Ever-Glory International Group, Inc.
Q4 2016 Earnings Call Transcript

Published: 31 Mar 2017

[Operator:]

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

[Wilson Bow:]

Thank you, Operator. Hello everyone, and welcome to Ever-Glory International Group's fourth quarter and full year 2016 earnings conference call. The company distributed its earnings press release earlier today via newswire services. You can also download it from Every-Glory's Web site at www.everglorygroup.com. With us today are Ever-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. 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, 2016 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 Web site. I will now turn the call over to Ever-Glory's Chairman, President and CEO, Mr. Kang. Edward, please?

[Yihua Kang:]

Thank you, Wilson. Good morning to those in the United States, and good evening to those in Asia. Thank you for joining our fourth quarter and full year 2016 earnings conference call. 2016 has been a challenging year as the macro environment remained soft in the fourth quarter. In light of the overall lackluster [ph] market condition, we have been proactively making adjustments to both of our retail and wholesale businesses to maintain competitive advantages in the tough market with a goal to evolve our business towards a long-term sustainability. For our retail business, we continued our efforts to optimize our store network by adding a net total of 33 stores during the fourth quarter. In the fourth quarter, we closed 70 stores and opened 106 new stores. As of December 31, 2016, we operated a nation-wide network of 1,378 stores, and expected to operate over 1,450 stores at the end of 2017. We also have adopted [ph] operational measures to seek -- delegate [indiscernible] the inventory, [indiscernible] and sales growth consisting of debt [ph] alliances, quick response and flexible supply chain systems, our quick reaction system continued to enable us to identify the most popular product items, then increase production and quick delivery to the stores. We look forward to further improving our inventories through our prior and quick reaction systems in 2017, and achieving an improvement in our sales cycle efficiency. In addition, we remain focused on our multi-brand strategy, and have completed the new store design for our youth brand Sea To Sky, and high-end brand Idole, both of which continue to be well-received by our consumers. The new store design for our lifestyle brand, Velwin, is also currently underway. All of our four brands have now released their 2017 Spring Summer Collections, and we highly received a positive feedback from our customers. In 2017, we will keep focusing on inventory and operation management, and branding, while further fine-tuning our store network. As the market evolves, the integration between the online and offline sales had become more important. In the fourth quarter, [indiscernible] of our total return stores, we are generating from our online sales, all through, we primarily sell our women's apparel directly to consumers through our own retail store channels. We also take [indiscernible] approaches such as LIBOR [ph] cutting to both our online stores on China, the popular e-commerce platforms. We believe our strategy were great and unique opportunities for us to increase sales volume in the future. For our wholesale business, where we have mostly experienced [indiscernible] over 100 brands, we keep exploring new brands in which to build relation with the core of optimizing our client base. For 2017, we look forward to maintain our sales in the United States at a stable level, as compared with the strong year of 2016, while improving sales growth in the Europe and in Japan. We believe our extensive product development and a supply chain management expertise, as well as network of high-quality, reliable, and a cost-efficient [indiscernible] channels and manufacture will benefit our brand clients with smooth and efficient operation on the same part of production in every cycle. Going forward, we will continue to attract high-quality customers with a focus on medium-to-high end brands. Through our continued growth initiatives in global sourcing network at Beijing, overseas lower cost and manufacturing space at Beijing and product design and development. Looking ahead, our key goal is to maintain a sustainability [indiscernible] profitable operation for both of our retail and wholesale business in the challenging market environment. We also take new initiatives to leverage our comparing and competitive advantages as we develop our retail network in China and a wholesale sourcing network globally. Now, I will turn the call over to our CFO, Jiansong Wang, to provide the details of our financial results.

[Jiansong Wang:]

