EVER-GLORY INTERNATIONAL GROUP, INC. The following discussion and analysis of our financial condition and results of operations for the three and nine months endedSeptember 30, 2022 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
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 throughoutEurope , theU.S. ,Japan andthe 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 theNanjing Jiangning Economic and Technological Development Zone andShang Fang Town in theJiangning District inNanjing ,Jiangsu province,China , Chuzhou,Anhui province,China andSamoa :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),Haian Tai Xin Garments Trading Company Limited ("Haian Tai Xin"),Nanjing Rui Lian Technology Company Limited ("Nanjing Rui Lian"),Shanghai Huarui Fashion Supply Chain Management Group Co. Ltd. ("Shanghai Supply Chain"),Ever-Glory Supply Chain Service Co., Limited ("Ever-Glory Supply Chain") andEver-Glory International Group (HK) Ltd. ("Ever-Glory HK"). Nanjing Rui Lian was closed inApril 2022 . Retail Business
We conduct our retail operations throughShanghai 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"),Nanjing Tai Xin Garments Trading Company Limited ("Tai Xin"), andXizang He Meida Trading Company Limited ("He Meida"). He Media was closed inApril 2021 . 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, 2022 , we had 774 stores (including store-in-stores), which
includes 19 stores that were opened and 125 stores that were closed during the
nine months ended September 30, 2022 .
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
? Taking advantage of our position as a multi-brand operator.
Equity Investments
The Company had idle cash and cash equivalent in operation. In order to realize
the capital preservation and appreciation, Ever-Glory Apparel invested in a
Partnership in August 2020 . As a limited partner of the Partnership, Ever-Glory
Apparel does not have the right to kick-out and appointment of general manager.
Therefore, Ever-Glory does not have ability to exercise significant influence.
In the meantime, the Company entered an agreement with the GP and an individual
that the Company has the privilege to sell the ownership interests in the
Partnership to GP or the individual for the consideration of the average net
asset value ten days prior to the closing date, if the Company is not able to
withdraw any part of the original investment from the Partnership during the
optional withdrawal period. If the Company opts to withdraw entire investment
during the optional withdrawal period, the GP will compensate up to 8% of annual
return on investment. If the return on investment is in excess of 8% for any
portion of the investment withdrawn during the optional withdrawal period, then
20% of the return in excess of 8% will be shared with the individual. The
Company may also continue to invest in the Partnership beyond the optional
withdrawal period, but none of above agreement with the GP and the individual is
in place. In December 2020 , the Partnership invested in a public company in
China .
In September 2021 , Goldenway signed an agreement and promised to invest
approximately $7.0 million (RMB 50.0 million ) in a Chinese private company for
20% shares of the investee. As of September 30, 2022 , Goldenway advanced
approximately $3.5 million (RMB 25.0 million ) to the investee. The investment
advances were recorded as other non-current assets.
18
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. 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 inthe United States andEurope 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 2021 and 2022. In addition, economic conditions inthe 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 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 accounts receivable may need to be allowed for or written off in the coming quarters. Our results of operations could be adversely affected by general conditions in the global economy, including conditions that are outside of our control, such as the impact of health and safety concerns from the outbreak of COVID-19. The outbreak inChina resulted in the reduction of customer traffic and temporary closures of shopping malls as mandated by the provincial governments in various provinces ofChina , which had adversely affected our retail business with a decline in sales sinceFebruary 2020 . Our wholesale business was also significantly affected as we were facing a sharp decline in our order quantities. Some of our wholesale clients had also cancelled or postponed existing orders. Due to the Chinese factories' shutdowns and traffic restrictions during the outbreak inChina and potential shutdowns and traffic restrictions in the countries where our suppliers are located, our supply chain and business operations of our suppliers may be affected. Disruptions from the closure of supplier and manufacturer facilities, interruptions in the supply of raw materials and components, personnel absences, or restrictions on the shipment of our or our suppliers' or customers' products, could have adverse ripple effects on our manufacturing output and delivery schedule. We also face difficulties in collecting our accounts receivables due to the effects of COVID-19 on our customers and risk gaining a large amount of bad debt. Global health concerns, such as COVID-19, could also result in social, economic, and labor instability in the countries and localities in which we or our suppliers and customers operate.
