Ever-Glory International Group, Inc.
Q1 2017 Earnings Call Transcript

Published: 15 May 2017

[Operator:]

Good day and welcome to the Ever-Glory International Group First Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. 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 First Quarter 2017 Earnings Conference Call. The Company distributed its earnings press release earlier today via newswire services. You can also download it from Every-Glory's website 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 website. I will now turn the call over to Ever-Glory's Chairman, President and CEO, Mr. Kang. Edward, please.

[Yihua Kang:]

Good morning in the United States and good evening to those in Asia. Thank you for joining our first quarter 2017 conference call. We are very pleased to kick off the year in satisfying process in our wholesale operation in the first quarter 2017. Notably, we achieved a year-over-year improvement in gross margin for both our retail and wholesale [indiscernible] profitability from the year ago quarter. For our retail business, which lead to focus our efforts on operational improvements in order to enhance the sales and increase profitability. Specifically we [indiscernible] core network optimization. We have re-mortgaged our relocated 27 stores during the quarter or [indiscernible] same-store sales growth. As of March 31, 2017 to operate a nationwide network of 1,369. We believe we have further room for additional or [indiscernible] and plan to regulate supply our new store design for our store. Turning to our wholesale business, [indiscernible] and continued the pricing pressure we manage to rely on notable gross margin improvement which we plan in product development and one stop supply chain management, we aim to further optimize our customer base with a goal of realizing margins expansion and [indiscernible]. In China, we have enhanced the current evaluation process to maintain collaborating with brand will have good growth with the goal of reducing our credit [indiscernible] we believe that recurring trends of our wholesale business, there has been our consistent and [indiscernible] value and quality. Looking ahead, we were the main focused to build our reserve business leading to making brand [indiscernible] with a nationwide retail network in China and to obtain our wholesale product sale into high class with paying customer and improving profitability. Now I will turn the call over to our CFO Jiansong Wang to provide detail on our annual results. Jiansong.

[Jiansong Wang:]

Thank you Mr. Kang. Hello to everyone on the call. We work devoted to maintaining a solid and efficient operation by implementing our margin enhancement and the cost control measures in a tonnage [indiscernible] condition that lasted for the past few quarters. We were pleased to see our efforts paid off in the first quarter 2017 where we gained the year-over-year [indiscernible] margin improvement of 450 and 40 basis points respectively as well as achieving net income of 1 million compared with a net loss in the year ago period. In addition to the gross margin improvement in first retail and wholesale business. Our retail business with high gross margin has gained a greater proportion of our total sales in the first quarter which indicated better operations, mixed assets of foundation for the [indiscernible] profitable operations. Moreover, we are pleased to report a significant increase in our cash position consisting from the build outstanding accounts receivables [indiscernible] executed on the client evolution proceeds and account receivable commercial management, as well as improved inventory [indiscernible] due to our prudent inventory management. Now, I will walk through our financial results for the first quarter 2017. Please note that all numbers discussed today are in U.S. dollars unless otherwise noted. Total sales for the first quarter of 2017 was $85.1 million, a decrease of 7.2% from $91.7 million in the first quarter of 2016. This decrease was primarily driven by a 13% decrease in our wholesale sales and 3.9% decrease in our retail sales. Sales for the Company's branded fashion apparel retail division decreased by 3.9% to $56.8 million for the first quarter of 2017 compared with $59.1 million for the first quarter of 2016. This decrease was primarily due a decrease in same-store sales, excluding the impact of recent depreciation of the [indiscernible] against the U.S. dollar. Sales for the Company's branded fashion apparels retail division increased by 1.2% year-over-year in the first quarter. The Company had 1359 retail stores as of March 31, 2017 compared with 1171 retail stores as of March 31, 2016. Sales for the Company's wholesale division decreased by 13% to $28.3 million for the first quarter of 2017, compared with $32.6 million for the first quarter of 2016. This decrease was primarily due to a decrease in sales in mainly in China. Hong Kong, Japan, and the United States, partially offset by a increase in sales in Germany, the United kingdom and other European markets. Total gross profit for the first quarter of 2017 increased by 0.6% to $28.5 million, compared with $28.3 million for the first quarter of 2016; total gross margin increased to 33.5% from 30.9% for the first quarter of 2016. Total gross profit for the retail business increased by 0.5% to $22.2 million for the first quarter of 2017, compared with $22.1 million for the first quarter of 2016; gross margin increased to 39.1% from 37.4% for the first quarter of 2016. Gross profit for the wholesale business increased by 1.1% to $6.3 million for the first quarter of 2017, compared with $6.2 million for the first quarter of 2016; gross margin increased to 22.3% from 19.1% for the first quarter of 2016. Selling expenses for the first quarter of 2017 decreased by 5.6% to $19.7 million or 23.2% of total sales compared with $20.9 or 22.8% from first year for the fourth quarter 2016. This decrease was mainly attributable to the decrease store operations and market uncertainty. General and administrative expenses for the first quarter of 2017 increased by 4.4% to $7.3 million or 1.5%of total sales compared with $6.9 million of 7.6% of total sales for the first quarter of 2016. The increase was attributable to our increase in average salaries. Income from operations for the first quarter of 2017 increased by 213.7% to $1.61 million compared with $0.5 million for the first quarter of 2016. Net income attributable for the first quarter of 2017 was $1 million compared with a net loss of $0.4 million for the first quarter of 2016. [indiscernible] this year earnings were $0.07 for the first quarter of 2017 compared with [indiscernible] loss per share of $0.02 for the first quarter of 2015. Turning to the balance sheet, as if March 31, 2016, Ever-Glory has approximately $68.1 million in cash and cash equivalents compared with approximately $45.3 million as if December 31, 2016. Ever-Glory had a working capital of approximately $57.9 million as if March 31, 2017 and outstanding bank loans of approximately $32.2 million as if March 31, 2017. In spite of the [indiscernible] tight in China and overseas marketing for the year 2017, we will achieve productivity in the apparel industry by further strengthening our operational ability to revise network optimization, margin retention long run profitability. This concludes my prepared remarks. Operator, we are now ready to take questions.

