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| EVK > SEC Filings for EVK > Form 10-Q on 10-Aug-2012 | All Recent SEC Filings |
10-Aug-2012
Quarterly Report
The following discussion and analysis of our financial condition and results of operations for the three and six months ended June 30, 2012 should be read in conjunction with the Financial Statements and corresponding notes included in this Quarterly Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Special Note Regarding Forward-Looking Statements in this report. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," "target", "forecast" and similar expressions to identify forward-looking statements.
Overview
Our Business
We are a leading apparel supply-chain manager and retailer in China. We are listed on NYSE MKT (previously NYSE Amex) under the symbol of "EVK".
We classify our businesses into two segments: Wholesale and Retail. Our wholesale business consists of wholesale-channel sales made principally to famous brands, and department stores located throughout Europe, the U.S., Japan and the People's Republic of China ("PRC"). We focus on well-known, middle-to-high grade casual wear, sportswear, and outerwear brands. Our retail business consists of retail-channel sales directly to consumers through retail stores located throughout the PRC.
Although we have our own manufacturing facilities, we currently outsource most of the manufacturing to our long-term contractors as part of our overall business strategy. We believe outsourcing allows us to maximize our production capacity and maintain flexibility while reducing capital expenditures and the costs of keeping skilled workers on production lines during low seasons. We oversee our long-term contractors with our advanced management solutions and inspect products manufactured by them to ensure that they meet our high quality control standards and timely delivery.
Wholesale Business
We conduct our original design manufacturing ("ODM") operations through six wholly-owned subsidiaries which are located in the Nanjing Jiangning Economic and Technological Development Zone and Shang Fang Town in the Jiangning District in Nanjing, China: Ever-Glory International Group Apparel Inc. ("Ever-Glory Apparel"), Goldenway Nanjing Garments Company Limited ("Goldenway"), Nanjing New-Tailun Garments Company Limited ("New Tailun"), Nanjing Catch-Luck Garments Co., Ltd. ("Catch-Luck"), Ever-Glory International Group (HK) Ltd. ("Ever-Glory HK"), and Nanjing Tai Xin Garments Trading Company Limited ("Tai Xin").
Retail Business
We conduct our retail operations through Shanghai LA GO GO Fashion Company Limited ("LA GO GO"), a wholly-owned subsidiary of Ever-Glory Apparel.
Business Objectives
Wholesale Business
We believe the enduring strength of our wholesale business is mainly due to our consistent emphasis on innovative and distinctive product designs that stand for exceptional styling and quality.
The primary business objective for our wholesale segment is to expand our portfolio into higher-class brands, expand our customer base and improve our profit. We believe that our growth opportunities and continued investment initiatives include:
Ÿ Expand our global sourcing network
Ÿ Expand our overseas low-cost manufacturing base (outside of mainland China);
Ÿ Focus on high value-added products and continue our strategy to produce mid to high end apparel
Ÿ Continue to emphasize product design and technology utilization.
Ÿ Seek strategic acquisitions of international distributors that could enhance global sales and our distribution network; and
Ÿ Maintain stable revenue increases in the markets while shifting focus to higher margin wholesale markets such as mainland China.
Retail Business
The business objective for our retail segment is to establish a leading brand of women's apparel and to build a nationwide retail network in China. As of June 30, 2012, we have 562 stores (including store-in-stores) which included 121 stores that were opened and 26 stores that were closed in first half of 2012.
We believe that our growth opportunities and continued investment initiatives include:
Ÿ Build the LA GO GO brand to be recognized as a major player in the mid-end women's apparel market in China;
Ÿ Expand the LA GO GO retail network throughout China;
Ÿ Improve the LA GO GO retail stores' efficiency and increase same-store sales
Ÿ Continue to launch LA GO GO flagship stores in Tier-1 Cities and increase penetration and coverage in Tier-2 and Tier-3 Cities
Ÿ Become a multi-brand operator by seeking opportunities for long-term cooperation with reputable international brands and by facilitating international brands entry into the Chinese market.