AlthoughChina has already begun to recover from the outbreak of COVID-19, the epidemic continues to spread on a global scale and there is the risk of the epidemic returning toChina in the future, thereby causing further business interruption. While the potential economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock. If our future sales continue to decline significantly, we may risk facing bankruptcy due to our recurring fixed expenses. The extent to which COVID-19 impacts our results will depend on many factors and future developments, including new information about COVID-19 and any new government regulations which may emerge to contain the virus, among others. 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. 19
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. The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP") have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onApril 12, 2022 ("2021 Form 10-K.") Estimates and Assumptions The preparation of the condensed consolidated financial statements in conformity withU.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. If these estimates differ significantly from actual results, the impact to the condensed consolidated financial statements may be material. There have been no material changes in our critical accounting policies and estimates from those disclosed in on the 2021 Form 10-K. Please refer to Part II, Item 7 of such a report for a discussion of our critical accounting policies and estimates.
Recently Issued Accounting Pronouncements
InJune 2016 , the FASB issued ASU No. 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"; InNovember 2019 , the FASB issued ASU No. 2019-10 "Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates"; InMarch 2020 , the FASB issued ASU No. 2020-03 "Codification Improvements to 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 afterDecember 15, 2022 . 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.
20
Results of Operations for the three months ended
The following table summarizes our results of operations for the three months endedSeptember 30, 2022 and 2021. 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, 2022 2021 (In thousands of U.S. dollars, except for percentages) Sales$ 106,437 100.0 %$ 94,406 100.0 % Gross profit$ 16,047 15.1 %$ 23,210 24.6 % Operating expense$ 22,098 20.8 %$ 23,910 25.3 % Loss from operations$ (6,051 ) (5.7 )%$ (700 ) (0.7 )% Other expense $ (907 ) (0.9 )%$ (572 ) (0.6 )% Income tax (benefit) expense $ (835 ) (0.8 )%$ 1,945 2.1 % Net Loss$ (6,123 ) (5.8 )%$ (3,217 ) (3.4 )% Revenue
The following table sets forth a breakdown of our total sales, by region, for
the three months ended
Growth
(Decrease)
2022 2021 in 2022
(In thousands of % of (In thousands of % of compared
Wholesale business U.S. dollars) total sales U.S. dollars) total sales with 2021
Mainland China $ 30,492 28.6 % $ 16,376 17.3 % 86.2 %
Hong Kong China 14,950 14.0 9,153 9.7 63.3
United Kingdom 4,950 4.7 2,020 2.1 145.1
Europe-Other 11,616 10.9 8,846 9.4 31.3
Japan 5,198 4.9 8,435 8.9 (38.4 )
United States 15,526 14.6 17,372 18.5 (10.6 )
Total Wholesale business 82,732 77.7 62,202 65.9 33.0
Retail business 23,705 22.3 32,204 34.1 (26.4 )
Total sales $ 106,437 100.0 % $ 94,406 100.0 % 12.7 %
Sales for the three months endedSeptember 30, 2022 were$106.4 million , a 12.7% increase compared with the three months endedSeptember 30, 2021 . This increase was primarily attributable to a 33.0% ($20.5 million ) increase in our wholesale business, offset by a 26.4% ($8.5 million ) decrease in our retail business. Sales generated from our wholesale business contributed 77.7% or$82.7 million of our total sales for the three months endedSeptember 30, 2022 , a 33.0% increase compared with 65.9% or$62.2 million in the three months endedSeptember 30, 2021 . This increase was primarily attributable to an increase in sales in Mainland China,Hong Kong ,United Kingdom and Europe-Other, partially offset by a decrease in sales inJapan andUnited States . Sales generated from our retail business contributed 22.3% or$23.7 million of our total sales for the three months endedSeptember 30, 2022 , a 26.4% decrease compared with 34.1% or$32.2 million in the three months endedSeptember 30, 2021 . This decrease was primarily due to outbreak of COVID-19. The outbreak inChina resulted in the reduction of customer traffic and temporary closures of shopping malls as mandated by the provincial governments in various provinces ofChina , which had adversely affected our retail business with a decline in sales. 21 Costs and Expenses
