Ever-Glory Internati

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EVER GLORY INTERNATIONAL : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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11/08/2018 | 05:22 pm


The following discussion and analysis of our financial condition and results of
operations for the three and nine months ended September 30, 2018 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 retailer of branded fashion apparel and leading global apparel supply
chain solution provider based in China. We are listed on the NASDAQ Global
Market 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
domestically and international recognized 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 end casual wear, sportswear, and
outerwear brands. Our retail business consists of retail-channel sales directly
to consumers through retail stores located throughout the PRC as well as sales
via online stores at Tmall, Dangdang mall, JD.com, VIP.com and etc.



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 slow 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 requirement.



Wholesale Business



We conduct our original design manufacturing ("ODM") operations through seven
wholly owned subsidiaries which are located in the Nanjing Jiangning Economic
and Technological Development Zone
, Jiangsu province, China, Chuzhou, Anhui
province, China and Samoa: 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"), Chuzhou Huirui Garments
Co., Ltd.
("Huirui), Nanjing Tai Xin Garments Trading Company Limited ("Tai
Xin"), Ever-Glory Supply Chain Service Co., Limited ("Ever-Glory Supply Chain")
and Ever-Glory International Group (HK) Ltd. ("Ever-Glory HK").



Retail Business




We conduct our retail operations through Shanghai LA GO GO Fashion Company
Limited
("LA GO GO"), Jiangsu LA GO GO Fashion Company Limited ("Jiangsu LA GO
GO"), Tianjin LA GO GO Fashion Company Limited ("Tianjin LA GO GO"), Shanghai Ya
Lan Fashion Company Limited
("Ya Lan"), 78% owned subsidiary Shanghai Yiduo
Fashion Company Limited
("Shanghai Yiduo") and Xizang He Meida Trading Company
Limited
("He Meida").



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. We maintain long-term, satisfactory
relationships with a portfolio of well-known and mid-class global brands.



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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:






? Expanding our global sourcing network;

? Expanding our overseas low-cost manufacturing base (outside of mainland
China);



? Focusing on high value-added products and continuing our strategy to produce



mid-to-high end apparel;

? Continuing to emphasize product design and technology utilization;

? Seeking strategic acquisitions of international distributors that could
enhance global sales and our distribution network; and



? Maintaining stable revenue increase in the markets while shifting focus to



higher margin wholesale markets such as mainland China.




Retail Business



The business objectives for our retail segment are to establish leading brands
of women's apparel and to build a nationwide retail network in China. As of
September 30, 2018, we had 1,396 stores (including store-in-stores), including
189 stores were opened and 193 stores were closed during the nine months ended
September 30, 2018.




We believe that our growth opportunities and continued investment initiatives
include:






? Building our retail brand to be recognized as a major player in the
mid-to-high end women's apparel market in China;

? Expanding our retail network throughout China;



? Improving our retail stores' efficiency and increasing same-store sales;



? Continuing to launch retail flagship stores in Tier-1 cities and increasing



our penetration and coverage in Tier-2 and Tier-3 cities; and

? Becoming a multi-brand operator.




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 good payment
track records, we generally provide payment terms between 30 to 180 days
following the delivery of finished goods.






Retail business



For store-in-store shops, we generally receive payments from the stores between
60 to 90 days following the date of the register receipt. For our own flagship
stores, we receive payments on the same day of the register receipt. For sales
from e-commerce platforms such as Tmall, Dangdang mall, JD.com, VIP.com and
etc., we generally receive payments between 5 to 15 days following the date



of
the register receipt.



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Global Economic Uncertainty



Our business is dependent on consumer demand for our products. We believe that
the significant uncertainty in the global economy and the slowdown of economies
in the United States and Europe 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, these worsening economic
conditions could have a negative impact on our sales growth and operating
margins in our wholesale segment in 2018.



