Ever-Glory International Group, Inc.
Q3 2016 Earnings Call Transcript

Published: 14 Nov 2016

[Operator:]

Good day and welcome to the Ever-Glory International Group’s Third Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Wilson Bow of Ever-Glory International Group. Please go ahead.

[Wilson Bow:]

Thank you, operator. Hello, everyone, and welcome to Ever-Glory International Group’s third quarter 2016 earnings conference call. The company distributed its earnings press release earlier today via Newswire services. You can also download it from Ever-Glory’s website at www.everglorygroup.com. With us today are Every-Glory’s Chairman, President, and Chief Executive Officer, Mr. Yihua Kang; and Chief Financial Officer Mr. Jiansong Wang. Both will deliver prepared remarks followed by a question-and-answer session. Before we get started, I will review the Safe Harbor statement regarding today’s conference call. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. The forward looking statements involve inherent risks and uncertainties, as such the company’s result may defer materially from the views expressed today. Further information regarding these and other risks and uncertainties are included in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and in other documents filed with the U.S. Securities and Exchange Commission. Ever-Glory does not assume any obligation to update any forward-looking statements except as required under applicable law. As a reminder, this conference call is being recorded. In addition, an audio webcast of this conference will be available on Ever-Glory’s Investor Relations website. I will now turn the call over to Ever-Glory’s Chairman, President and CEO, Mr. Yihua Kang. Edward please?

[Yihua Kang:]

Okay. Thank you, Wilson. Good morning to those in the United States and good evening to those participants in Asia. Thank you for joining our third quarter 2016 earnings conference call. The macro environment remained challenging during the third quarter. However, the tough operating environment did not slow us from continuing to execute our strategic initiatives with a keen focus on building a long-term sustainable business I’ll begin by discussing our performance for the quarter and provide update for our whole retail business. In the third quarter, we continue to optimize our retail store network by adding a net total of 70 stores and remodeling 71 stores. As of September 30, we operated a total of 1,345 stores across Mainland China, compared with 1,275 as of June 30, and 1,188 as of September 30, 2015. In the third quarter, we closed 58 stores and opened 128 new stores. We expect to have all 1,400 stores in total at the end of this year. We’ve accomplished this by closing underperforming stores and opening new stores. As mentioned before, our new store design for La go go has received positive customer business, and we’re also on track to introduce a great store design for Sea To Sky store by early next year. Now, I’d like to spend a few minutes discussing our e-commerce initiative in the third quarter. 6.4% of our total sales was generated from online sales. This compares with 5.3% in the year-ago period. E-commerce is a [weather delay] [ph] becoming a typical channel to purchase a wide array of products. However, for apparel – fashion, apparel products, we have noted our customer buying behavior often prefers in-store product contact before purchasing online. In this way, we’ve personally verified styling, [indiscernible], color and quality and can make a more convenient online purchase. This buying behavior is a key raising remain focused on our traditional offline mode complemented by e-commerce. Our goal is to use online platforms to drive new store traffic. Increased sales volume and enhanced brand awareness [indiscernible] with sales both out-of-fashion and in-fashion products in our online stores. In the future, we will aid online inclusive items. For the remainder of 2016, we expect slower macro marketing conditions, we’re continuing to influence our retail sales. However, we’re convinced our investment in store network optimization, brand building, and e-commerce. We’re strengthening our solid foundation and remained sustainable for [indiscernible] business in the long-term. Now, turning to our wholesale business. Global economies remained the challenge in the third quarter, negatively impacting our wholesale business results. The year-over-year decrease in our third quarter wholesale business was mainly due to the lower sales from Japan, UK, and Mainland China. In Japan, we’re seeing a growing number of retailers, reducing order volumes from China and sourcing production in lower cost in Southeast Asian countries. This trend seems huge by [indiscernible] consumer demand. Second, Japanese apparel companies [indiscernible] design thus only also as a production and that can easily move the production to lowest cost countries. In addition, UK brands and the retailers are facing rising oversea import prices as a result of a weaker British pounds. Thirdly, our wholesale business remains focused on building for [indiscernible] long-term growth. We are pleased to record a highest already year-over-year sales from Hong Kong and the European areas including UK and the United States in the third quarter. Compared with the year ago period, this growth was mainly driving by our extensive product development and supply chain management know-how, and was supported by our network of high quality, reliable and cost-efficient sourcing channels and manufacturers. For the remainder of 2016, our wholesale strategies remained further driving our product development and supply chain management further optimize our customer base by focusing on high-quality medium to high-end customers with good [indiscernible]. Now, I will turn the call over to our CFO, Jiansong Wang, to provide details of our financial results. Jiansong?

[Jiansong Wang:]