Cost of Sales and Gross Margin
Cost of goods sold includes the direct raw material cost, direct labor cost, and manufacturing overhead including depreciation of production equipment and rent, consistent with the revenue earned. Cost of goods sold excludes warehousing costs, which historically have not been significant. The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the three months endedSeptember 30, 2022 and 2021. Growth (Decrease) in Three months ended September 30, 2022 2022 2021 Compared (In thousands of U.S. dollars, except for percentages) with 2021
Net Sales for Wholesale Sales$ 82,732 100.0 %
$ 62,202 100.0 % 33.0 % Raw Materials 41,563 50.2 29,507 47.4 40.9 Labor 528 0.6 422 0.7 25.1
Outsourced Production Costs 29,651 35.8 20,967 33.7 41.4 Other and Overhead 530 0.6 1,090 1.8 (51.4 ) Total Cost of Sales for Wholesale 72,272 87.4 51,986 83.6 39.0 Gross Profit for Wholesale 10,461 12.6
10,217 16.4 2.4
Net Sales for Retail 23,705 100.0 32,204 100.0 (26.4 )
Production Costs 12,476 52.6 12,632 39.2 (1.2 )
Rent 5,642 23.8 6,579 20.4 (14.2 )Total Cost of Sales for Retail 18,118 76.4 19,210 59.7 (5.7 ) Gross Profit for Retail 5,587 23.6
12,993 40.3 (57.0 )
Total Cost of Sales 90,390 84.9 71,196 75.4 27.0
Gross Profit $ 16,047 15.1 % $ 23,210 24.6 % (30.9 )%
Raw material costs for our wholesale business were 50.2% of our total wholesale
business sales in the three months ended September 30, 2021 , compared with 47.4%
in the three months ended September 30, 2021 . The increase was mainly due to
higher raw material prices.
Labor costs for our wholesale business were 0.6% (0.5 million) of our total wholesale business sales in the three months endedSeptember 30, 2022 , compared with 0.7%(0.4 million) in the three months endedSeptember 30, 2021 . There
were no significant changes.
Outsourced production costs for our wholesale business for the three months endedSeptember 30, 2022 increased by 41.4% to$29.7 million from$21.0 million for the three months endedSeptember 30, 2021 . Outsourced production costs accounted for 35.8% of our total wholesale business sales in the three months endedSeptember 30, 2022 , compare with 33.7% in the three months endedSeptember 30, 2021 . This increase in percentage was primarily attributable to higher
labor
costs.
22
Overhead and other expenses for our wholesale business accounted for 0.6% of our
total wholesale business sales for the three months ended September 30, 2022 ,
compared with 1.8% of total wholesale business sales for the three months ended
September 30, 2021 .
Wholesale business gross profit for the three months ended September 30, 2022
was $10.5 million compared with $10.2 million for the three months ended
September 30, 2021 . Gross profit accounted for 12.6% of our total wholesale
sales for the three months ended September 30, 2022 , compared with 16.4% for the
three months ended September 30, 2021 . The decrease was mainly due to an
increase in wholesale raw material prices and outsourced production costs.
Production costs for our retail business were $12.5 million for the three months
ended September 30, 2022 compared with $12.6 million during the three months
ended September 30, 2021 . Retail production costs accounted for 52.6% of our
total retail sales in the three months ended September 30, 2022 , compared with
39.2% for the three months ended September 30, 2021 . The increase in percentage
was due to increased inventory write-off in 2022 because of COVID-19.
Rent costs for our retail business for the three months ended September 30, 2022
were $5.6 million compared with $6.6 million for the three months ended
September 30, 2021 . Rent costs for our retail business accounted for 23.8% of
our total retail sales for the three months ended September 30, 2022 , compared
with 20.4% for the three months ended September 30, 2021 . The decrease in amount
was due to decrease in sales.
Gross profit in our retail business for the three months ended September 30,
2022 was $5.6 million and gross margin was 23.6%. Gross profit in our retail
business for the three months ended September 30, 2021 was $13.0 million and
gross margin was 40.3%. The decrease was primarily due to increased production
costs and write-off of obsolete inventories.