In addition, economic conditions in the United States and other foreign markets
in which we operate could substantially affect our sales profitability, 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 most 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 accounts receivable may
need to be allowed for or 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



The Company recognizes revenue pursuant to Accounting Standards Codification 606
("ASC 606") Revenue from Contracts with Customers, the standard applies five
step model (i) The standard applies to a company's contracts with customers (ii)
The unit of account for revenue recognition under the new standard is a
performance obligation (a good or service) and the performance obligations will
be accounted for separately if they are distinct (iii) The transaction price is
determined based on the amount of consideration that a company expects to be
entitled to from a customer (iv) The transaction price is allocated to all the
separate performance obligations in an arrangement, and (v) Revenue will be
recognized when an entity satisfies each performance obligation by transferring
control of the promised goods or services to the customer. Goods or services can
transfer at a point in time.




The Company operates in two segments - wholesale and retail.



The Company recognizes 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.



The Company recognizes retail sales net of promotional discounts, rebates, and
return allowances. Retail store sales are recognized at the time of the register
receipt. Retail online sales are recognized when products are shipped and
customers receive the products because we retain a portion of the risk of loss
on these sales during transit.



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 2018 and 2017 include
the assumptions used to value tax liabilities, derivative financial instruments,
the estimates of the allowance for deferred tax assets, and the accounts
receivable allowance and inventory slow-moving and obsolete write-offs.




Recent Accounting Pronouncements






In February 2016, the FASB issued ASU No. 2016-02, Leases. Under the new
guidance, lessees will be required to recognize a lease liability and a
right-of-use asset for all leases (with the exception of short-term leases) at
the commencement date. The ASU is effective for fiscal years and interim periods
within those years beginning after December 15, 2018. The Company is currently
assessing the impact of this ASU on its consolidated financial statements.






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In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments - Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which
modifies the measurement of expected credit losses of certain financial
instruments. This ASU is effective for fiscal years and interim periods within
those years beginning after December 15, 2019. The Company is currently
assessing the impact of this ASU on its consolidated financial statements.



The Company reviews new accounting standards as issued. Management has not
identified any other new standards that it believes will have a significant
impact on the Company's consolidated financial statements.



Results of Operations For The Three Months Ended September 30, 2018 And 2017






The following table summarizes our results of operations for the three months
ended September 30, 2018 and 2017. 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
September 30,
2018 2017
(In thousands of U.S. dollars, except for percentages)
Sales $ 125,480 100.0 % $ 120,257 100.0 %
Gross Profit $ 30,061 24.0 % $ 33,250 27.6 %
Operating Expense $ 26,107 20.8 % $ 30,405 25.3 %
Income From Operations $ 3,954 3.2 % $ 2,845 2.4 %
Other Income (Expenses) $ 130 0.1 % $ 1,795 1.5 %
Income tax expense $ 908 0.7 % $ 1,522 1.3 %
Net Income $ 3,176 2.5 % $ 3,118 2.6 %




Revenue




The following table sets forth a breakdown of our total sales, by region, for
the three months ended September 30, 2018 and 2017.






Growth
2018 2017 (Decrease)
(In thousands (In thousands in 2018
of % of total of % of total compared
Wholesale business U.S. dollars) sales U.S. dollars) sales with 2017
Mainland China $ 25,853 20.6 % $ 23,885 19.9 % 8.2 %
Hong Kong, China 18,427 14.7 20,520 17.1 (10.2 )
Germany 2,750 2.2 2,239 1.9 22.9
United Kingdom 8,254 6.6 5,599 4.7 47.4
Europe-Other 19,707 15.7 10,899 9.1 80.8
Japan 2,371 1.9 232 0.2 920.2
United States 8,321 6.6 5,611 4.7 48.3
Total Wholesale business 85,683 68.3 68,985 57.4 24.2
Retail business 39,797 31.7 51,272 42.6 (22.4 )
Total sales $ 125,480 100.0 % $ 120,257 100.0 % 4.3 %





Sales for the three months ended September 30, 2018 were $125.5 million, a 4.3%
increase compared with the three months ended September 30, 2017. This increase
was primarily attributable to a 24.2% increase in sales in our wholesale
business partially offset by a 22.4% decrease in our retail business.



