Zuoan Fashion Limited Announces Third Quarter 2014 Financial Results

SHANGHAI, December 23, 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 third quarter ended September 30, 2014.

Third Quarter 2014 Financial Highlights

• Revenues in the third quarter of 2014 were RMB301.1 million ($49.1 million), a decrease of 20.9% from RMB380.5 million in the same quarter of 2013.
• Gross profit in the third quarter decreased 45.6% year over year to RMB84.8 million ($13.8 million) from RMB155.8 million in the same quarter of 2013.
• Gross margin was 28.2% compared with 40.9% in the prior year period and 30.0% in the second quarter of 2014.
• Net loss was RMB14.1 million ($2.3 million) compared with net income of RMB23.0 million in the same quarter of 2013.
• Diluted loss per ordinary share was RMB0.13 ($0.02) in the third quarter, equivalent to RMB0.51 ($0.08) per ADS, compared to diluted earnings per ordinary share of RMB0.21 ($0.03) or RMB0.83 ($0.13) per ADS in the third quarter of 2013.

James Hong, Founder, Chairman and Chief Executive Officer, commented, "Market conditions at the retail store level remain challenging driven by an industry downturn and the continued rise of e-commerce. Customer spending at Zuoan retail stores continues to be restrained while orders from our distributors declined in the third quarter over the prior year period as inventories remain at elevated levels. In response to the current market environment, we continue to offer lower prices to our customers and are increasing our advertising efforts to boost brand awareness. While these efforts resulted in margin pressure this quarter, we believe these actions along with our latest growth initiatives will strengthen our performance and benefit Zuoan as market conditions improve."

Mr. Hong continued, "A major new initiative for Zuoan going forward focuses on the integration of our supply chain structure to establish a brand new online-to-offline (OTO) business. This October, we conducted a pilot program in which we launched a new and lower priced collection in twelve Zuoan stores. This new collection is tailored according to customer fashion trends and sold at very competitive prices in these twelve stores. This new initiative received very positive results during the trial period and we plan to expand the trial program to forty to fifty stores over the next several quarters. When implemented fully, customers will also have the ability to purchase this special collection online on PCs and mobile devices. We believe the OTO business can serve as a model for Zuoan's future development. This interactive shopping experience will enable Zuoan to attract a new group of target customers that prefer the convenience and low price of online shopping while also seeking a recognized brand and reliable sourcing channel. We aim to significantly improve our overall customer experience by seamlessly integrating our online and offline product offerings."

"As we look to 2015, in addition to maintaining product quality and strengthening our brand image, we actively look for new growth drivers to improve our performance. We will continue optimizing supply chain which can result in lower pricing for our customers, incorporate online resources to offer customers a wide range of quality products at different levels of affordable prices and evaluate new business lines for growth. For example, earlier this year, we separated our new leather accessories business to ensure greater focus on product development and marketing. We have opened over fifty special stores as of September 30th. We expect these actions to improve our brand popularity, reinforce Zuoan's leadership in the fashion casual menswear sector and boost sales in 2015 and beyond," concluded Mr. Hong.

Third Quarter 2014 Financial Performance

Revenue for the third quarter of 2014 was RMB301.1 million ($49.1 million), representing a decrease of 20.9% from RMB380.5 million in the same quarter of 2013. The decrease was primarily driven by decreased sales volume, 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 20.7% to RMB299.9 million from RMB378.3 million in the same quarter of 2013. Third quarter 2014 self-operated direct store sales were RMB1.2 million, compared to RMB2.2 million in the same quarter of 2013. A net total of 120 distributor and sub-distributor stores and two self-operated direct store were closed in the third quarter of 2014, resulting in a total of 803 store locations as of September 30, 2014 compared to 1,074 store locations in the same period of the prior year.

Cost of sales decreased by 3.8% to RMB216.3 million ($35.2 million) in the third quarter of 2014 from RMB224.7 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 71.8% in the third quarter of 2014 from 59.1% in the same quarter of 2013.

Gross profit decreased by 45.6% to RMB84.8 million ($13.8 million) from RMB155.8 million in the third quarter of 2013. Third quarter 2014 gross margin was 28.2% compared to 40.9% 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 20.4% and 28.2%, respectively.

Selling and distribution expenses in the third quarter were RMB72.1 million ($11.8 million), or 24.0% of revenue, compared to RMB108.3 million, or 28.5% of revenue in the same quarter of 2013. The actual amount and percentage decreases were primarily due to lower advertising expenses incurred for the marketing activities and sales promotions in the third quarter of 2014 offset by an increase in renovation costs of the existing stores.

Administrative expenses in the third quarter were RMB26.7 million ($4.3 million), or 8.9% of revenue, compared with RMB14.5 million, 3.8% of revenue in the same quarter of 2013.

Effective tax rate in the third quarter was nil compared to 27.0% in the same quarter of 2013 as a result of the operating loss in the third quarter of 2014.

Net loss for the third quarter was RMB14.1 million ($2.3 million) compared to net income of RMB23.0 million in the same quarter of 2013.

Diluted loss per ordinary share were RMB0.13 ($0.02) in the third quarter of 2014, equivalent to RMB0.51 ($0.08) per ADS, compared to diluted earnings per ordinary share of RMB0.21 ($0.03) or RMB0.83 ($0.13) per ADS in the third quarter of 2013. The Company's diluted number of shares outstanding was 111.3 million in the third quarter ended September 30, 2014.

As of September 30, 2014, the Company had cash, cash equivalents of RMB1,411.9 million ($230.0 million), compared to RMB1,227.4 million as of December 31, 2013. Net cash provided by operating activities was RMB215.6 million ($35.1 million) in the nine months ended September 30, 2014, compared to RMB356.7 million in the prior year period.

Financial Outlook

For the fourth quarter of 2014, the Company currently anticipates revenue in the range of RMB190-RMB210 million ($31.0-34.2 million), gross margin of approximately 21-23%, net loss of approximately RMB2.4-2.8 million ($0.4-$0.5 million) and basic and fully diluted loss per share of approximately RMB0.02 ($0.004) - RMB0.03 ($0.004), equivalent to RMB0.09 ($0.01) - RMB0.10 ($0.02) per ADS.

Conference Call Information

Zuoan's management will host an earnings conference call on December 23, 2014 at 8:30 a.m. U.S. Eastern Time. Listeners may access the call by dialing # 1-719-325-2420. A webcast will also be available via http://public.viavid.com/index.php?id=112369. A replay of the call will be available through December 30, 2014. Listeners may access the replay by dialing #1-858-384-5517, access code: 1268188.

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 6.12 to US$1.00, as set forth in the H.10 statistical release of the Federal Reserve Board on September 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 803 stores located in China as of September 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.

Contact Information

John Low
Email: john.low@zuoancn.com

ICR, LLC
William Zima
Phone: +86-10-6583-7511

Zuoan Investor Relations Department
US: 1-646-308-1614

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