Seasonality of Business
Our business is affected by seasonal trends, with higher levels of wholesale sales in our third and fourth quarters and higher retail sales in our first and fourth quarters. These trends primarily result from the timing of seasonal wholesale shipments and holiday periods in the retail segment.
Collection Policy
Wholesale business
For our new customers, we generally require orders placed to be backed by letters of credit. For our long-term and established customers with a good payment track record, we generally provide payment terms between 30 to 120 days following delivery of finished goods.
Retail business
For store-in-store shops, we generally receive payments from the stores between 60 and 90 days following the date of the register receipt. For our own flagship stores, we receive payments at the time of the register receipt.
Global Economic Uncertainty
Our business is dependent on consumer demand for our products. We believe that the significant uncertainty in the global economy and a slowdown in the United States and European economies have increased our clients' sensitivity to the cost of our products. We have experienced continued pricing pressure. If the global economic environment continues to be weak or should it weaken, these economic conditions could have a negative impact on our sales growth and operating margins in our wholesale segment in 2012.
In addition, economic conditions in the United States and other foreign markets in which we operate could substantially affect our sales, and profitability, and our cash position and collection of accounts receivable. Global credit and capital markets have experienced unprecedented volatility and disruption. Business credit and liquidity have tightened in much of the world. Some of our suppliers and customers may face credit issues and could experience cash flow problems and other financial hardships. These factors currently have not had an impact on the timeliness of receivable collections from our customers. We cannot predict at this time how this situation will develop and whether reserve for bad accounts receivable may need to be taken or such receivable written off in the coming quarters.
Despite the various risks and uncertainties associated with the current global economy, we believe our core strengths will continue to allow us to execute our strategy for long-term sustainable growth in revenue, net income and operating cash flow.
Summary of Critical Accounting Policies
We have identified critical accounting policies that, as a result of judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operation involved could result in material changes to our financial position or results of operations under different conditions or using different assumptions.
Revenue Recognition
We recognize wholesale revenue from product sales, net of value-added taxes,
upon delivery for local sales and upon shipment of the products for export
sales, at such time title passes to the customer provided however that (i) there
are no uncertainties regarding customer acceptance (ii) persuasive evidence of
an arrangement exists (iii) the sales price is fixed and determinable, and (iv)
collectability is deemed probable. We recognize wholesale revenue from
manufacturing fees charged to buyers for the assembly of garments from materials
provided by the buyers upon completion of the manufacturing process and shipment
of the products for export sales, provided that (i)there are no uncertainties
regarding customer acceptance (ii) persuasive evidence of an arrangement exists
(iii) the sales price is fixed and determinable, and (iv) collectability is
deemed probable. Retail sales are recorded at the time of register receipt.
Estimates and Assumptions
In preparing our consolidated financial statements, we use estimates and assumptions that affect the reported amounts and disclosures. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable, but that are inherently uncertain and unpredictable. We are also subject to other risks and uncertainties that may cause actual results to differ from estimated amounts. Significant estimates in 2012 and 2011 include the assumptions used to value warrants and the estimates of the allowance for deferred tax assets.
Results of Operations for the three months ended June 30, 2012 and 2011
The following table summarizes our results of operations for the three months ended June 30, 2012 and 2011. The table and the discussion below should be read in conjunction with our condensed consolidated financial statements and the notes thereto appearing elsewhere in this report.
Three Months Ended June 30,
2012 2011
(in U.S. Dollars, except for percentages)
Sales $ 47,195,031 100.0 % $ 42,923,640 100.0 %
Gross Profit $ 13,586,581 28.8 % $ 10,356,747 24.1 %
Operating Expense $ 11,164,465 23.7 % $ 7,884,083 18.4 %
Income From Operations $ 2,422,116 5.1 % $ 2,472,664 5.8 %
Other Income $ 250,043 0.1 % $ 181 0.1 %
Income tax expense $ 321,010 0.7 % $ 213,976 0.5 %
Net Income $ 2,351,149 5.0 % $ 2,258,869 5.3 %
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Revenue
The following table sets forth a breakdown of our total sales, by region, for
the three months ended June 30, 2012 and 2011.
