Ever-Glory International Group, Inc.
Q2 2017 Earnings Call Transcript

Published: 14 Aug 2017

[Operator:]

Good day, everyone, and welcome to the Ever-Glory International Group’s Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. 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 Second 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, the 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:]

Okay, thank you. Good morning to those in the United States and good evening to here in Asia. Thank you for joining our second quarter 2017 earnings conference call. During the second quarter, we pivot our focus on developing retail business through our multi-brand strategy and store network optimization initiative while improving our wholesale businesses by upgrading customer portfolio. Though the overall consumer demand in China and key global markets remained weak in the quarter, we achieved year-over-year improvement in gross margins for both of our retail and wholesale businesses. We are also pleased to report that our retail business records a 9.1% revenue increase in the second quarter compared with the year ago period. Thanks to increased same-store sales, which is a reflection of our efforts in store network optimization. We remodeled or relocated 86 stores during the quarter to create more network and accessible locations. As of June 30, 2017, we operated a nationwide network of 1,362 stores compared to 1,275 stores as of June 30, 2016. [indiscernible] our first La go go lifestyle store is expected to open this month in Wuhan, one of the major cities in the central China. The lifestyle store is designed and decorated with La go go new store images and special lifestyle elements to enhance customer shopping experience in the store. As we walk, our additional store [indiscernible] apply our new store designs to our store décor. We were pleased that we have received positive feedback from our customers as we deployed new store designs of our La go go, Sea to Sky and idole. In the second half of this year, we also planned to launch the new store design for another brand, Velwin, in the store located in Beijing, Shanghai, Guangdong and Zhengzhou to present [indiscernible] to our customers. We look forward to the continued integration of online and offline and the synergies that were creating growth for our retail business. In the meanwhile, we will continue our product inventory and operation management by clearing out outdated products and improving quick response, while upgrading technology to focus the massive damage and keep inventory at a [indiscernible] level. Now turning to our wholesale business. We managed to improve gross margin by 180 basis points from the year ago period, despite the low sales in the second quarter. On our strategic margin requirements, we are able to maintain solid control of our gross margin performance weather through challenging market conditions. Looking ahead, we aim to further optimize our customer space which of course of realizing margin expansion and improved efficiency. Looking at the reminder of 2017, we expect the market to remain challenging. However, we are committed in the base of our business and our growth strategies. [indiscernible], our brand management capabilities as extensively experienced in the apparel market as well as our strong presence in the whole supply chain, we will continue our retails initiative which focus on store network optimization, inventory management, brand management and the further upgrading older customer base, expanding our product development and supply chain management. Now I will turn the call over to our CFO, Jiansong Wang, to provide details of our financial results. Jiansong?

[Jiansong Wang:]

Thank you, Edward, and hello to everyone on the call. During the second quarter, we continued to improve our operating leverage by increasing efficiencies. Our diligence in this area is paying off. We are pleased to see margin improvement in retail and wholesale business by 480 and 180 basis points, respectively, compared with the year ago period. Now I will walk through our financial results for second quarter 2017. Please note that, all numbers discussed are in US dollars, unless otherwise noted. Total sales for the second quarter of 2017 were $89.8 million, a decrease of 1.1% from $80.7 million in second quarter of 2016. This decrease was primarily driven by a 12.7% increase in our wholesale sales, partially offset by a 9.1% increase in our retail sales. Sales for the company’s branded fashion apparel retail division increased by 9.1% to $46.8 million for second quarter of 2017 compared with $42.9 million for second quarter of 2016. This increase was primarily due to increased same-store sales, excluding the impact of recent depreciation of the renminbi against the US dollar. Sales for the company's branded fashion apparel retail division increased by 12.3% year-over-year in the second quarter. The company had 1,352 retail stores as of June 30, 2017 compared with 1,275 retail stores as of June 30, 2016. Sales for the company's wholesale division decreased by 12.7% to $33 million for the second quarter of 2017 compared with $37.8 million for the second quarter of 2016. This decrease was primarily due to a decrease in sales in Mainland China, the United Kingdom, Europe-Other and Japan, partially offset by increase in sales in Hong Kong, Germany and the United States. Facing headwinds in overall apparel market in Mainland China, we optimized our customer base with more strategic client assessment system to reduce accounts receivable risk, which resulted in the sales decreased in Mainland China. Total gross profit for the second quarter of 2017 increased by 14.7% to $30.7 million compared with $26.7 million for second quarter of 2016. Total gross margin increased to 38.4% from 33.1% for the second quarter of 2016. Gross profit for the retail business increased by 20% to $24.8 million for the second quarter of 2017 compared with $20.6 million for the second quarter of 2016. Gross margin increased to 52.9% from 48.1% for the second quarter of 2016. Gross margin improvement was mainly due to our effective cost control efforts has been lowered rental price in [indiscernible] shopping mall by launching multiple retail brands in the same shopping malls instead of one. Gross profit for the wholesale business decreased by 3.2% to $5.9 million for the second quarter of 2017 compared with $6.1 million for second quarter of 2016. Gross margin increased to 17.9% from 16.1% for the second quarter of 2016. Selling expenses for the second quarter of 2017 increased by 26.1% to $20.2 million or 25.3% of total sales compared with $16 million or 19.9% of total sales for the second quarter of 2016. This increase was mainly attributable to increased store operation and marketing expenses associated with the promotion of the retail brands. General and administrative expenses for the second quarter of 2017 increased by 2.2% to $7.5 million or 9.4% of total sales compared with $7.3 million of 9.1% of total sales for the second quarter of 2016. The increase was attributable to an increase in average salaries. Income from operations for the second quarter of 2017 decreased by 12.1% to $2.9 million compared to $3.4 million for the second quarter of 2016. Net income attributable to the company for second quarter of 2017… [Technical Difficulty]

