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Mecox Lane Limited (NASDAQ:MCOX)

Q4 2013 Earnings Conference Call

March 04, 2014 08:00 PM ET

Executives

Ryan Shi – Director-Investor Relations

Alfred Beichun Gu – Chief Executive Officer

Michael Gui Sheng Liu – Vice President-Finance and Acting Chief Financial Officer

Operator

Hello and thank you for standing by for Mecox Lane’s Fourth Quarter and Full Year 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, Director.

Ryan Shi

Hello, everyone, and thank you for joining us today. The Company’s fourth quarter and full year 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 business operations; and Michael Liu, our Vice President of Finance, who will discuss our financial results. After their prepared remarks, Alfred and Michael 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 these 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 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 a presentation related to our results are available on Mecox Lane’s IR website at irmecoxlane.com.

I will now turn the call over to our CEO, Alfred Gu. Please go ahead, Alfred.

Alfred Beichun Gu

Thank you Ryan, and thank you to everyone for joining the call. Our revenues continued to be negatively impacted by the combination effect of China’s overall economic downturn and various competitive challenges we faced, along with the transformation of the M18.com website as a non-exclusive, multi-channel platform operated by our joint venture.

That being the case, we will remain prudent in our cost management and cash expenditure and will make efforts to improve our overall operational efficiency and inventory management to maintain proper inventory levels.

As we announced by press release in January and as noted in our Q4 earnings release, Cnshangquan E-Commerce, a Nanjing-based provider of integrated marketing platform for business and the consumers, has agreed to purchase approximately 63% of Mecox Lane issued and outstanding ordinary shares in the private transaction for our certain existing shareholders including entity wholly-owned by myself. The share purchase and sale transactions are expected to be closed in the second quarter of this year, subject to the satisfaction of customary closing conditions in the share purchase agreement, including certain PRC government approvals.

Obviously, the transaction contemplated by the share purchase agreement will result in a change in the ownership and control of the company upon confirmation and we will provide specific update regarding Directors and Management and other matters after the closing of this transaction occurs and the company is aware of such specific arrangement.

From now, we and our management team will continue making our effort to build-up our multi-brand and multi-channel retailer provision and carefully manage our comps.

I’ll turn the call over to our acting CFO, Michael Liu who will discuss our financial results. Michael, please.

Michael Gui Sheng Liu

Thank you, Alfred. I would now like to walk you through our first quarter and full year 2013 financial results.

In the first quarter, total net revenues were $23.2 million, representing a decrease of 41.4% year-over-year. Total net revenues for the full year 2013 were $87.4 [ph] million representing a decrease of 42.4% year-over-year. Net revenues from our e-commerce channel were $4.5 million in the first quarter of 2013, a decrease of 74.8% from $17.9 million in the first quarter of 2012.

Net revenues from our e-commerce channel were $22.0 million for a full year 2013, a decrease of 69.3% from $71.8 million for the full year 2012; the decrease was primarily attributed to a decrease in our sales on M18.com, which was re-launched as a brand-neutral open platform operated by our joint venture, Giosis Mecoxlane. In January of 2013, the decrease in net revenues was partially offset by an increase in our sales of independent e-commerce platforms including TMall.com and VIPshop.

Net revenues from the call center were $10.7 million in the fourth quarter of 2013, a decrease of 10.7% from $14.5 million in the fourth quarter of 2012. Net revenues from the call center were $43.7 million for the full year 2013, a decrease of 9.0% from $48.0 million for the full year 2012; the decrease was primarily attributed to a decline in orders placed through the call center as a result of the discontinuation of our print catalog in the first quarter of 2013.

Net revenues from directly operated stores were $4.7 million in the fourth quarter of 2013, an increase of 28% from $3.7 million in the fourth quarter of 2012. The increase was primarily due to an increase in average store sales, partially offset by a decrease in the number of directly operated stores from an average of 62 stores in the fourth quarter of 2012 to an average of 58 stores in the fourth quarter of 2013.

Net revenues from directly operated stores were $14.2 million for the full year 2013, representing a decrease of 17.9% from $17.3 million for the full year 2012. The decrease was primarily due to a decline in the number of directly operated stores from an average of 91 stores in 2012 to an average of 60 stores in 2013, partially offset by an increase in average store sales.

Net revenues from franchised stores were $1.4 million in the fourth quarter of 2013, a decrease of 61.8% from $3.6 million in the fourth quarter of 2012. The decrease in net revenues was primarily due to a decline in average store sales and a decrease in the number of franchised stores from an average of 261.1 stores in the fourth quarter of 2012 to an average of 181 stores in the fourth quarter of 2013.