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Sales generated from our wholesale business contributed 68.3% or $85.7 million
of our total sales for the three months ended September 30, 2018, a 24.2%
increase compared with $69.0 million in the three months ended September 30,
2017
. This increase was primarily attributable to an increase in sales in
Mainland China, Germany, the United Kingdom, Europe-Other, Japan and the United
States
partially offset by a decrease in sales in Hong Kong, China.



Sales generated from our retail business contributed 31.7% or $39.8 million of
our total sales for the three months ended September 30, 2018, a 22.4% decrease
compared with 42.6% or $51.3 million in the three months ended September 30,
2017
. This decrease was primarily due to a decrease in same store sales.



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 September 30, 2018 and 2017.



Growth
Three months ended (Decrease)
September 30, in 2018
2018 2017 Compared
(In thousands of U.S. dollars, except for percentages) with 2017



Net Sales for Wholesale Sales $ 85,683 100.0 %



$ 68,985 100.0 % 24.2 %
Raw Materials 40,745 47.4 31,092 45.1 31.0
Labor 1,159 1.4 1,468 2.1 (21.1 )



Outsourced Production Costs 33,401 39.0 25,999 37.7 28.5
Other and Overhead 138 0.2 199 0.3 (30.5 )
Total Cost of Sales for Wholesale 75,443 88.0 58,758 85.2 28.4
Gross Profit for Wholesale 10,240 12.0



10,227 14.8 0.1
Net Sales for Retail 39,797 100.0 51,272 100.0 (22.4 )
Production Costs 11,677 29.3 18,081 35.3 (35.4 )
Rent 8,300 20.9 10,168 19.8 (18.4 )



Total Cost of Sales for Retail 19,976 50.2 28,249 55.1 (29.3 )
Gross Profit for Retail 19,821 49.8



23,023 44.9 (13.9 )
Total Cost of Sales 95,420 76.0 87,007 72.4 9.7
Gross Profit $ 30,061 24.0 % $ 33,250 27.6 % (9.6 )%




Raw material costs for our wholesale business were 47.4% of our total wholesale
business sales in the three months ended September 30, 2018, compared with 45.1%
in the three months ended September 30, 2017. The increase was mainly due to
higher raw material prices.



Labor costs for our wholesale business were 1.4% of our total wholesale business
sales in the three months ended September 30, 2018, compared with 2.1% in the
three months ended September 30, 2017. The marginal decrease was mainly due to a
higher number of outsourced orders in 2018.



Outsourced production costs for our wholesale business for the three months
ended September 30, 2018 increased 28.5% to $33.4 million from $26.0 million for
the three months ended September 30, 2017. Outsourced production costs accounted
for 39.0% of our total wholesale business sales in the three months ended
September 30, 2018, a 28.5% increase from the three months ended September 30,
2017
. This increase was primarily attributable to higher average employee
salaries at our outsourced manufacturing factories.



Overhead and other expenses for our wholesale business accounted for 0.2% of our
total wholesale business sales for the three months ended September 30, 2018,
compared with 0.3% of total wholesale business sales for the three months ended
September 30, 2017.



Wholesale business gross profit for the three months ended September 30, 2018
was $10.2 million compared with $10.2 million for the three months ended
September 30, 2017. Gross profit accounted for 12.0% of our total wholesale
sales for the three months ended September 30, 2018, compared with 14.8% for the
three months ended September 30, 2017. The decrease was mainly due to an
increase in raw materials costs.



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Production costs for our retail business were $11.7 million for the three months
ended September 30, 2018 compared with $18.1 million during the three months
ended September 30, 2017. Retail production costs accounted for 29.3% of our
total retail sales in the three months ended September 30, 2018, compared with
35.3% for the three months ended September 30, 2017. The decrease was due to
lower discounts on our out-of-season products in the three months ended
September 30, 2018 compared with the same period of the prior year in percentage
of sales.




