SOKO Fitness & Spa Group Reports Second Quarter Fiscal 2011 Financial Results

HARBIN, China, Jan. 14, 2011 /PRNewswire-Asia-FirstCall/ -- SOKO Fitness & Spa Group, Inc. (OTC Bulletin Board: SOKF) ("SOKO"), an operator of fitness centers and beauty salons and spas in Northeast China as well as Beijing, today announced its financial results for the second quarter and first six months of fiscal 2011, ended November 30, 2010.

Second Quarter Financial Highlights:

• Revenue totaled $9.8 million, an increase of 32% over $7.4 million year-over-year.

• Gross profit increased 29% to $6.6 million, compared with $5.2 million, in the same period a year ago. Gross margin was 67.6% for the second quarter of fiscal 2011, compared with 69.5% for the second quarter of fiscal 2010, and 66.1% for the first quarter of fiscal 2011. The decline in gross margin was related to increased promotional activity in the second quarter of fiscal 2010, which contributed to increased sales of higher-margin services.

• Net income attributable to SOKO improved by 2% year-over-year to $3.3 million, or $0.15 per diluted share, compared with $3.2 million, or $0.17 per diluted share in the same period a year ago. Net income for the second quarter of fiscal 2010 included the abovementioned increase in sales of higher-margin services.

• SOKO increased total fitness club members 54% year-over-year and 11% sequentially to approximately 22,900 and beauty salon and spa clients 27% year-over-year and 11% sequentially to approximately 25,320.

• Cash and cash equivalents was $15.0 million as of November 30, 2010, a decrease of $9.5 million over August 31, 2010.  The sequential decrease in cash and cash equivalents was related to increased investment in new facility openings, consistent with SOKO's growth strategy.

• SOKO has narrowed its expected revenue range to $39-$42 million for fiscal 2011, ending May 31, 2011.  This represents an increase of approximately 30–40% compared with fiscal 2010.

Second Quarter and Recent Business Highlights:

• Expanded presence in Northeastern China and Beijing through the opening of four new facilities, including its first facility operated under a management agreement in the new market of Dalian, Liaoning Province.

• Continued aggressive expansion initiatives, with nine facilities under construction or engaged in pre-opening activities; SOKO remains on-track to add up to 16 new facilities in fiscal 2011 through new construction, acquisition or operation under management agreements.

"We achieved record quarterly sales and net income based on the strength of our offering and the successful and continued implementation of our growth strategy to increase our member and client base, as well as our aggressive facility opening efforts," said Tong Liu, Chief Executive Officer of SOKO. "In addition to our new members, clients and centers, our renewal rates remain strong due to the high level of service we provide our customers. We continue to invest in the growth of our business through ongoing expansion in our traditional markets of Harbin and Shenyang, while taking steps to establish SOKO's presence in new strategic markets where we believe we can quickly build our brand and develop profitable facilities. In conjunction with the opening of new facilities, which we believe will give us exposure to a growing base of potential customers, we are constantly working to improve the level of service we provide to fitness center members and spa and salon clients."

"In addition to growing SOKO's presence in our core markets and expanding our geographic footprint with entry into Dalian, we extended our business model through the initiation of our first facility management agreement for our fitness center in Dalian. Under this agreement, we will operate the minority-owned facility and receive a percentage of the center's pre-tax sales, maintaining an option to acquire full ownership after two years of operation.  We believe this approach will provide us with an effective, lower-risk way to enter new markets as it grants us the ability to acquire complete control of a facility without incurring the significant upfront capital costs typically associated with the launch of a new fitness center, spa or salon. Of our 16 new facilities planned for fiscal 2011, we expect that at least five will operate under this new model."

Second Fiscal Quarter Financial Summary

Total revenue for the three months ended November 30, 2010 was $9.8 million, an increase of 32%, compared with revenue of $7.4 million for the three months ended November 30, 2009. The increase in revenue was primarily attributable to the growth in the number of members and clients at SOKO's facilities.

During the three months ended November 30, 2010, spa and beauty services and products, including beauty school tuition, accounted for 80.1% of revenue, with fitness centers accounting for 19.9% of revenue for the quarter. SOKO expects its revenue mix to remain relatively stable in future periods.

Gross profit for the three months ended November 30, 2010 was $6.6 million, compared with $5.2 million for the three months ended November 30, 2009. The increase in gross profit was related to the increase in the number of members and clients through new facility openings, organic growth at existing facilities and the introduction of value added products and services. Overall gross profit margin was 67.6% for the three months ended November 30, 2010, compared with 69.5% in the year-ago period. The year-over-year decline in gross margin was primarily related to increased promotional activity in the second quarter of fiscal 2010, which contributed to increased sales of higher-margin services.

Selling, general and administrative expenses for the three months ended November 30, 2010 was $3.4 million, compared with $2.0 million for the three months ended November 30, 2009. The increase in SG&A expense was mainly attributable to increased amortization of leasehold improvement, increased rental expenses and expenses related to new facility openings, as well as expenses directly related to the increase in sales over previous periods. SOKO expects that its SG&A will continue to fluctuate from quarter to quarter, based on the level of facility opening and construction activity.