Thank you, Mr. Kang, and hello to everyone on the call. In 2015, despite continued price increases due to [indiscernible] we maintained the gross margin for wholesale business at same level compared with the year-ago period, while improving the gross margin for retail business by 110 basis points, due to the decrease of our cost. In the fourth quarter, we are pleased to record notable growth margin expansion of 510 and 320 basis points in our retail and wholesale business respectively. Now, I will walk through our financial results for the fourth quarter as a full year to 2015. Please note that all numbers discussed today are in U.S. dollars unless otherwise noted. First, let me walk you through fourth quarter financial results. Total sales for the fourth quarter of 2015 were $110.4 million, a decrease of 14.5% from $129.2 million in the fourth quarter of 2015. This decrease was primarily driven by a 21.2% decrease in our wholesale sales and 8.3% decrease in retail sales. Sales for the company's branded fashion apparel retail division decreased by 8.3% to $51.4 million for the fourth quarter of 2015 compared with $57 million for the fourth quarter of 2015. This decrease was primarily due 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 apparels retail division decreased by 2.4% year-over-year in the fourth quarter. The company had 1378 retail stores as of December 31, 2015 compared with 1159 retail stores as of December 31, 2015. Sales for the company's wholesale division decreased by 21.2% to $49 million for the fourth quarter of 2016, compared with $62.2 million for the fourth quarter of 2015. This decrease was primarily due to a decrease in sales in Hong Kong, Germany, the United Kingdom and Mainland China, partially offset by a increase in sales in Europe-Other, Japan and the United States. Total gross profit for the fourth quarter of 2016 increased by 0.5% to $36.5 million, compared with $36.3 million for the fourth quarter of 2015; total gross margin increased to 33.1% from 28.1% for the fourth quarter of 2015. Gross profit for the retail business increased by 4.4% to $25.8 million for the fourth quarter of 2016, compared with $24.7 million for the fourth quarter of 2015; gross margin increased to 42% from 36.9% for the fourth quarter of 2015. Gross profit for the wholesale business decreased by 7.8% to $10.7 million for the fourth quarter of 2016, compared with $11.6 million for the fourth quarter of 2015; gross margin increased to 21.8% from 18.6% for the fourth quarter of 2015. Selling expenses for the fourth quarter of 2016 increased by 12.4% to $21.9 million, or 19.9% of total sales, compared with $19.5 million, or 15.1% of total sales for the fourth quarter of 2015. This increase was mainly attributable to the increased average salaries, increased number of stores, as well as increased store decoration associated with the promotion of the retail brand. General and administrative expenses for the fourth quarter of 2016 decreased by 18.1% to $9.9 million or 9% of total sales compared with $12.1 million or 9.4% of total sales for the fourth quarter of 2015. The decrease was attributable to a decrease in the number of deal and retail management personnel. Income from operations for the fourth quarter of 2016 decreased by 1% to $4.65 million compared with $4.7 million for the fourth quarter of 2015. Net income attributable to the company for the fourth quarter of 2016 was $3.4 million compared with $4.7 million for the fourth quarter of 2015. Basic and diluted earnings per share were $0.23 for the fourth quarter of 2016 compared with $0.32 for the fourth quarter of 2015. Now let me talk about the full year 2016 financial results. Sales for the full year of 2016 was $392.7 million, a decrease of 6.8% compared with $421.4 million in the full year of 2015. This decrease was primarily due to a 9.1% decrease in retail sales and 4.3% decrease in wholesale sales. Retail sales from the company's branded fashion apparel retail division decreased by 9.1% to $204.4 million for the full year of 2016 compared with $224.8 million for the full year of 2015. This decrease was primarily due to a decrease in same-store sales. Wholesale sales from the company's wholesale business decreased by 4.3% to $188.2 million for the full year of 2016 compared with $196.6 million for the full year of 2015. This decrease was primarily due to decreased sales in Mainland, China, Hong Kong, China, Germany, United Kingdom and Japan partially offset by increased sales in Europe and the United States. Total gross profit for the full year of 2016 decreased by 6.3% to $121.2 million compared with $129.3 million for the full year of 2015. Total gross margins for the full year of 2016 increased by 20 basis points to 30.9% compared with 20.7% for the full year of 2015. Gross profit for retail business decreased by 6.7% to $88.1 million for the full year of 2016 compared with $94.4 million for the full year of 2015. Gross margin for the full year of 2016 increased by 110 basis points to 43.1% compared with 42% for the full year of 2015. Gross profit for wholesale business decreased by 5.2% to $23.1 million for the full year of 2016 compared with $24.9 million the full year of 2015. Gross margin was 17.6% for the full year of 2015 relatively that as compared with the full year of 2015. Selling expenses for the full year of 2016 increased by 1.1% to $77.4 million or 19.7% up to sales compared with 76.5 million or 18.2% of total sales for the full year of 2015. This increase was attributable to the increased average salaries [indiscernible] operations and marketing expenses associated with the promotion of the retail brands. General and administrative expenses for the full year of 2015 decreased by 5.3% to $34 million or [indiscernible] of total sales, compared with [indiscernible] for the full year of 2015. The decrease was mainly due to a decrease in the number of [indiscernible]. Income from operations for the full year of 2015 decreased by 22.2% [ph] to 9.7 million compared with 15.8 million for the full year of 2015. Net income attributable to the company for the full year of 2015 decreased by 50.2% to $6.8 million compared with $13.6 million for the full year of 2015. Basic and diluted earnings this year were $0.46 and $0.92 for the full year of 2015 and 2015 respectively. Turning to the balance sheet, as of December 31, 2015, Every-Glory had approximately $45.3 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 $59.1 million as of December 31, 2015 and outstanding bank loan of approximately $29.2 million as of December 31, 2015. While market weakness impacted our top line results, we netted several strategies initiatives throughout the year including optimizing our retail store network, increasing our marketing and promotional activities, and developing our online channels. We also delivered an improvement in gross margin in 2015 as compared with last year. Going forward, we believe our efforts will help ensure the growth of our overall business over the long run as market conditions improve, and we remain focused on maximizing our profitability through [indiscernible] expenses management. This concludes my prepared remarks. Operator, we are now ready to take questions.

