Zuoan Fashion Limited Announces Second Quarter 2014 Financial Results

SHANGHAI, Oct 9, 2014 /PRNewswire/ -- Zuoan Fashion Limited (NYSE: ZA) ("Zuoan" or the "Company"), a leading design-driven fashion casual menswear company in China, today announced its financial results for the second quarter ended June 30, 2014.

Second Quarter 2014 Financial Highlights

• Revenues in the second quarter of 2014 were RMB245.7 million ($39.6 million), a decrease of 22.6% from RMB317.6 million in the same quarter of 2013.
• Gross profit in the second quarter decreased 47.4% year over year to RMB73.8 million ($11.9 million) from RMB140.1 million in the same quarter of 2013. 
• Gross margin was 30.0% compared with 44.1% in the prior year period and 39.9% in the first quarter of 2014.    
• Net loss was RMB2.3 million ($372,000) compared with net income of RMB67.6 million in the same quarter of 2013.
• Diluted loss per ordinary share was RMB0.02 ($0.003) in the second quarter, equivalent to RMB0.08 ($0.01) per ADS, compared to diluted earnings per ordinary share of RMB0.61 ($0.10) or RMB2.43 ($0.39) per ADS in the second quarter of 2013.

James Hong, Founder, Chairman and Chief Executive Officer, commented, "As general economic conditions remain weak, our target customers continued their cautious spending patterns resulting in higher inventories at the distributor and sub-distributor levels. We continued to decrease our wholesale prices and retail prices as well. We also increased our advertising and store renovation costs to reinforce our brand image and market share. Together, these efforts negatively impacted our revenue and profit margin in the quarter, however, we believe such adjustments will help ensure our long term growth and will benefit Zuoan as market conditions improve."

"Looking to the second half of 2014, we will adhere to our strategy of improving product design and quality, prudently invest in store renovation and advertising initiatives, and reduce our inventory at the store level and through our online initiatives. These actions are expected to strengthen our customer base and drive higher sales and profits over time," concluded Mr. Hong.

Second Quarter 2014 Financial Performance

Revenue for the second quarter of 2014 was RMB245.7 million ($39.6 million), representing a decrease of 22.6% from RMB317.6 million in the same quarter of 2013. The decrease was primarily driven by lower wholesale prices offered to the Company's distributors as well as reduced pricing at the retail level due to a slower economic environment in China. During the quarter, distributor sales decreased by 22.1% to RMB243.7 million from RMB312.8 million in the same quarter of 2013. Second quarter 2014 self-operated direct store sales were RMB2.0 million, compared to RMB4.7 million in the same quarter of 2013. A net total of 161 distributor and sub-distributor stores and one self-operated direct store were closed in the second quarter of 2014, resulting in a total of 925 store locations as of June 30, 2014 compared to 1,383 store locations in the same period of the prior year. 

Cost of sales decreased by 3.1% to RMB171.9 million ($27.7 million) in the second quarter of 2014 from RMB177.4 million in the same quarter of 2013, primarily due to the slightly lower sales volume.  As a percentage of revenues, cost of sales increased to 70.0% in the second quarter of 2014 from 55.9% in the same quarter of 2013.

Gross profit decreased by 47.4% to RMB73.8 million ($11.9 million) from RMB140.1 million in the second quarter of 2013. Second quarter 2014 gross margin was 30.0% compared with 44.1% in the same quarter of 2013. The decrease in gross margin was primarily due to lower wholesale pricing from 35% to 33% offered to the Company's distributors as well as decreased pricing at the retail level. Gross margin at the Company's direct stores and distributor stores were 41.9% and 29.9%, respectively.

Selling and distribution expenses in the second quarter were RMB59.6 million ($9.6 million), or 24.3% of revenue, compared to RMB31.1 million, or 9.8% of revenue in the same quarter of 2013.  The percentage increase was primarily due to advertising expenses incurred for the marketing activities and sales promotions in the second quarter of 2014 as well as an increase in renovation costs.

Administrative expenses in the second quarter were RMB14.1 million ($2.3 million), or 5.8% of revenue, compared with RMB15.3 million, 4.8% of revenue in the same quarter of 2013.

Effective tax rate in the second quarter was 10.9% compared to 26.0% in the same quarter of 2013. The lower effective tax rate stems from an operating loss from the investment holding companies and SH Mingfu, one of the Company's PRC subsidiaries.

Net loss for the second quarter was RMB2.3 million ($372,000) compared to RMB67.6 million in the same quarter of 2013. 

Diluted loss per ordinary share were RMB0.02 ($0.003) in the second quarter of 2014, equivalent to RMB0.08 ($0.01) per ADS, compared to diluted earnings per ordinary share RMB0.61 ($0.10) or RMB2.43 ($0.39) per ADS in the second quarter of 2013. The Company's diluted number of shares outstanding was 111.3 million in the second quarter ended June 30, 2014.

As of June 30, 2014, the Company had cash, cash equivalents of RMB1,364.7 million ($220.0 million), compared to RMB1,227.4 million as of December 31, 2013.  Net cash provided by operating activities was RMB181.9 million ($29.3 million) in the six months ended June 30, 2014, compared to RMB278.3 million in the prior year period.

Financial Outlook

For the third quarter of 2014, the Company currently anticipates revenue in the range of RMB290-RMB310 million ($46.7-$50.0 million), gross margin of approximately 28-30%, net loss of approximately RMB11.7-RMB12.3 million ($1.9-$2.0 million) and basic and fully diluted loss per share of approximately RMB0.11 ($0.02) - RMB0.11 ($0.02), equivalent to RMB0.42 ($0.07) - RMB0.44 ($0.07) per ADS.

Conference Call Information

Zuoan's management will host an earnings conference call on October 9, 2014 at 8:30 a.m. U.S. Eastern Time. Listeners may access the call by dialing # 1-719-325-2469. A webcast will also be available via http://public.viavid.com/index.php?id=111216. A replay of the call will be available through October 16, 2014. Listeners may access the replay by dialing #1-858-384-5517, access code: 6575501.

Exchange Rate

This announcement contains translations of certain Renminbi amounts into U.S. dollars at specified rates solely for the convenience of readers. Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the exchange rate of RMB 6.2036 to US$1.00, as set forth in the H.10 statistical release of the Federal Reserve Board on June 30, 2014.

About Zuoan Fashion Limited

Zuoan Fashion Limited is a leading design-driven fashion casual menswear company in China, and is head-quartered in Shanghai. Zuoan offers a wide range of products, including men's casual apparel, footwear and lifestyle accessories, primarily targeting urban males between the ages of 20 and 40 who prefer stylish clothing that represents a sophisticated lifestyle. Through extensive networks of distributors and retail stores, Zuoan sells its products in 925 stores located in China as of June 30, 2014.

Safe Harbor

This news release may contain forward-looking information about Zuoan Fashion Limited, which is covered under the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts. These statements can be identified by the use of forward- looking terminology such as believe, expect, may, will, should, project, plan, seek, intend, or anticipate or the negative thereof or comparable terminology, and include discussions of strategy, and statements about industry trends and Zuoan Fashion Limited's future performance, operations, and products.

Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Actual performance results may vary significantly from expectations and projections. Further information regarding this and other risk factors are contained in Zuoan's public filings with the U.S. Securities and Exchange Commission.

All information provided in this news release and in any attachments is as of the date of the release, and the companies do not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law.

SOURCE Zuoan Fashion Limited