Total cost of sales for the three months ended September 30, 2022 was $90.4
million , a 27.0% increase from $71.2 million for the three months ended
September 30, 2021 . Total cost of sales as a percentage of total sales for the
three months ended September 30, 2022 was 84.9%, compared with 75.4% for the
three months ended September 30, 2021 . Gross margin for the three months ended
September 30, 2022 was 15.1% compared with 24.6% for the three months ended
September 30, 2021 .
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
(Decrease) in
Three Months Ended September 30, 2022
2022 2021 Compared
(In thousands of U.S. dollars, except for percentages) to 2021
Gross Profit $ 16,047 15.1 % $ 23,210 24.6 % (30.9 )%
Operating Expenses:
Selling Expenses 12,792 12.0 14,443 15.3 (11.4 )General and Administrative Expenses 9,306 8.7
9,467 10.0 (1.7 )
Total 22,098 20.8 23,910 25.3 (7.6 )
Loss from Operations $ (6,051 ) (5.7 )% $ (700 ) (0.7 )% 764.4 %
Selling expenses for the three months endedSeptember 30, 2022 decreased by 11.4% to$12.8 million from$14.4 million for the three months endedSeptember 30, 2021 . The decrease was attributable to the decreased average salaries and decreased business trips. General and administrative expenses for the three months endedSeptember 30, 2022 decreased by 1.7% to$9.3million from$9.5 million for the three months endedSeptember 30, 2021 . The decrease was attributable to the decreased publicity expense and the depreciation of RMB. 23 Loss from Operations
Loss from operations for the three months endedSeptember 30, 2022 was$6.1 million , an increase of 764.8% from$0.7 million of loss for the three months endedSeptember 30, 2021 . Loss from operations for the three months endedSeptember 30, 2022 accounted for 5.7% of our total sales, while the three months endedSeptember 30, 2021 accounted for 0.7% of our total sales. Interest Expense Interest expense for the three months endedSeptember 30, 2022 was$0.5 million , while interest expense was$1.2 million for the three months endedSeptember 30, 2021 . The decrease was due to the decreased bank loans.
Income Tax (Benefit) Expenses
Income tax (benefit) expense was
The Company's operating subsidiaries are governed by the Income Tax Law of the
PRC concerning
All PRC subsidiaries are subject to income tax at the 25% statutory rate.
Perfect Dream was incorporated in the
Ever-Glory HK was incorporated in
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 outsideChina ; 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 mainlandChina and the jurisdiction of the foreign holding company. The foreign invested enterprise became subject to the withholding tax starting fromJanuary 1, 2008 . Given that the undistributed profits of the Company's subsidiaries inChina are intended to be retained inChina for business development and expansion purposes, no withholding tax accrual has been made. Net Loss Net loss for the three months endedSeptember 30, 2022 was$6.1 million , and net loss for the three months endedSeptember 30, 2021 was$3.2 million . Our basic and diluted loss per share were$0.41 and$0.22 for the three months endedSeptember 30, 2022 and 2021, respectively. Results of Operations for the nine months endedSeptember 30, 2022 and 2021 The following table summarizes our results of operations for the nine months endedSeptember 30, 2022 and 2021. The table and the discussion below should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this report. Nine Months Ended September 30, 2022 2021 (In thousands of U.S. Dollars, except for percentages) Sales$ 235,022 100.0 %$ 225,776 100.0 % Gross Profit 53,828 22.9 64,038 28.4 Operating Expense 59,974 25.5 69,475 30.8 Loss From Operations (6,146 ) (2.6 ) (5,437 ) (2.4 ) Other (Expense) Income (1,464 ) (0.6 ) 3,039 1.3 Income tax expense 1,202 0.5 3,760 1.7 Net Loss$ (8,812 ) (3.7 )%$ (6,158 ) (2.7 )% 24 Revenue
The following table sets forth a breakdown of our total sales, by region, for
the nine months ended
Growth
(Decrease)
2022 2021 in 2022