Thank you, Mr. Kang, and hello to everyone on the call. We have been diligently executing our strategic initiatives and have made important progress. In the third quarter, despite the lower total sales, we maintained the gross margin for our retail business at the same level compared with the year-ago period, while improving the gross margin for our wholesale business by 70 basis points, mainly due to our effective procurement system and lower cotton prices. Now, I will walk through our financial results for the third quarter 2016. Please note that all numbers discuss today are in U.S. dollars unless otherwise noted. Total sales for the third quarter of 2016 were $109.9 million, a decrease of 7.3% from $118.6 million in the third quarter of 2015. This decrease was mainly driven by a 3.4% decrease in our wholesale sales and a 13.2% decrease in our retail sales. Sales for the company’s branded fashion apparel retail division decreased by 13.2% to $41.1 million for the third quarter of 2016, compared with $47.3 million for the third quarter of 2015. This decrease was mainly due to a decrease in same-store sales. Excluding the impact of recent depreciation of the renminbi against the U.S. dollar, sales for the company’s branded fashion apparel retail division decreased by 3.4% year-over-year in the third quarter. The company had 1,345 retail stores as of September 30, 2016, compared with 1,188 retail stores as of September 30, 2015. Sales for the company’s wholesale division decreased by 3.4% to $68.9 million for the third quarter of 2016, compared with $71.3 million for the third quarter of 2015. This decrease was mainly due to a decrease in sales in Japan, the United Kingdom and Mainland China, partially offset by an increase in sales in Hong Kong, Germany, Europe-Other and the United States. Total gross profit for the third quarter of 2016 decreased by 8.4% to $29.6 million, compared with $32.3 million for the third quarter of 2015. Total gross margin decreased to 26.9% from 27.3% for the third quarter of 2015. Gross profit for the retail business decreased by 12.9% to $19.6 million for the third quarter of 2016, compared with $22.4 million for the third quarter of 2015. Gross margin increased to 47.6% from 47.5% for the third quarter of 2015. Gross profit for the wholesale business increased by 1.6% to $10.1 million for the third quarter of 2016, compared with $9.9 million for the third quarter of 2015. Gross margin increased to 14.6% from 13.9% for the third quarter of 2015. Selling expenses for the third quarter of 2016 decreased by 3.5% to $18.5 million, or 16.8% of total sales, compared with $19.2 million, or 16.2% of total sales for the third quarter of 2015. This decrease was mainly attributable to lower retail sales and decreased store management expenses. General and administrative expenses for the third quarter of 2016 increased by 5.7% to $9.9 million, or 9% of total sales, compared with $9.3 million, or 7.9% of total sales for the third quarter of 2015. The increase was attributable to an increase of $1.9 million for bad-debt expenses for the three months ended September 30, 2016 compared with the three months ended September 30, 2015. Income from operations for the third quarter of 2016 decreased by 67.7% to $1.2 million compared with $3.8 million for the third quarter of 2015. Net income attributable to the company for the third quarter of 2016 was $0.4 million compared with $2.7 million for the third quarter of 2015. Basic and diluted earnings per share were $0.04 for the third quarter of 2016 compared with $0.19 for the third quarter of 2015. Turning to the balance sheet. As of September 30, 2016, Ever-Glory had approximately $38.3 million of cash and cash equivalents, compared with approximately $22.7 million as of December 31, 2015. Ever-Glory had a working capital of approximately $51.6 million as of September 30, 2016, and outstanding bank loans of approximately $49.8 million as of September 30, 2016. During this lackluster market conditions, we are pleased that our business foundation remains solid, while we expect the remainder of 2016 to remain challenging. We will continue implementing our margin enhancement and the cost control measures to further strengthen our foundation and mitigate the macro [indiscernible] to our business. This concludes my prepared remarks. Operator, we are now ready to take questions. Hello, operator?

[Operator:]

Thank you. [Operator Instructions] Ad we will take our first question from [indiscernible]. Please go ahead.

[Unidentified Analyst:]

Hello, everybody. Thank you for your presentation and thank you for taking my call. I would like to ask three questions. The first one is, can you describe your experience with November 11 Singles’ Day?

[Yihua Kang:]

[Interpreted] On this occasion that we have had both online and offline activities and have the both connected and combined together. As a result, our offline business is comparatively successful on the weekend. But the online business is not so successful just because the storage of store – the stock is not so enough. That’s the brief of this time 11 activities.

[Unidentified Analyst:]

Okay. Thank you. And could you comment on rental rates and availability of good store locations?

[Yihua Kang:]

[Interpreted]

[Unidentified Analyst:]

Please continue.

[Yihua Kang:]

[Interpreted] Okay, expect Tibet, we have already – almost every provisions in the cities to have our shops offline shops. Just because the macro condition is not good – so good as last year, so we have lowered our rent discount comparatively. The La go go brand has already spread their shops over – almost every good shopping centers across China. That’s my explanation.

[Unidentified Analyst:]

Okay. Thank you. And my last question is, can you comment on the sales performance of your different brands?

[Yihua Kang:]

[Interpreted] Just because of the underperformance of their offline stores, we have close a number of La go go shops across China. After these operations, the business of the La go go shops had become comparatively smooth. But the other suite brand that is Velwin, Sea To Sky and idole, they operated comparatively better than La go go. And the main question is that, just because the stock is not fully enough, it is just my own responsibility. We haven’t invested lot of money and lot of cost in the stock. So we just felt that sales is not so hopeful, as we had hoped, that’s what I should explain.

[Unidentified Analyst:]

Okay. Thank you very much. That’s very helpful.

[Wilson Bow:]

Edward, please go ahead.

[Yihua Kang:]

Our stock again [ph] is inventory.

[Jiansong Wang:]

Inventory. We haven’t invested enough cost in – to increase our inventory. That is the point that next time we will do our effort to make it better.

[Wilson Bow:]

Is that so, Edward.

[Yihua Kang:]

Yes.

[Unidentified Analyst:]

Thank you. It appears there are no further questions at this time. I would like to turn the conference back to management for any additional or closing remarks.

[Wilson Bow:]

Edward, do you have any closing remarks?

[Yihua Kang:]

No additional question, right?

[Wilson Bow:]

No, no.

[Yihua Kang:]

Okay. Thank you for participating in Ever-Glory’s third quarter 2016 earnings call. We look forward to talking with you next quarter. If you have any additional questions, please feel free to contact our IR department or TPG Investor Relations. Good bye. Thank you, everybody.

[Jiansong Wang:]

Good bye.

[Wilson Bow:]

Thank you. Thank you, everybody. See you next time.

[Operator:]

This concludes today’s conference. Thank you for your participation. You may now disconnect.