Rent costs for our retail business for the three months ended September 30, 2018
were $8.3 million compared with $10.2 million for the three months ended
September 30, 2017. Rent costs for our retail business accounted for 20.9% of
our total retail sales for the three months ended September 30, 2018, compared
with 19.8% for the three months ended September 30, 2017. The decrease was
primarily attributable to lower variable rent charged at certain locations.



Gross profit in our retail business for the three months ended September 30,
2018
was $19.8 million and gross margin was 49.8%. Gross profit in our retail
business for the three months ended September 30, 2017 was $23.0 million and
gross margin was 44.9%.




Total cost of sales for the three months ended September 30, 2018 was $95.4
million
, a 9.7% increase from $87.0 million for the three months ended September
30, 2017
. Total cost of sales as a percentage of total sales for the three
months ended September 30, 2018 was 76.0%, compared with 72.4% for the three
months ended September 30, 2017. Gross margin for the three months ended
September 30, 2018 was 24.0% compared with 27.6% for the three months ended
September 30, 2017.




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.



Increase
Three Months Ended (Decrease)
September 30, in 2018
2018 2017 Compared
(In thousands of U.S. dollars, except for percentages) to 2017
Gross Profit $ 30,061 25.0 % $ 33,250 27.6 % (9.6 )%
Operating Expenses:
Selling Expenses 17,588 14.6 20,238 16.8 (13.1 )



General and Administrative Expenses 8,519 7.1



10,167 8.5 (16.2 )
Total 26,107 21.7 30,405 25.3 (14.1 )
Income from Operations $ 3,954 3.3 % $ 2,845 2.4 % 39.0 %




Selling expenses for the three months ended September 30, 2018 decreased 13.1%
to $17.6 million from $20.2 million for the three months ended September 30,
2017
. The decrease was attributable to lower retail sales.



General and administrative expenses for the three months ended September 30,
2018
decreased 16.2% to $8.5 million from $10.2 million for the three months
ended September 30, 2017. The decrease was attributable to lower financial



fees.



Income from Operations




As result, income from operations for the three months ended September 30, 2018
increased 39.0% to $4.0 million from $2.8 million for the three months ended
September 30, 2017.



Interest Expense




Interest expense for the three months ended September 30, 2018 was $0.3 million,
a 50.5% decrease compared with the same period in 2017.






21





Income Tax Expenses




Income tax expense was $0.9 million and $1.5 million for the three months end
September 30, 2018 and 2017, respectively.



The Company's operating subsidiaries are governed by the Income Tax Law of the
PRC concerning Foreign Investment Enterprises and Foreign Enterprises and
various local income tax laws ("the Income Tax Laws").



All PRC subsidiaries, except for He Meida, are subject to income tax at the 25%
statutory rate.






He Meida incorporated in Xizang (Tibet) Autonomous Region is subject to income
tax at 15% statutory rate. The local government has implemented an income tax
reduction from 15% to 9% valid through December 31, 2018.




Perfect Dream was incorporated in the British Virgin Islands (BVI), and under
the current laws of the BVI dividends and capital gains arising from the
Company's investments in the BVI are not subject to income taxes.



Ever-Glory HK was incorporated in Samoa, and under the current laws of Samoa has
no liabilities for income taxes.



Ever-Glory Supply Chain Service Co., Limited was incorporated in Hongkong, and
under the current laws of Hongkong, are subject to income tax at the 16.5%
statutory rate.






The PRC's Enterprise Income Tax Law imposes a 10% withholding income tax for
dividends distributed by a foreign invested enterprise in PRC to its immediate
holding company outside China; such distributions were exempted under the
previous income tax law and regulations. A lower withholding tax rate will be
applied if there is a tax treaty arrangement between mainland China and the
jurisdiction of the foreign holding company. The foreign invested enterprise
became subject to the withholding tax starting from January 1, 2008. Given that
the undistributed profits of the Company's subsidiaries in China are intended to
be retained in China for business development and expansion purposes, no
withholding tax accrual has been made.



Net Income




Net income for the three months ended September 30, 2018 was $3.2 million, a
19.9% decrease compared with the same period in 2017. Our basic and diluted
earnings per share were $0.22 and $0.22 for the three months ended September 30,
2018
and 2017, respectively.