Growth in 2012
% of total % of total Compared with
2012 sales 2011 sales 2011
Wholesale business
The People's Republic of China $ 10,932,970 23.2 % $ 6,160,177 14.4 % 77.5 %
Germany 3,393,413 7.2 8,670,146 20.2 (60.9 )
United States 4,287,325 9.1 5,543,305 12.9 (22.7 )
United Kingdom 4,588,231 9.7 5,403,112 12.6 (15.1 )
Japan 2,416,434 5.1 5,060,331 11.8 (52.2 )
Europe-Other 3,189,555 6.8 2,826,082 6.6 12.9
Total wholesale business 28,807,928 61.0 33,663,153 78.4 (14.4 )
Retail business 18,387,103 39.0 9,260,487 21.6 98.6
Total $ 47,195,031 100.0 % $ 42,923,640 100.0 % 10.0 %
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Sales for the three months ended June 30, 2012 were $47.2 million, an increase of 10.0% from the three months ended June 30, 2011. This increase was primarily attributable to increased sales in our retail business.
Sales generated from our wholesale business contributed 61.0% or $28.8 million of our total sales for the three months ended June 30, 2012, a decrease of 14.4% compared to $33.7 million in the three months ended June 30, 2011. This decrease was primarily attributable to decreased sales in Germany, the United States, the United Kingdom and Japan. The reduced sales in the wholesale segment was primarily due to global economic uncertainty and instability, the advanced economies represented by Europe and the US are recovering slowly, which seriously impacted China's apparel exports; therefore, our overseas wholesale business also faced declining orders.
Sales generated from our retail business contributed 39.0% or $18.4 million of our total sales for the three months ended June 30, 2012, an increase of 98.6% compared to 21.6% or $9.3 million in the three months ended June 30, 2011. This increase was primarily due to the increase in same store sales and new stores opened. We had 562 LA GO GO stores as of June 30, 2012, compared to 368 LA GO GO stores at June 30, 2011.
Costs and Expenses
Cost of Sales and Gross Margin
Cost of goods sold includes the direct raw material cost, direct labor cost, and manufacturing overhead including depreciation of production equipment and rent, consistent with the revenue earned. Cost of goods sold excludes warehousing costs, which historically have not been significant.
The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the three months ended June 30, 2012 and 2011.
Growth (Decrease)
in 2012 Compared
Three months ended June 30, with
2012 2011 2011
(in U.S. dollars, except for percentages)
Net Sales for Wholesale Sales $ 28,807,928 100.0 % $ 33,663,153 100.0 % (14.4 )%
Raw Materials 13,097,205 45.5 16,395,407 48.7 (20.1 )
Labor 1,137,557 3.9 1,073,988 3.2 5.9
Outsourced Production Costs 7,979,797 27.7 9,543,021 28.3 (16.4 )
Other and Overhead 22,662 0.1 66,428 0.2 (65.9 )
Total Cost of Sales for Wholesale 22,237,221 77.2 27,078,844 80.4 (17.9 )
Gross Profit for Wholesale 6,570,707 22.8 6,584,309 19.6 (0.2 )
Net Sales for Retail 18,387,103 100.0 9,260,487 100.0 98.6
Production Costs 5,212,762 28.4 2,758,990 29.8 88.9
Rent 6,158,467 33.5 2,729,059 29.5 125.7
Total Cost of Sales for Retail 11,371,229 61.8 5,488,049 59.3 107.2
Gross Profit for Retail 7,015,874 38.2 3,772,438 40.7 86.0
Total Cost of Sales 33,608,450 71.2 32,566,893 75.9 3.2
Gross Profit $ 13,586,581 28.8 % $ 10,356,747 24.1 % 31.2 %
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Raw material costs for our wholesale business were 45.5% of our total wholesale business sales in the three months ended June 30, 2012, compared to 48.7% in the three months ended June 30, 2011. The decrease was mainly due to decreased raw materials prices.
