James Hong, Founder, Chairman of the Board and Chief Executive Officer, commented, "Our revenue growth was a result of increased distributor sales volumes as well as increased sales volume from our direct stores. We came in slightly below our third quarter top line revenue forecast largely due to an inventory shipment delay to distributors of approximately RMB58.8 million, resulting in a shift in revenue recognition to the fourth quarter instead of our third quarter”.
Third Quarter 2012 Financial Performance
Revenue for the third quarter was RMB476.3 million ($75.8 million), a 12.1% increase from RMB424.8 million ($67.6 million) in the same period last year. The increase in revenue was driven by both distributor and direct store sales volume. Third quarter distributor sales increased 11.3% to RMB450.2 million compared to RMB404.4 million in the third quarter of 2011.
Third quarter 2012 self-operated direct store and flagship store sales were RMB26.1 million compared to RMB20.4 million in the prior year period. A total of 49 distributor and sub-distributor stores and 2 direct stores were opened in the third quarter of 2012, offset by the closing of 93 unproductive, older distributor and sub-distributor stores, resulting in a total of 1,289 store locations at the end of September 30, 2012 compared to 1,331 store locations at the end of June 2012.
Cost of sales increased 6.8% to RMB252.7 million ($40.2 million) in the third quarter of 2012 from RMB236.6 million ($37.7 million) in the same quarter of 2011, primarily as a result of the increase in sales volume. As a percentage of revenues, cost of sales decreased to 53.1% in the third quarter of 2012 from 55.7% in the third quarter of 2011.
Gross profit in the third quarter increased 18.8% year over year to RMB223.6 million ($35.6 million) from RMB188.1 million ($29.9 million) in the same period of 2011. Third quarter 2012 gross profit margin was 46.9% compared to 44.3% in the same period last year.
Third quarter 2012 gross margin increased primarily due to greater sales from the Company's higher margin self-operated direct stores and flagship stores. Gross margin at the Company's self-operated direct stores and flagship stores was 65.4% and 73.0%, respectively. Combined gross margin at Company self-operated locations was 72.1%.
Selling and distribution expenses in the third quarter were RMB84.1 million ($13.4 million), or 17.7% of revenue, compared to RMB46.6 million ($7.4 million), or 11.0% of revenue in the same period last year. This percentage increase was primarily due to the increase in store expansion related rental charges and direct store expenses, advertising and promotion expenses, and costs of renovation and fittings of distributors' new and existing stores.
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