Results of Operations For The Nine Months Ended September 30, 2018 And 2017



The following table summarizes our results of operations for the nine months
ended September 30, 2018 and 2017. 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.



Nine Months Ended
September 30,
2018 2017
(in thousands of U.S. Dollars, except for percentages)
Sales $ 306,806 100.0 % $ 285,148 100.0 %
Gross Profit 95,948 31.3 92,408 32.4
Operating Expense 87,420 28.5 85,106 29.8
Income From Operations 8,528 2.8 7,302 2.6
Other Income (Expenses) 903 0.3 2,790 1.0
Income tax expense 2,949 1.0 3,573 1.3
Net Income $ 6,482 2.1 % $ 6,519 2.3 %




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Revenue




The following table sets forth a breakdown of our total sales, by region, for
the nine months ended September 30, 2018 and 2017.






Growth
2018 2017 (Decrease)
(In thousands of % of total (In thousands of % of total in 2018 compared
Wholesale business U.S. dollars) sales U.S. dollars) sales with 2017
Mainland China $ 39,195 12.8 % $ 34,000 11.9 % 15.3 %
Hong Kong China 30,982 10.1 33,738 11.8 (8.2 )
Germany 5,515 1.8 7,007 2.5 (21.3 )
United Kingdom 13,353 4.4 11,174 3.9 19.5
Europe-Other 29,993 9.8 25,288 8.9 18.6
Japan 6,689 2.2 2,863 1.0 133.6
United States 24,026 7.7 16,225 5.7 48.1



Total Wholesale business 149,753 48.8



130,295 45.7 14.9
Retail business 157,053 51.2 154,853 54.3 1.4
Total sales $ 306,806 100.0 % $ 285,148 100.0 % 7.6 %





Sales for the nine months ended September 30, 2018 were $306.8 million, an
increase of 7.6% from the nine months ended September 30, 2017. This increase
was primarily attributable to a 14.9% increase in sales in our wholesale
business and an 1.4% sales increase in our retail business.






Sales generated from our wholesale business contributed 48.8% or $149.8 million
of our total sales for the nine months ended September 30, 2018, an increase of
14.9% compared with $130.3 million in the nine months ended September 30, 2017.
This increase was primarily attributable to increased sales in Mainland China,
the United Kingdom, Europe-Other, Japan and the United States partially offset
by decreased sales in Hong Kong, China and Germany.



Sales generated from our retail business contributed 51.2% or $157.1 million of
our total sales for the nine months ended September 30, 2018, an increase of
1.4% compared with $154.9 million in the nine months ended September 30, 2017.
This increase was primarily due to an increase in same store sales.




Total retail store square footage and sales per square foot for the nine months
ended September 30, 2018 and 2017 are as follows:






2018 2017
Total store square footage 1,405,399 1,370,117
Number of stores 1,396 1,363
Average store size, square foot 1,007


1,005



Total store sales (in thousands of U.S. dollars) $ 157,053 $ 154,853
Sales per square foot


$ 112 $ 113





Same-store sales and newly opened store sales for the nine months ended
September 30, 2018 and 2017 are as follows:






2018 2017
(In thousands of U.S. dollars)
Sales from stores opened for a full year $ 128,588 $ 130,790
Sales from newly opened store sales $ 12,212 $ 12,944
Sales from e-commerce platform $ 11,491 $



7,716
Other* $ 4,762 $ 3,403
Total $ 157,053 $ 154,853





* Primarily sales from stores that were closed in the current reporting period.







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We remodeled or relocated 206 stores in 2017, and 225 stores during the nine
months ended September 30, 2018.We plan to relocate or remodel an aggregate of
200-300 stores in 2018. Remodels and relocations typically drive incremental
same-store sales growth. A relocation typically results in an improved, more
visible and accessible location, and usually includes increased square footage.
We believe we will continue to have opportunities for additional remodels and
relocations beyond 2018. Same-store sales are calculated based upon stores that
were open at least 12 full fiscal months in each reporting period and remain
open at the end of each reporting period.