Labor costs for our wholesale business were 3.9% of our total wholesale business sales in the three months ended June 30, 2012, compared to 3.2% in the three months ended June 30, 2011. The increase was mainly due to decreased outsourced production.
Outsourced manufacturing costs for our wholesale business were 27.7% of our total wholesale business sales in the three months ended June 30, 2012, compared to 28.3% in the three months ended June 30, 2011. This decrease was primarily attributable to the decreased outsourced manufacturing costs in the PRC, because we had available domestic capacity in the three months ended June 30, 2012, compared with limited capacity in the three months ended June 30, 2011, and our Chinese suppliers were willing to lower their prices due to their excess production capacity .
Overhead and other expenses for our wholesale business accounted for 0.1% of our total wholesale business sales for the three months ended June 30, 2012, compared to 0.2% of total sales for the three months ended June 30, 2011.
Wholesale business gross profit for the three months ended June 30, 2012 and 2011 was both $6.6 million. As a percentage of wholesale sales, gross profit accounted for 22.8% of our total wholesale sales for the three months ended June 30, 2012, an increase of 3.2% compared to 19.6% for the three months ended June 30, 2011. The increase was mainly due to decreased raw materials prices and outsourced manufacturing costs.
Production costs for our retail business were $5.2 million during the three months ended June 30, 2012 compared to $2.8 million during the three months ended June 30, 2011. As a percentage of retail sales, retail production costs accounted for 28.4% of our total retail sales in the three months ended June 30, 2012, compared to 29.8% of total retail sales in the three months ended June 30, 2011. This decrease was primarily due to reduced retail prices in various promotions in exchange for increased sales volume during the three months ended June 30, 2011. .
Rent costs for our retail business were $6.2 million for the three months ended June 30, 2012 compared to $2.7 million for the three months ended June 30, 2011. As a percentage of sales, rent costs accounted for 33.5% of our total retail sales for the three months ended June 30, 2012, compared to 29.5% of total retail sales for the three months ended June 30, 2011. Total rent costs increased as a result of the increase in the number of our stores. The increase in rent costs as a percentage of total retail sales was due to the increase in the number of new stores opened in the second quarter of 2012; there were 95 and 77 new stores opened in the three months ended June 30, 2012 and 2011, respectively.
Gross profit in our retail business for the three months ended June 30, 2012 was $7.0 million and gross margin was 38.2%. Gross profit in our retail business for the three months ended June 30, 2011 was $3.8 million and gross margin was 40.7%.
Total cost of sales for the three months ended June 30, 2012 was $33.6 million, compared to $32.6 million for the three months ended June 30, 2011, an increase of 3.2%. As a percentage of total sales, cost of sales decreased to 71.2% of total sales for the three months ended June 30, 2012, compared to 75.9% of total sales for the three months ended June 30, 2011. Consequently, gross margin increased to 28.8% for the three months ended June 30, 2012 from 24.1% for the three months ended June 30, 2011.
Selling, General and Administrative Expenses
Our selling expenses consist primarily of local transportation, unloading charges, product inspection charges, salaries for retail staff and decoration and marketing expenses associated with our retail business.
Our general and administrative expenses include administrative salaries, office expense, certain depreciation and amortization charges, repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable to our revenues.
Costs of our distribution network that are excluded from cost of sales consist of local transportation and unloading charges, and product inspection charges. Accordingly our gross profit amounts may not be comparable to those of other companies who include these amounts in cost of sales.
Three Months Ended June 30, Increase/
2012 2011 (Decrease)
(in U.S. Dollars, except for percentages)
Gross Profit $ 13,586,581 28.8 % $ 10,356,747 24.1 % 31.2 %
Operating Expenses: ?