[Operator:]

Thank you. [Operator Instructions]. We will go first to [indiscernible].

[Unidentified Analyst:]

Hello everybody. Congratulations on the improved results and thank you for taking my call. First can I ask, can you comment on your inventory level and sell through rate for current collections?

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

Thank you for your concern about the inventory. Actually we have a good control of the inventory level and our inventory in the first quarter decreased by 38.7 from the same period last year. So far our sales were raised for our spring summer collections improved compared with the same period last year. The inventory level decreased this year compared with last year. The decrease rate was 38.7%. And we improved our sales rate for this year’s spring summer collection and the increased rate is comparatively very big. And I have always the past importance to the balance between inventory and the sales and it lead to much sales and we must be ensured on our inventory. And if our inventory is comparatively big, so that our sales will be effected in other way. So I have always been controlling the balance between the two factors. And we have this in the year half 2015 and 2016 and so this year’s effort, we are confident to have increased our ability in control of the balance and I’m very optimistic on this concern. Thank you.

[Unidentified Analyst:]

Excellent, that’s very good information. And can you comment on your level of promotions and discounting this year?

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

Thank you for your question. And beside the same activities as last year and this year before last we have other new activities such as in-store promotions, such as on reach out team [indiscernible] to build interactions between online and offline. As this not only have rise our sales in physical stores that also improved our brand exposure and attracted new followers. Please feel free to check more details on the new product is on our website. Thank you, again.

[Unidentified Analyst:]

Ok thank you, will the Company continued paying dividends.

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

Thank you very much for raising again the question. If you have reviewed our financial documents you can see that our cash situation is comparatively very good. Net income kept as retained earnings for the operational investment including store remodeling, and relocation, manufactured device, [indiscernible] and overseas business development of the wholesale business. With the sustainable development of the Company, we are committed to bring more value to our shareholders. Thank you.

[Unidentified Analyst:]

Thank you very much, thanks for the detailed presentation. Congratulations on improved results and thank you for answering all of my questions.

[Jiansong Wang:]

Thanks a lot.

[Operator:]

We will go next to [indiscernible].