(In thousands of % of (In thousands of % of compared
Wholesale business U.S. dollars) total sales U.S. dollars) total sales with 2021
Mainland China $ 45,483 19.4 % $ 28,222 12.5 % 61.2 %
Hong Kong China 22,902 9.7 16,124 7.1 42.0
United Kingdom 10,469 4.5 5,558 2.5 88.4
Europe-Other 24,528 10.4 18,905 8.4 29.7
Japan 11,836 5.0 13,390 5.9 (11.6 )
United States 39,820 17.0 29,650 13.1 34.3
Total Wholesale business 155,038 66.0 111,849 49.5 38.6
Retail business 79,984 34.0 113,927 50.5 (29.8 )
Total sales $ 235,022 100.0 % $ 225,776 100.0 % 4.1 %
Sales for the nine months endedSeptember 30, 2022 were$235.0 million , an increase of 4.1% from the nine months endedSeptember 30, 2021 . This increase was primarily attributable to a 38.6% (43.2 million) increase in sales in our wholesale business and a 29.8% (33.9 million) decrease in our retail business. Sales generated from our wholesale business contributed 66.0% or$155.0 million of our total sales for the nine months endedSeptember 30, 2022 , an increase of 38.6% compared with 49.5% or$111.8 million in the nine months endedSeptember 30, 2021 . This increase was primarily attributable to increased sales in Mainland China,Hong Kong China ,United Kingdom , Europe-Other andthe United States , partially offset by decreased sales inJapan . Sales generated from our retail business contributed 34.0% or$80.0 million of our total sales for the nine months endedSeptember 30, 2022 , a decrease of 29.8% compared with 50.5% or$113.9 million in the nine months endedSeptember 30, 2021 . This decrease was primarily due to a decrease in same store sales and outbreak of COVID-19. The outbreak inChina resulted in the reduction of customer traffic and temporary closures of shopping malls as mandated by the provincial governments in various provinces ofChina , which had adversely affected our retail business with a decline in sales.
Total retail store square footage and sales per square foot for the nine months
ended
2022 2021
Total store square footage 879,108 982,683
Number of stores 774 893Average store size, square feet 1,136 1,100
Total store sales (in thousands of
$ 91 $ 116
Same store sales and newly opened store sales for the nine months ended
2022 2021
(In thousands of U.S. dollars)
Sales from stores opened for a full year $ 65,840 $ 89,478
Sales from newly opened store sales $ 2,245 $ 6,950
Sales from e-commerce platform $ 8,683 $ 9,725 Other*$ 3,216 $ 7,774 Total$ 79,984 $ 113,927
* Primarily sales from stores that were closed in the current reporting period.
We remodeled or relocated 137 stores in year 2021, and 29 stores during the six months endedSeptember 30, 2022 . We plan to relocate or remodel 0 to 50 stores in 2022. 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 2022. 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.
25
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 endedSeptember 30, 2022 and 2021. Growth (Decrease) Nine months ended September 30, in 2022 2022 2021 Compared (In thousands of U.S. dollars, except for percentages) with 2021
Net Sales for Wholesale Sales$ 155,038 100.0 %
$ 111,849 100.0 % 38.6 % Raw Materials 71,638 46.2 51,299 45.9 39.6 Labor 1,448 0.9 1,141 1.0 26.9
Outsourced Production Costs 56,973 36.7 39,744 35.5 43.4 Other and Overhead 820 0.5 1,290 1.2 (36.4 ) Total Cost of Sales for Wholesale 130,879 84.4 93,474 83.6 40.0 Gross Profit for Wholesale 24,158 15.6
18,375 16.4 31.5
Net Sales for Retail 79,984 100.0 113,927 100.0 (29.8 )
Production Costs 34,601 43.3 45,784 40.2 (24.4 )
Rent 15,713 19.6 22,480 19.7 (30.1 )Total Cost of Sales for Retail 50,315 62.9 68,264 59.9 (26.3 ) Gross Profit for Retail 29,670 37.1
45,663 40.1 (35.0 )
Total Cost of Sales 181,194 77.1 161,738 71.6 12.0
Gross Profit $ 53,828 22.9 % $ 64,038 28.4 % (15.9 )%
Raw material costs for our wholesale business were 46.2% of our total wholesale
business sales in the nine months ended September 30, 2022 , compared with 45.9%
in the nine months ended September 30, 2021 . The increase was mainly due to
higher raw material purchase prices.
