Zuoan Fashion Limited Announces Third Quarter 2014 Financial Results

– Third Quarter Revenue and Gross Margin Meet Guidance Forecast –

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.

Outlet Type:

3Q2013

3Q2014

Direct Stores

8

3

Distributor and Sub-distributor Stores

1,003

746

Distributor-Operated Flagship Stores

63

54

Total:

1,074

803

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


ZUOAN FASHION LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three months period ended September 30

Nine months period ended September 30

2013

2014

2014

2013

2014

2014

RMB

RMB

US$

RMB

RMB

US$

(in thousands)

Revenues

380,501

301,077

49,051

994,310

735,921

119,896

Cost of goods sold

(224,705)

(216,272)

(35,235)

(562,921)

(501,819)

(81,756)

Gross profit

155,796

84,805

13,816

431,389

234,102

38,140

Other income

1,181

2,795

455

4,187

5,778

941

Selling and distribution expenses

(108,270)

(72,123)

(11,750)

(165,832)

(156,388)

(25,479)

Administrative expenses

(14,482)

(26,654)

(4,342)

(40,119)

(53,159)

(8,661)

Finance costs

(2,787)

(2,968)

(484)

(8,205)

(8,852)

(1,442)

(Loss/)Profit before taxation

31,438

(14,145)

(2,304)

221,420

21,481

3,500

Income tax expense

(8,473)

(57,013)

(10,032)

(1,634)

(Loss)/Profit after taxation

22,965

(14,145)

(2,304)

164,407

11,449

1,865

Other comprehensive (loss)/profit:

Foreign exchange difference arising from translation of foreign currency financial statements

(687)

(152)

(25)

(3,025)

769

125

Total comprehensive (loss)/income for the periods

22,278

(14,297)

(2,329)

161,382

12,218

1,991

(Loss)/Earnings per share (RMB):

Basic (loss)/earnings per share

0.21

(0.13)

(0.02)

1.48

0.10

0.02

Diluted (loss)/earnings per share

0.21

(0.13)

(0.02)

1.48

0.10

0.02

Weighted average basic no. of shares (‘000)

111,276

111,276

111,276

111,276

Weighted average diluted no. of shares (‘000)

111,276

111,276

111,276

111,276


ZUOAN FASHION LIMITED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

As of December 31

As of September 30

(in thousands)

2013

2014

2014

ASSETS

RMB

RMB

US$

Non-current assets

Property, plant and equipment

17,377

7,806

1,272

Current assets

Inventories

24,629

50,855

8,285

Trade and other receivables

450,983

361,046

58,821

Prepayments

94

Fixed deposits – pledged

41,800

45,800

7,462

Cash and cash equivalents

1,227,402

1,411,891

230,025

1,744,908

1,869,592

304,593

Total assets

1,762,285

1,877,398

305,865

EQUITY AND LIABILITIES

Share capital

185

185

30

Share premium

426,165

426,165

69,431

Reserves

49,165

50,233

8,184

Retained profits

1,007,517

984,337

160,368

Total equity

1,483,032

1,460,920

238,012

LIABILITIES

Current liabilities

Trade and other payables

124,398

269,074

43,837

Interest-bearing bank borrowings

149,550

147,010

23,951

Income tax payable

5,305

394

64

Total liabilities

279,253

416,478

67,852

Total equity and liabilities

1,762,285

1,877,398

305,865

ZUOAN FASHION LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS

Nine months period ended September 30

2013

2014

2014

(in thousands)

RMB

RMB

US$

Cash flows from operating activities

Profit before taxation

221,420

21,481

3,500

Adjustments for :

Depreciation of property, plant and equipment

6,301

9,191

1,497

Equity-settled employees benefit expenses

1,356

299

49

Interest expenses on bank borrowings

8,205

8,852

1,442

Loss on disposal of property, plant and equipment

183

827

135

Provision for obsolete inventory

14,897

2,427

Interest income

(4,187)

(5,778)

(941)

Operating profit before working capital changes

233,278

49,769

8,108

Increase in inventories

(11,233)

(41,123)

(6,700)

Decrease in trade and other receivables

129,383

89,937

14,652

Decrease in prepayments

100

94

15

Increase in fixed deposits pledged

(20,181)

(4,000)

(652)

Increase in trade and other payables

105,902

144,676

23,571

Cash generated from operations

437,249

239,353

38,995

Interest paid

(8,205)

(8,852)

(1,442)

Income tax paid

(72,327)

(14,943)

(2,435)

Net cash generated from operating activities

356,717

215,558

35,119

Cash flows from investing activities

Acquisition of property, plant and equipment

(22,690)

(447)

(73)

Interest received

4,187

5,778

941

Net cash generated from/(used in) investing activities

(18,503)

5,331

869

Cash flows from financing activities

Dividend paid

34,629

5,642

Bank loans obtained

171,200

131,870

21,484

Repayment of bank loans

(137,750)

(134,410)

(21,898)

Net cash (used in)/generated from financing activities

33,450

(37,169)

(6,056)

Net increase in cash and cash equivalents

371,664

183,720

29,932

Exchange difference

(3,025)

769

125

Cash and cash equivalents at beginning of the periods

918,451

1,227,401

199,968

Cash and cash equivalents at end of the periods

1,287,090

1,411,891

230,025

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