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 nine months
ended September 30, 2018 and 2017.



Growth
Nine months ended (Decrease)
September 30, in 2018
2018 2017 Compared
(In thousands of U.S. dollars, except for percentages) with 2017



Net Sales for Wholesale Sales $ 149,753 100.0 %



$ 130,295 100.0 % 14.9 %
Raw Materials 67,469 45.0 56,766 43.6 18.9
Labor 1,940 1.3 3,236 2.5 (40.1 )



Outsourced Production Costs 56,848 38.0 47,542 36.5 19.6
Other and Overhead 294 0.2 325 0.2 (9.3 )
Total Cost of Sales for Wholesale 126,551 84.5 107,869 82.8 17.3
Gross Profit for Wholesale 23,202 15.5



22,426 17.2 3.5
Net Sales for Retail 157,053 100.0 154,853 100.0 1.4
Production Costs 51,731 32.9 49,769 32.1 3.9
Rent 32,576 20.8 35,102 22.7 (7.2 )



Total Cost of Sales for Retail 84,307 53.7 84,871 54.8 (0.7 )
Gross Profit for Retail 72,747 46.3



69,982 45.2 4.0
Total Cost of Sales 210,858 68.7 192,740 67.6 9.4
Gross Profit $ 95,948 31.3 % $ 92,408 32.4 % 3.8 %




Raw material costs for our wholesale business were 45.0% of our total wholesale
business sales in the nine months ended September 30, 2018, compared with 43.6%
in the nine months ended September 30, 2017. The increase was mainly due to
higher raw materials prices.



Labor costs for our wholesale business were 1.3% of our total wholesale business
sales in the nine months ended September 30, 2018, compared with 2.5% in the
nine months ended September 30, 2017. The marginal decrease was mainly due to a
higher number of outsourced orders in the nine months ended September 30, 2018.



Outsourced manufacturing costs for our wholesale business were 38.0% of our
total wholesale sales in the nine months ended September 30, 2018, compared with
36.5% in the nine months ended September 30, 2017. This increase was primarily
attributable to increased average salaries of the employees at our outsourced
manufacturing factories.



Overhead and other expenses for our wholesale business accounted for 0.2% and
0.2% of our total wholesale sales for the nine months ended September 30, 2018
and 2017, respectively.




Gross profit for our wholesale business for the nine months ended September 30,
2018
was $23.2 million, a 3.5% increase compared with the nine months ended
September 30, 2017. As a percentage of total wholesale business sales, gross
profit was 15.5% of our total wholesale business sales for the nine months ended
September 30, 2018, compared with 17.2% for the nine months ended September 30,
2017
. The decrease was mainly due to increased raw material costs and outsourced
production costs.



24





Production costs for our retail business for the nine months ended September 30,
2018
were $51.7 million compared with $49.8 million for the nine months ended
September 30, 2017. As a percentage of our total retail sales, production costs
were 32.9% of our total retail sales for the nine months ended September 30,
2018
, compared with 32.1% for the nine months ended September 30, 2017. The
increase was due to higher discounts on our out-of-season products in the nine
months ended September 30, 2018 compared with the same period of the prior



year
in percentage of sales.




Rent costs for our retail business for the nine months ended September 30, 2018
were $32.6 million compared with $35.1 million for the nine months ended
September 30, 2017. As a percentage of total retail sales, rent costs were 20.8%
of our total retail sales for the nine months ended September 30, 2018 compared
with 22.7% for the nine months ended September 30, 2017. The decrease was
primarily attributable to lower rent at certain locations.



Gross profit for our retail business for the nine months ended September 30,
2018
was $72.7 million compared with $70.0 million for the nine months ended
September 30, 2017. Gross margin for our retail business for the nine months
ended September 30, 2018 was 46.3% compared with 45.2% for the nine months



ended
September 30, 2017.




