QKL Stores' (QKLS) CEO Zhuangyi Wang on Q2 2014 Results - Earnings Call Transcript

Aug.15.14 | About: QKL Stores (QKLS)

QKL Stores Inc (NASDAQ:QKLS)

Q2 2014 Earnings Conference Call

August 14, 2014 08:30 AM ET

Executives

Mike Li - IR

Zhuangyi Wang - Chairman and CEO

Jerry Chan - CFO

Analysts

Operator

Good morning and welcome to the QKL Stores Second Quarter 2014 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’ second quarter 2014 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 Officer.

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 period to differ materially from the forecast of their and expected results. Those risks include, among other things, a 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 our Company’s filings with the SEC.

Mr. Wang and Mr. Li will discuss the highlights of the Company’s business during the second 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

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

We continue just to make meaningful progress with our store promotion activity in the second quarter.

We believe our in-store promotional efforts are attracting a growing number of shoppers and we’ll continue to expand our initiative to further expand our customer base.

Now we have 46 stores and that is 26 supermarkets and 16 hypermarkets and 4 department stores.

We opened two stores in the first two quarter, opened one store in the third quarter and translate time to open additional two new locations for the remainder of the year.

We will open these new stores within our cooperating area around the Daqing City or in the locations in which we currently operate. This expansion direction will be our long-term strategy.

We also will continue to focus on improving the performance of our stores from optimizing our product assortment, consolidating labor expenses and further reducing operating costs where possible.

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

We continue to benefit from a strong overall balance sheet. Our cash balance remained healthy. We will preserve our cash to focus primarily on new store openings and store remodel activity.

We remain focused on viewing our large regional footprint of highly efficient profitable supermarket, hypermarket locations, and remain very encouraged with our opportunities ahead.

At this time, I’d like to turn the call over to our Mr. Mike Li and Mr. Jerry Chan, who will discuss the Company’s second quarter operation results and financial highlights with you.

Mike Li

Thank you, Zhuang, and thank you everyone for joining our call today. The second quarter was a period in which we focused on cost control of the business while also improving efficiency at the same time.

As part of this effort, we remain highly focused on showing solid revenue and margin performance within our existing store as well as the new locations. Looking first at our existing stores, our same store sales were approximately $49.6 million in the second quarter of 2014, and that is a decrease of 7.1% from $53.4 million in the second quarter of 2013.

This reflected as a decrease of 44 comparable stores, because of the impact of economy control and the insufficient domestic demand, the retailing business is facing rising cost and diverging effect from growing eCommerce channel. Mainly retailers’ revenue decreased and profitability declined. It is difficult to achieve our fundamental improvement in the consumer purchasing power in these two years. But China’s third and fourth tier city urbanization going forward, the domestic need will be driven by a large number of people with middle income.

Furthermore, the anti-corruption move stopped the government purchase, which was big part of sales during the festival and holiday before. It provided bad impact to our business especially in the area of key and high starch-based tobacco and wine.

As of June 30, 2014, we operate 26 supermarkets, 16 hypermarkets and 4 departmental stores. The average size of our supermarket approximately 2100 square meters in sales area, while our hypermarket typically average approximately 4700 square meters in sales area. The performance of our existing store opened for more than a year continued to show stable growth profit margin of 17%, which helps support the ramp up period of our newer stores, which typically take longer to reach profitability. Many of residents located near our newly opened stores take longer for them to understand the modern grocery store format while our average sales per square meter are lower compared to our mature stores. As we execute our new store marketing initiative, we are confident that our store will be likely understood and accepted by the local consumer overtime.

We continue focus on controlling our cost in all the areas of our business. As part of that effort, we monitor the performance of each our locations to evaluate any room for improvement. Any stores that do not meet the certain performance benchmark over period of time will be closed.

We will try to -- we're still closely watching two to three stores if these stores cannot match our expectation, we will close them in the future. As it relates to our future stores opening plan, we opened one stores in Daqing in the third quarter and we plan to open another two stores in Daqing City this year. These two stores will be in a mature market in Daqing City which residents well understand the concept of modern grocery stores.

As QKL expands its market presence in northeast of China, we are uniquely positioned against our local competitors through our large in-store products offering, strong supplier relationships, efficient distribution network and state-of-the-art IT system. We are comfortable with our opportunities in the second half of the year and believe we'll see an improvement in operating expenses and profit growth from the current quarter.

For the remaining two quarters of 2014, we believe our gross margin will be stable in the range of 16.8 and 17.3 ranges. Operating expenses as a percent of the revenue will be in 15 to 16 range.

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 for the second quarter.

Jerry Chan

Thank you, Mike. Our net sales decreased by $7.3 million or 12.4% to $51.7 million for the second quarter from $59.0 million for the comparable quarter in 2013. Same stores representing 44 stores, generate $49.6 million in sales in the second quarter of 2013, a decrease of 7.1% compared with the next half in the second quarter of 2013. New store sales increased, reflecting the opening of two new stores since January 1, 2013. They generated approximately $2.1 million in sales in the second quarter of 2014.

Gross profit decreased by $1.4 million or 14.3% to $8.7 million or 16.8% of net sales in the second quarter of 2014 from $10.1 million or 17.2% of net sales in the second quarter of 2013. The change in gross profit was primarily attributable to a decrease in net sales of $7.3 million in the second quarter of 2014 compared to the second quarter of 2013.

Selling expenses decreased by $0.4 million or 4.3% to $9.5 million or 18.3% of net sales in the second quarter of 2014 to $9.9 million or 16.7% of net sales in the second quarter of 2013. The increase in selling expenses relative to net sales was due to the significant decrease in net sales in the second quarter.

General and administrative expenses decreased by $0.1 million or 5.6% to $2 million or 3.8% of net sales in the second quarter of 2014 from $2.1 million or 3.5% of net sales in the second quarter of 2013. There is no significant change to our general and administrative expense.

Our net loss for the second quarter of 2014 was $3.8 million or $2.47 per diluted share from net loss of $1.5 million or $0.96 per diluted share in the prior year period. The number of shares used in the computation of diluted EPS was about $1.5 million for the second quarter of 2014 and 2013.

We have cash on hand of $47.2 million as of June 30, 2014 and we expect capital expenditure for the remainder of 2014, [indiscernible] opening of new stores, store related remodeling and relocation.

With 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) This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Mike Li for any closing remarks.

Mike Li

Thank you all for participating on today’s conference call. We’re looking forward to provide you with additional updates on our business in the weeks and months ahead. Thank you again.

Operator

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

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