James Hong, Founder, Chairman of the Board and Chief Executive Officer, commented, "We had another strong quarter of top line revenue and bottom line earnings growth, exceeding our financial second quarter forecast. Our growth was primarily fueled by an increase in wholesale prices implemented last year as well as higher revenue derived from direct and flagship stores."
"We experienced elevated inventory positions at the end of the second quarter by our distributors and sub-distributors compared to last year due to a general slowdown in the Chinese consumer market. We are actively working with our distributors to clear through any excess inventory so our fall/winter collections can be prominently displayed throughout our distributor and sub-distributor Zuoan stores in the second half of the year.
We look forward to improving our inventory channels through the implementation of our ERP system which is scheduled for October. The installation of this system will initially benefit our company-owned stores but are expected to be deployed in our distributors' warehouse and logistic systems within the next 12 months."
"As the consumer market in China becomes more challenging, we are taking all relevant actions to manage our cost structure and maximize operational efficiency. As part of this effort, we have applied additional cost and quality controls to our supply chain, reduced our total number of suppliers to obtain more favorable pricing and implemented stricter requirements on quality to ensure customer loyalty. Despite slower market conditions, we continue to believe that 2012 will result in respectable revenue and net profit growth for Zuoan.
Our brand recognition in China continues to grow through our domestic marketing efforts and international design collaborations and trade show participation. We continue to build on this momentum through our upcoming involvement in China Fashion Week, one of China's largest fashion events."
Second Quarter 2012 Financial Performance
Revenue for the second quarter was RMB301.6 million ($47.5 million), a 26.0% increase from RMB239.3 million ($37.7 million) in the same period last year. The increase in revenue was driven by both distributor and direct store sales volume. Second quarter distributor sales increased 14.5% to RMB271.2 million compared to RMB237.0 million in the second quarter of 2011. Second quarter 2012 self-operated direct store and flagship store sales were RMB 30.3 million. A net total of 30 distributor and sub-distributor stores, 2 direct stores and 4 Company self-operated flagship stores were opened in the second quarter of 2012, resulting in a total of 1,331 store locations at the end of June 30, 2012 compared to 1,295 store locations at the end of March 2012.
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