[Operator:]

Thank you. [Operator Instructions] And we'll take our first question from John Sheehy [ph] with Private Investor.

[Unidentified Analyst:]

Hello everybody. Thank you for the detailed presentation, and thank you for taking my call. First, could you tell us the change in your revenues for the year in Chinese Yen before conversion to U.S. dollars?

[Yihua Kang:]

[Foreign Language] Total sales for the full year of 2016 decreased 6.8% compared with the year of 2015. This decrease was primarily due to a 9.1% decrease in retail sales, and a 4.3% decrease in wholesale sales. Excluding the impact of the depreciation of the renminbi against the U.S. dollar, total sales for 2016 decreased 0.7% compared with 2015. This decrease was primarily due to a 3.1% decrease in retail sales, and a 2.0% decrease in wholesale sales.

[Unidentified Analyst:]

That was very helpful. Thank you. And also you describe your wholesale results by country. Can you give us some background about how investors should interpret these numbers?

[Yihua Kang:]

[Foreign Language] The company's sales in different countries are influenced by the macro economic condition of each country and foreign exchange factors, but influence is not absolute. Currently the company has nine export sales teams, and each is responsible for different regions and different clients. Each team is allowed clients in its responsible regions after the completion of client valuation to meet the company's growth margin requirements. Therefore, the sales growth in different regions are also subject to each team's business development ability, investment services, team performances, costs, seasonality, and the ability to optimize client base.

[Unidentified Analyst:]

Thank you, that's helpful. And can you tell us about your experience with brand extension in like home goods, lingerie, and anything else that you have tried?

[Yihua Kang:]

[Foreign Language] The company has made efforts to upgrade the image of traditional apparel stores, and have introduced [indiscernible] lingerie, hired and home supplies consignment sales to some of our stores which increased the diversification of our store space. We have received positive feedbacks on these changes. Currently, the company does not have plans -- that's all. Thank you.

[Unidentified Analyst:]

Okay, thank you. And then my last question, can you share some expectations for 2017 as far as the number of stores for each brand and your total retail gross margins?

[Yihua Kang:]

[Foreign Language] We expect to operate over 1,450 stores at the end of 2017. We don't currently provide detailed breakdown of the store members for each of our brands, but we will continue to optimize our store network in 2017.

[Yihua Kang:]

[Foreign Language] The gross margin rate of our retail sales in 2016 was 43.1% and increase of 110 basis points compared with 2016. In the last two years, the company has maintained disciplined cost control and met our internal expectations. In 2017, we will focus on boosting sales and increasing same store sales while at the same time continue our cost control efforts. We're aimed to keep the gross margin at similar levels in 2017.

[Unidentified Analyst:]

Thanks again for your detailed management comments, and thanks for answering all my questions.

[Operator:]

[Operator Instructions] At this time, we have no further questions. I'd like to turn the conference call back over to management for any additional or closing remarks.

[Yihua Kang:]

Okay. Thank you for joining Ever-Glory's fourth quarter and full year 2016 earnings call. We are looking forward to talking with you next quarter. If you have additional questions, please feel free to contact our IR Department or TPG Investor Relations. Thank you everybody.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.

[Yihua Kang:]

Thank you, Operator.