based compensation was $3.9 million in the third quarter compared to non-GAAP net loss of $5.8 million in the year-ago period. Also excluding share-based compensation, basic and diluted loss per American depositary share attributable to Mecox Lane shareholders was $0.41 in the third quarter. One ADS represents 35 ordinary shares.

Cash and cash equivalents as of September 30 of this year, totaled $6.4 million, compared to $13.3 million as of December 31, 2012. Short-term investments as of September 30 of this year were $12.8 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 September 30th of this year was $1.6 million, compared to zero as of December 31, 2012.

Turning to our financial outlook. We will remain prudent in our cash flow and continue to focus on improving efficiency for the remainder of the year. In the fourth quarter we expect a decrease in net revenue of approximately one-half on a year-over-year basis. Please note that these estimates are the Company’s preliminary view and are subject to change.

This concludes our prepared remarks. We will now open the calls to questions. Operator?

Question-and-Answer Session

The question-and-answer session of this conference call starts in a moment. (Operator Instructions) We have no questions at this time. And we’re now approaching the end of the conference call. I’ll now turn the call over to Mecox Lane’s Investor Relations Manager, Mr. Ryan Shi for his closing remarks.

Ryan Shi

Thank you again for joining us. This concludes the Company’s earnings call. Good day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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