[Operator:]

Yes, Mr. Bow’s line disconnect. That’s what the noise was from. I will get him back online and you continue.

[Jiansong Wang:]

Thank you. Okay, net income attributable to [indiscernible] for the second quarter of 2017 was $2.7 million compared with a net income of $3.1 million for the second quarter of 2016. Basic and diluted earnings per share was $0.18 for the second quarter of 2017 compared with basic and diluted earnings per share of $0.21 for the second quarter of 2016. Turning to the balance sheet. As of June 30, 2017, Ever-Glory had approximately $47.9 million of cash and cash equivalent compared with approximately $45.3 million. As of December 31, 2016, Ever-Glory had working capital of approximately $55.5 million and the outstanding bank loans of approximately $37.8 million as of June 30, 2017. Our forecast going forward is to continue to balance [indiscernible] and improving operating leverage while at the same time building a solid foundation for our overall business. With out steady and strategic steps we are taking now, we are ready to capture the opportunities when the market conditions pick up. This concludes my prepared remarks. Operator, we are now ready to take questions. Thank you. Hi, operator, we are now ready to take questions.

[Operator:]

Thank you. [Operator Instructions] And we’ll go first to John Shehe as a private investor.

[Unidentified Analyst:]

Hello, everybody. Thank you for the detailed presentation and thank you for taking my call. First, I would like to ask, can you share some comments on your sell-through rates for 2017 collections and current inventory levels?

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

As a retail business, we attach importance to the inventory control. That is the thing we are always doing. Thank you.

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

We attach the importance to the inventory control in the three aspects as following. One is that we shortened our development period, that is to say we develop our products in comparatively shorter period. And secondly, we bettered operating activities. And the third one is that -- that is to say we have the quick response activities. If good sales were well, we will do it quickly. And if the sale is not so good, we will abandon it. At last spring -- from last spring, we increased our sales by 2.91 million pieces. Last year, we had [2,206,000] pieces. And consumption rate, we increased 3 percentage points. 2.9 million pieces. Actually, it’s 2.9 million pieces. Last year, it’s 2.2 million. The sell-through rate increased [indiscernible] point. This time we have added 2.2 million pieces again. Last year, the number was 1.58 million pieces. We expect our sell-through rate should be 81% for this year. That is referring to the spring and summer periods. We expect that the rate will be 84% to 85% this year. That is to say, compared with last year, the order increased by 70,000 pieces and the sell-through rate increased by 3 percentage. That is the result of our effort in this last two years, and so far we have established our new model of development. If the environment remains the same, we hope that we can achieve a better result with this new development and operation model.

[Unidentified Analyst:]

Thank you for that detailed information. Those numbers sounds very promising. And my next question, can you share some details about the performance and growth of your new brands?

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

Our three new brands have developed with the development of the number increased of ourselves. That is totally within our expectations. For example, either one of the brand increased its number of shops one time. This will brand our all -- in the relatively shorter history. And the important approach we are taking now is that to investigate about the market preferences and demand with the goal of long-term sustainable development. That is to say we are now adjusting our design, fashion style to meet the market preference and to meet the customers’ final demand. That is the road every new brand should take. I’m now to the preparation works for the developments of these new brands in the next -- and again, next year.

[Operator:]

We will take our next question from Peter Halesworth with Heng Ren.

[Peter Halesworth:]

Hi, thank you. Well done on the margin improvement. It looks like your hard work in management is paying off. My first question, if you could speak about the decline in wholesale, what is the driver of that? And also, what are the gross margins in your wholesale business relative to your retail? That’s my first question.