Total cost of sales for the nine months ended September 30, 2018 was $210.9
million
, a 9.4% increase compared with the nine months ended September 30, 2017.
As a percentage of total sales, total costs were 68.7% of total sales for the
nine months ended September 30, 2018, compared with 67.6% for the nine months
ended September 30, 2017. Total gross margin for the nine months ended September
30, 2018
was 31.3% compared with 32.4% for the nine months ended September



30,
2017.




We purchase the majority of our raw materials directly from numerous local
fabric and accessories suppliers. For our wholesale business, purchases from our
five largest suppliers represented approximately 16.8% and 14.9% of raw material
purchases for the nine months ended September 30, 2018 and 2017, respectively.
No one supplier provided more than 10% of our raw material purchases for the
nine months ended September 30, 2018 and 2017. For our retail business,
purchases from our five largest suppliers represented approximately 82.7% and
79.8% of raw material purchases for the nine months ended September 30, 2018 and
2017, respectively. Five suppliers provided approximately 22.1%, 19.6%, 15.3%,
13.9 and 11.8% of our raw material purchases for the nine months ended September
30, 2018
. Five suppliers provided approximately 25.9%, 20.4%, 11.7%, 11.0 and
10.8% of our raw material purchases for the nine months ended September 30,
2017
. We have not experienced difficulty in obtaining raw materials essential to
our business, and we believe we maintain good relationships with our suppliers.



We also purchase finished goods from contract manufacturers. For our wholesale
business, purchases from our five largest contract manufacturers represented
approximately 26.8% and 49.2% of finished goods purchases for the nine months
ended September 30, 2018 and 2017, respectively. No one supplier provided more
than 10% of our finished goods for the nine months ended September 30, 2018. One
contract manufacturer provided approximately 29.2% of our finished goods
purchases for the nine months ended September 30, 2017. For our retail business,
our five largest contract manufacturers represented approximately 17.3% and
16.7% of finished goods purchases for the nine months ended September 30, 2018
and 2017, respectively. No contract manufacturer provided more than 10% of our
retail finished goods purchases for the nine months ended September 30, 2018 and
2017. We have not experienced difficulty in obtaining finished products from our
contract manufacturers and we believe we maintain good relationships with our
contract manufacturers.




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 costs of sales.



25





Increase
Nine months ended (Decrease)
September 30, in 2018
2018 2017 Compared
(In thousands of U.S. dollars, except for percentages) to 2017
Gross Profit $ 95,948 33.6 % $ 92,408 32.4 % 3.8 %
Operating Expenses:
Selling Expenses 62,405 21.9 60,206 21.1 3.7



General and Administrative Expenses 25,015 8.8



24,900 8.7 0.5
Total 87,420 30.7 85,106 29.8 2.7
Income from Operations $ 8,528 3.0 % $ 7,302 2.6 % 16.8 %





Selling expenses for the nine months ended September 30, 2018 were $62.4
million
, a 3.7% increase compared with the nine months ended September 30, 2017.
The increase was attributable to higher retail sales.



General and administrative expenses for the nine months ended September 30, 2018
were $25.0 million a 0.5% increase compared with the nine months ended September
30, 2017
. As a percentage of total sales, general and administrative expenses
accounted for 8.8% of total sales for the nine months ended September 30, 2018,
compared with 8.7% of total sales for the nine months ended September 30, 2017.
The increase was mainly attributable to the increased average salaries.



Income from Operations



Income from operations for the nine months ended September 30, 2018 was $8.5
million
, an 16.8% increase from $7.3 million for the nine months ended September
30, 2017
. This increase was due to increased gross profit.



Interest Expense




Interest expense was $1.2 million and $1.2 million for the nine months ended
September 30, 2018 and 2017, respectively.






Income Tax Expenses




Income tax expense for the nine months ended September 30, 2018 was $2.9
million
, a 17.5% decrease compared to the same period of 2017. The decrease was
primarily due to lower pretax income.






Net Income




Net income for the nine months ended September 30, 2018 was $6.5 million, a
decrease of 0.6% compared with the same period in 2017. Our basic and diluted
earnings per share were $0.47 and $0.47 for the nine months ended September 30,
2018
and 2017, respectively.

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