[Unidentified Analyst:]

Thank you. I have a question and then some follow up questions. First on the results, I thought they were promising in terms of margin improvement which you highlighted, I would like to know from the Chairman what we can expect in terms of strategy for improved top line growth. What is the strategy for this year and the future to improve that? And then I have a follow-up questions.

[Yihua Kang:]

[Foreign language]

[Wilson Bow:]

Regarding the wholesale and first of all we must up code our [indiscernible] shop sales and at the same time we must delete the shops which has not very good outcomes, that is two methods we are going to case. And we are going through some adjustment in our product development so we can promote our sales.

[Unidentified Analyst:]

Okay, thank you. And can I get some indication of what number of stores will be added in 2017 net of closing. What the CapEx budget is for 2017 and then I have a follow-up, thank you.

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

And by the end of the this year the net increase of number of the shops will 1500. And as investment for one shop, there two factors. One is debt of the shop and another is inventory for new shop. And the total of these two factors will be totally about $100,000 for one shop.

[Unidentified Analyst:]

Okay. And just to confirm the number. The total number of shops with that net increase at the end of 2017 is how much?

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

Now let me clarify. The total number of the shops by the end of this year will be 1500. And net increase will be about 200. But that is to say that currently, we have 1300 shops.

[Unidentified Analyst:]

Okay, thank you for clarifying. And also I think what I heard in the earlier discussions that there is a move to develop higher end product. And I'm wondering what is the motivation for that and would this also lead to an increase in need for the investment in real estate in order to get the proper locations for higher end products. I just want to make sure I understand it.

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

Currently we have four self hold brands that is [indiscernible] and we attach importance and put emphasis on [indiscernible] is very promising, the second one is idle. And because these two brands are comparatively high-end brands so the decor and location of the shop will be confirming to these two factors. The promotion to do so is that we must make some differences between these two high-end brands and [indiscernible] the common brand and in later in the year we will do something to upgrade these two brands.

[Unidentified Analyst:]

Okay. Thank you for clarifying the high-end development is under existing brands that’s important thank you. And then just last two questions, one is on the depreciation of the renminbi over the past year, I’m wondering is that helping in terms of your sales in particular overseas and have you been focusing marketing efforts more there and also we have been hearing a lot in the U.S. about tightening of credit in China and I see that you receivables have come down which is important. I’m just wondering are you expecting any issues related to the tightening credit conditions in china. Thank you.

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

And under such circumstance we will strengthen our development of overseas sales and we have always been attaching importance to the evaluation of our customers' credit. So we are confident that we are doing a very good job.

[Unidentified Analyst:]

Okay, thank you very much.

[Operator:]

[Operator Instructions] And we will go next [indiscernible].

[Unidentified Analyst:]

Just one final question regarding the increase in the salaries, I saw a note there. Does that impacted SG&A increase? And I’m wondering is it at a level where its legally mandated? And if so, what will be the increases for the remainder of this year and next year? What type of percentage should we forecast in our earnings model?

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

Regarding the mandate increase of the salaries, this is just a truly effect but mainly we have instituted importance to the different brands. So we have recruited some new talents. This is the main factor for us to increase our total investment in salary.

[Unidentified Analyst:]

Okay thank you and going forward what should we forecast in terms of the salary increases if any going forward for rest of this year and also 2018? What would be a range of expectations?

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

After sales scale increase for the company the rate for the salary will be decreased in the total. That is what I can tell you.

[Unidentified Analyst:]

Is there any percentage. Any approximate percentage increase?

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

In the last quarter that was - I’ll give you some detailed numbers after doing the detailed calculation. Would you please wait for a little while?

[Unidentified Analyst:]

Okay. If you want, you can just e-mail it to me through [indiscernible] that’s easier, I don’t want to hold up anybody.

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

We will arrange somebody to the broadcast offline and we will do it soon. Thank you.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

[Operator Instructions] and at this time there is further remarks. I’ll turn it back to management for closing remarks.

[Wilson Bow:]

Edward do you have something to say?

[Yihua Kang:]

Okay, no additional question right? Okay thank you for those being in Ever-Glory’s first quarter 2017 earnings call. We look forward to talking with you next quarter. If you have additional questions, please feel free to contact our IR department investor relations. Thank you very much good bye.

[Operator:]

This does concludes today’s conference. We thank you for your participation.