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

The so-called decrease of wholesale sales is mainly referring to the Chinese market, and the main reason is that the credit of some wholesale business in Chinese Mainland is not so good. So we are now in the process of adjusting the portfolio of our business partner. In contrary, the response in Australia and European market is comparatively better than in Chinese Mainland. To answer your second question that is about margin of wholesale and retails business and what is the difference between the two? I can only say to you that calculating calibers of these two are different. Mainly, the calculating methods are different for the two. For example, the payment -- payroll of the employees and some other expenses included in the calculation of retail, but in the wholesale business they are not included. And there are, of course, other elements and reasons. But in regard to the comparativeness of the two, I think both of them have different advantages and disadvantages. Regarding the retail business, I always attach our attention to the same-store sale and inventory control. That is the two important factors I always pay attention to. And if we have very good control over these two points, I believe this retail business will have a very good development. As of the wholesale business, I pay attention to the collectives and margin control and some other things different than the retail business.

[Peter Halesworth:]

Thank you. If I may follow-up regarding the retail business and the selling expenses, it looked considerably higher and I understand that’s driven by the remodeling and the marketing. When we do we expect that to start to stabilize and not to see such high increases in selling expenses.

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

As of the remodeling of shops -- in the store, in-store aspect, the period is generally 10 months and all the expenses will be consumed within this period, that is to say 10 months. And in big shops, this period should be much longer, that is to say approximately two years. But I believe, in the next year, that is 2018, all the expenses of remodeling will be -- get to a smooth line, and that is to stabilized.

[Peter Halesworth:]

Okay, thank you. And then just a couple of final questions. On the fashion apparel retail, what percentage of those sales or how much is online? You listed $46.8 million for fashion apparel retail in the quarter, over in the quarter, what -- how much of that was online? And then secondly, what are your key performance indicators for this year relative to sales and margins? And then finally, if you can just remind us what the advance [indiscernible] related party of $6.4 million, what was that for? Thank you.

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

E-commerce accounted for 4% to 5% of our retail business. Unit sales amount -- and the through sale, these three are the main indicators of the margin of the retail. Sales amounted to store. These are the main -- and the sales will raise. These are the main indicator of the retail business model. Are you clear with our answer?

[Peter Halesworth:]

Regarding your third quarter of $6.4 million related party transaction, can you provide more details of this question?

[Jiansong Wang:]

It’s in the balance sheet as a related party, maybe alone, or at least as we say for the transaction.

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

With regards to your question, that is the guarantee amount resulted from the guarantee business of our related third party. Are you clear with the answer?

[Peter Halesworth:]

Yes, so basically you are backing -- what is the related party?

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

[Foreign Language] That is the Chinese pronunciation. Literally Ever-Glory.

[Peter Halesworth:]

And what do they do and what was the purpose of the backing? What do they need backing for?

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

So on the contrary, Jiansong already provided backup of us. Because our company is the newly listed companies, so the bank wouldn’t confirm our credibility. So with some backup or guarantee, we can get the loans from the banks. That is the truth. Do you understand?

[Peter Halesworth:]

I do. Thank you.

[Operator:]

We’ll take a follow up now from John Shehe.

[Unidentified Analyst:]

Hello, everybody. Thank you for taking my follow-up. I’m sorry, I lost the connection before. I would like to ask, do you have any new e-commerce marketing strategies that you can describe for us?

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

We are always effort to increase the categories, kind and accounting in our wholesale. We are doing our effort to better the image of offline and online business. And in order to increase the rate of online sales, we will do our special efforts to increase categories, kind – of the product, which has good sales online. Of course, we will do some strategies to promote our online sales. We have several aspects, such as

[Unidentified Analyst:]

Thank you for those details. And as my final question, Mr. Kang, what do your company’s your company’s strength that give such the opportunity to succeed in what is a very competitive retail market in China?

[Yihua Kang:]

[indiscernible] The Ever-Glory is from originally wholesale business. The Ever-Glory retail from originally in our wholesale [indiscernible] We are doing something the other suppliers or brands are not doing. We have our specialties. [Technical Difficulty]

[Wilson Bow:]

Hey, Debbie, could you please dial back to Mr. Kang?

[Yihua Kang:]

[Foreign Language]

[Wilson Bow:]

As we have grown originally from a wholesale business, we have learned to be able to do the quick response and we have learned a lot from the foreign brand variances, and these are the two main points that we have the advantage and capability to win in the world market at present.

[Unidentified Analyst:]

That’s very helpful. Thank you very much. Thank you for the detailed answers to all of the questions.

[Wilson Bow:]

Thank you for your questions.

[Operator:]

Ladies and gentlemen, this will conclude our question-and-answer session, and I’ll turn it back to management for closing remarks.

[Yihua Kang:]

Thank you for joining our second quarter 2017 earnings conference call. Thank you very much. We look forward to talking with you in the next quarter. If you have any additional questions, please feel free to contact our IR department or TPG IR. Thanks. Good bye.

[Operator:]

Ladies and gentlemen, thank you for your participation. This concludes today’s conference. You may now disconnect.