Selling Expenses 6,966,335 14.8 % 3,766,770 8.8 84.9
General and Administrative Expenses 4,198,130 8.9 % 4,117,313 9.6 2.0
Total 11,164,465 23.7 % 7,884,083 18.4 41.6
Income from Operations $ 2,422,116 5.1 % $ 2,472,664 5.8 % (2.0) %
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Selling expenses increased 84.9% to $7.0 million for the three months ended June 30, 2012 from $3.8 million for the three months ended June 30, 2011. The increase was attributable to the increased number of retail employees and increased average salaries, as well as increased store decoration and marketing expenses associated with the promotion of the LA GO GO brand.
General and administrative expenses increased 2.0% to $4.2 million the three months ended June 30, 2012 from $4.1 million for the three months ended June 30, 2011. As a percentage of total sales, general and administrative expenses decreased to 8.9% of total sales for the three months ended June 30, 2012, compared to 9.6% of total sales for the three months ended June 30, 2011. The percentage decrease was attributable to the increase in our sales.
Income from Operations
Income from operations decreased 2.0% to $2.4 million for the three months ended June 30, 2012 from $2.5 million for the three months ended June 30, 2011. As a percentage of sales, income from operations accounted for 5.1% of our total sales for the three months ended June 30, 2012, a decrease of 0.7% compared to the three months ended June 30, 2011 as a result of increasing selling expenses.
Interest Expense
Interest expense was $0.5 million for the three months ended June 30, 2012, an increase of 77.2% compared to the same period in 2011. This increase was attributable to the increased interest rates.
Change in fair value of derivative liability
Change in fair value of derivative liability was a gain of $0.2 million and $0.1 million, based on the Binnomial Lattice model, for the three months ended June 30, 2012 and 2011, respectively.
Income Tax Expenses
Income tax expense for the three months ended June 30, 2012 was $0.3 million, an increase of 50% compared to the same period of 2011. The increase was primarily due to increased profits of LA GO GO and Ever-Glory Apparel.
Our PRC subsidiaries are governed by the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws. Each of our consolidated entities files its own separate income tax return.
All PRC subsidiaries are subject to 25% income tax rate.
Perfect Dream Limited was incorporated in the British Virgin Islands on July 1, 2004, and has no income tax.
Ever-Glory International Group (HK) Ltd was incorporated in Samoa on September 15, 2009, and has no liabilities for income tax.
Ever-Glory International Group Inc. was incorporated in the United States and has incurred net operating losses for income tax purposes through 2010. The net operating loss carry forwards for United States income taxes may be available to reduce future years' taxable income. These carry forwards will expire, if not utilized, through 2031. Management believes that the realization of the benefits from these losses is uncertain due to our limited operating history and continuing losses for United States income tax purposes. Accordingly, we provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero.
Net Income
Net income for the three months ended June 30, 2012 was $2.4 million, an increase of 4.1% compared to the same period in 2011. Our basic and diluted earnings per share were $0.16 and $0.15 for the three months ended June 30, 2012 and 2011, respectively.
Results of Operations for the six months ended June 30, 2012 and 2011
The following table summarizes our results of operations for the six months ended June 30, 2012 and 2011. The table and the discussion below should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this report.
Six Months Ended June 30,
2012 2011
(in U.S. Dollars, except for percentages)
Sales $ 100,421,204 100.0 % $ 96,131,877 100.0 %
Gross Profit $ 25,189,569 25.1 % $ 19,468,759 20.3 %
Operating Expense $ 20,003,933 19.9 % $ 13,685,030 14.2 %
Income From Operations $ 5,185,636 5.2 % $ 5,783,729 6.0 %
Other Income (Expenses) $ 132,589 0.5 % $ (19,867 ) 0 %
Income tax expense $ 845,866 0.8 % $ 892,997 0.9 %
Net Income $ 4,472,359 4.5 % $ 4,870,865 5.1 %
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Revenue
The following table sets forth a breakdown of our total sales, by region, for
the six months ended June 30, 2012 and 2011.
Growth in 2012
. . .
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