Net revenues from franchised stores were $7.5 million for the full year 2013, a decrease of 49.1% from $14.7 million for the full year 2012. The decrease was primarily due to the decline in average store sales and the decline in the number of franchised stores from an average of 266 stores in 2012 to an average of 230 stores in 2013.

Cost of goods sold, which excludes amortization and depreciation expenses was $14.2 million in the fourth quarter of 2013, a decrease of 45.4% from $26.0 million in the fourth quarter of 2012. Cost of goods sold for the full year 2013 was a $52.7 million, a decrease of 45.9% from $97.5 million for the full year 2012. The decreases were consistent with the overall decline in revenues.

Gross profit was $9.1 million in the fourth quarter of 2013, a decrease of 33.9% from $13.7 million in the fourth quarter of 2012. Gross margin was 38.9% in the fourth quarter of 2013 compared to 34.5% in the fourth quarter of 2012.

Gross profit or the full year 2013 was $34.7 million, a decrease of $36.1% from $54.3 million for the full year 2012. Gross margin was 39.7% for the full year 2013, compared to 35.8% for the full year 2012; the increase in gross margin for both fourth quarter and full year was mainly due to an increase in the weighting of the call center in total net revenues, which generated a higher margin than that of other segments; the increase in gross margin for the fourth quarter was partially offset by an inventory write-down of $1.2 million recorded in the fourth quarter of directly operated stores as the Company tested new store models, along with new brands and products.

Total operating expenses were $18.7 million in the fourth quarter of 2013, a decrease of 13.7% from $21.7 million in the fourth quarter of 2012. Total operating expenses were $57.5 million for the full year 2013, a decrease of 26.9% from $78.7 million for the full year 2012.

Selling, general, and administrative expenses were $17.6million in the fourth quarter of 2013, a decrease of 14.3% from $20.5 million in the fourth quarter of 2012. SG&A expenses were $58.8 million or the full year 2013, a decrease of 23.0% from $76.3 million for the full year 2012; the decreases in SG&A expenses for both fourth quarter and the full year were primarily due to a decrease in headcount and related labor costs and a shift to Giosis Mecoxlane of advertising costs and IT expenses associated with the operation of M18.com.

SG&A expenses for the first quarter also include an impairment charge of $3.3 million recorded in the fourth quarter of 2013 related to the contemplated sale of our logistics center, the specific terms and conditions of which will be subjected to the execution of definitive agreements with the potential buyer. In connection with such contemplated sale, the reclassified the logistics center to assets held for sale as of December 31, 2013.

Loss from operations was $9.6 million in the fourth quarter of 2013 compared to loss from operations of $8.0 million in the fourth quarter of 2012. Loss from operations for full year 2013 was $22.8 million compared to loss from operations of $24.4 million for the full year 2012.

Loss from equity in an affiliate, specifically Giosis Mecoxlane was $2.0 million in the fourth quarter of 2013 compared to nil in the fourth quarter of 2012. Loss from equity in an affiliate, also specifically Giosis Mecoxlane was $5.5 million for the full year 2013 compared to nil for the full year 2012.

Net loss was $11.2 million in the fourth quarter of 2013 compared to net loss of $7.1 million in the fourth quarter of 2012. Non-GAAP net loss, which excludes share-based compensation was $10.2 million in the fourth quarter of 2013 compared to non-GAAP net loss of $6.7 million in the fourth quarter of 2012, also excluding share-based compensation. Basic and diluted loss per American Depositary Share or ADS attributable to Mecox Lane shareholders was $0.90 in the fourth quarter of 2013. One ADS represents 35 ordinary shares.

Net loss was $26.6 million for the full year 2013 compared to net loss of $22.4 million for the full year 2012. Non-GAAP net loss was $22.4 million for the full year 2013 compared to non-GAAP net loss of $20.3 million for the full year 2012. Basic and diluted loss per ADS attributable to Mecox Lane shareholders was $2.23 for the full year 2013. Again one ADS represents 35 ordinary shares.

Cash and cash equivalents as of December 31, 2013, totaled $15.7 million, compared to $13.3 million as of December 31, 2012 and $6.4 million as of September 30, 2013. Short-term investments on December 31, 2013 were nil, compared to $20.7 million as of December 31, 2012, all of which were structured term bank deposits.

Now turning to our financial outlook. For our first quarter of this year, we expect a decrease in net revenues of approximately 10% on a year-over-year basis. Please note that the about estimates are our preliminary view and are subject to change.

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

Question-and-Answer Session

Operator

Thank you. The question-and-answer session of this conference call will start in a moment (Operator Instructions). We’re now approaching the end of the conference call. I will now turn the call over to Mecox Lane’s Investor Relations Director, Mr. Ryan Shi for his closing remarks.

Ryan Shi

Thank you again for joining us today. Please don’t hesitate to contact with any follow-up question. 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 bye.

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