Labor costs for our wholesale business were 0.9% of our total wholesale business
sales in the nine months ended September 30, 2022 , compared with 1.0% in the
nine months ended September 30, 2021 . There were no significant changes.
Outsourced production costs for our wholesale business were 36.7% of our total
sales in the nine months ended September 30, 2022 , compared with 35.5% in the
nine months ended September 30, 2021 . This increase in percentage was primarily
attributable to higher labor costs.
Overhead and other expenses for our wholesale business accounted for 0.5% and
1.2% of our total sales for the nine months ended September 30, 2022 and 2021,
respectively.
Gross profit for our wholesale business for the nine months endedSeptember 30, 2022 was$24.2 million , a 31.5% increase compared with the nine months endedSeptember 30, 2021 . As a percentage of total wholesale business sales, gross profit was 15.6% of our total wholesale business sales for the nine months endedSeptember 30, 2022 , compared with 16.4% for the nine months endedSeptember 30, 2021 . The decrease in gross margin was mainly due to an increase in raw material prices. Production costs for our retail business for the nine months endedSeptember 30, 2022 were$34.6 million compared with$45.8 million for the nine months endedSeptember 30, 2021 . As a percentage of our total retail sales, production costs were 43.3% of our total retail sales for the nine months endedSeptember 30, 2022 , compared with 40.2% for the nine months endedSeptember 30 , 2021.The increase of percentage was due to higher discounts on our past season products in the nine months endedSeptember 30, 2022 compared with the same period of the prior year of sales.
Rent costs for our retail business for the nine months endedSeptember 30, 2022 were$15.7 million compared with$22.5 million for the nine months endedSeptember 30, 2021 . As a percentage of total retail sales, rent costs were 19.6% of our total retail sales for the nine months endedSeptember 30, 2022 compared with 19.7% for the nine months endedSeptember 30, 2021 . There were no significant changes in percentage. Gross profit for our retail business for the nine months endedSeptember 30, 2022 was$29.7 million compared with$45.7 million for the nine months endedSeptember 30, 2021 . Gross margin for our retail business for the nine months endedSeptember 30, 2022 was 37.1% compared with 40.1% for the nine months
endedSeptember 30, 2021 .
Total cost of sales for the nine months endedSeptember 30, 2022 was$181.2 million , a 12.0% increase compared with the nine months endedSeptember 30, 2021 . As a percentage of total sales, total costs were 77.1% of total sales for the nine months endedSeptember 30, 2022 , compared with 71.6% for the nine months endedSeptember 30, 2021 . Total gross margin for the nine months endedSeptember 30, 2022 was 22.9% compared with 28.4% for the nine months ended
September 30, 2021 . 26
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.
Increase
(Decrease)
Nine months ended September 30, in 2022
2022 2021 Compared
(In thousands of U.S. dollars, except for percentages) to 2021
Gross Profit $ 53,828 22.9 % $ 64,038 28.4 % (15.9 )%
Operating Expenses:
Selling Expenses 38,153 16.2 44,495 19.7 (14.3 )General and Administrative Expenses 21,821 9.3
24,980 11.1 (12.6 )
Total 59,974 25.5 69,475 30.8 (13.7 )
Loss from Operations $ (6,146 ) (2.6 )% $ (5,437 ) (2.4 )% 13.0 %
Selling expenses for the nine months ended September 30, 2022 were $38.2
million , a 14.3% decrease compared with $44.5 million in the nine months ended
September 30, 2021 . The decrease was attributable to the decreased average
salaries and the marketing expenses associated with the promotion of the retail
brand.
General and administrative expenses for the nine months endedSeptember 30, 2022 were$21.8 million a 12.6% decrease compared with the nine months endedSeptember 30, 2021 . As a percentage of total sales, general and administrative expenses accounted for 9.3% of total sales for the nine months endedSeptember 30, 2022 , compared with 11.1% of total sales for the nine months endedSeptember 30, 2021 . The decrease was attributable to the decreased publicity expense
and the depreciation of RMB. Loss from Operations
Loss from operations for the nine months ended
Interest Expense Interest expense was$1.5 million and$1.9 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The decrease was due to the decreased bank loans. Income Tax Expense
Income tax expense for the nine months ended
27
Net Loss
Net loss was
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