Net income attributable to SOKO Fitness & Spa Group, Inc. for three months ended November 30, 2010 increased 2% year-over-year to $3.3 million, or $0.15 per diluted share, based on 21.7 million weighted average diluted shares outstanding. This compares with $3.2 million, or $0.17 per diluted share, based on 18.2 million weighted average diluted shares outstanding, for the same period a year ago. Net income for the second quarter of fiscal 2010 included increases in sales of newly introduced, higher margin services, which were driven by increased promotional activity.

As of November 30, 2010, SOKO had cash and cash equivalents of $15.0 million compared with $18.1 million on May 31, 2010 and $24.5 million on August 31, 2010. The sequential-quarter decrease in cash and cash equivalents was related to increased investment in new facilities.

Fiscal 2011 Guidance:

SOKO is narrowing its gross revenue guidance for fiscal year 2011. Revenue for the fiscal year is expected to range from $39 million to $42 million, which if achieved, would represent year-over-year growth of approximately 30-40%.  SOKO expects its revenue growth to be driven by a combination of new facility openings, an increase in the number of members and clients at its existing fitness and spa facilities and an increase in average revenue per customer.

During fiscal 2011, SOKO plans to open up to 16 new or acquired facilities.  SOKO expects that these new facilities will be predominately wholly or majority owned by SOKO, and several will be minority owned and operated under a management agreement by SOKO with an option to purchase controlling equity interest at a later time.  Some of the new facilities are expected to be in SOKO's core markets of Heilongjiang and Liaoning Provinces where Harbin and Shenyang are located, respectively.  SOKO expects that capital expenditures associated with these facilities will be fully funded from cash on hand and operating cash flow.  

Through the first half of fiscal 2011, SOKO has opened or commenced operation of four new facilities with nine additional facilities under construction or engaged in pre-opening activities.

By the end of fiscal 2011, SOKO expects its customer base to increase to 24,000 fitness center members and 27,000 spa and beauty clients. This compares with 18,000 fitness center members and 21,000 spa and beauty clients at the end of fiscal 2010. As of November 30, 2010, SOKO had approximately 22,900 fitness club members, and approximately 25,320 beauty salon and spa clients.

Mr. Liu added, "We continued to execute on our strategic and operational objectives, while taking steps to position SOKO for greater operational and financial achievements during the second half of fiscal 2011. Our business development efforts have remained aggressive. We are expanding in both our core markets and entering new, strategically targeted cities. We operate in an industry characterized by favorable demographic trends, and we are confident that we can carry out our growth initiatives to increase our customer base, capture market share and build additional shareholder value."

SOKO currently operates 24 facilities in Northeastern China and Beijing, including 13 beauty salons and spas, one non-surgical medical beauty center, nine fitness centers and yoga studios and one beauty school. 17 of these facilities are wholly owned, six are majority owned, and one is minority owned and operated by SOKO under a management agreement.

Conference Call

SOKO will host a conference call for interested investors and analysts to discuss its financial results for the period on Friday, January 14, 2011, at 8:00 a.m. Eastern time. To participate in the conference call, please dial 1-877-941-2069 from the U.S. and Canada, or 1-480-629-9713 for international callers.

An audio replay will also be available approximately one hour after the conclusion of the call and will be made available through January 28, 2011. The audio replay can be accessed by dialing 1-800-406-7325 from the U.S or Canada, or 1-303-590-3030 internationally, and entering access ID Number 4400985.

About SOKO Fitness & Spa Group, Inc.

SOKO Fitness & Spa Group, Inc., an OTCBB listed company (SOKF), is an operator of fitness centers and beauty salons and spas in key cities in Northeastern China as well as Beijing. SOKO provides programs, services, and products combined with exercise, education and nutrition to help their members lead a healthy life and achieve their fitness goals. For further information, please go to http://www.sokofitness.com.

To be added to SOKO's email distribution for future news releases, please send your request to [email protected].

Cautionary Note Regarding Forward Looking Statements

This press release and the statements of representatives of SOKO Fitness & Spa Group, Inc. (the "Company") related thereto contain, or may contain, statements that are not historical facts and are therefore "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements involve significant risks and uncertainties. Such statements may include, without limitation, statements with respect to the Company's plans, objectives, projections, beliefs, expectations and intentions and other statements identified by words such as "guidance," "projects," "may," "could," "would," "should," "believe," "expect," "anticipate," "estimate," "intend," "plan," or similar expressions. These statements are based upon the current beliefs and expectations of the Company's management and are subject to significant risks and uncertainties, including those detailed in the Company's filings with the Securities and Exchange Commission. Actual results, including, without limitation, future financial results and results regarding the Company's expansion strategies, service offerings, client, membership and customer figures, proposed new center openings and prospects and strategies for growth, may differ significantly from those set forth in the forward-looking statements.  These forward-looking statements involve certain risks and uncertainties that are subject to change based on various factors (many of which are beyond the Company's control).  The Company does not undertake any obligation to update any forward- looking statement, except as required under applicable law.

SOURCE Soko Fitness & Spa Group, Inc.

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