EVER-GLORY INTERNATIONAL GROUP, INC. The following discussion and analysis of our financial condition and results of operations for the three months endedMarch 31, 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"),Ever-Glory Supply Chain Service Co., Limited ("Ever-Glory Supply Chain") andEver-Glory International Group (HK)
Ltd.
("Ever-Glory HK").
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 . 16 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.
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; ? Exploring the overseas low-cost manufacturing base;
? 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
March 31, 2022 , we had 848 stores (including store-in-stores), which includes 4
stores that were opened and 36 stores that were closed in the first quarterof 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;
? Taking advantage of our position as a multi-brand operator.
17
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
$7.9million (RMB 50.0 million ) in a Chinese private company for 20% shares of
the investee. As of March 31, 2022 , Goldenway advanced $1.6 million (RMB 10.0
million ) to the investee. In April 2022 , Goldenway made additional advances of
$0.8 million (RMB 5.0 million ). The investment advances were recorded as other
non-current assets.
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. 18
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.
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. 19
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.
Results of Operations The following table summarizes our results of operations for the three months endedMarch 31, 2022 and 2021. The table and the discussion below should be read in conjunction with the condensed consolidated financial statements and the notes thereto appearing elsewhere in this report. Three Months Ended March 31, 2022 2021 (In thousands of U.S. dollars, except for percentages) Sales$ 64,773 100.0 %$ 70,814 100.0 % Gross Profit 17,372 26.8 22,435 31.7 Operating Expenses 20,680 31.9 23,399 33.0 Loss From Operations (3,308 ) (5.1 ) (964 ) (1.4 ) Other (Loss) Income, net (669 ) (1.0 ) 523 0.7 Income Tax Expense 1,112 1.7 729 1.0 Net Loss$ (5,089 ) (7.9 )%$ (1,170 ) (1.7 )% Revenue
The following table sets forth a breakdown of our total sales, by region, for
the three months ended
Growth
2022 2021 (decrease)
(In thousands (In thousands in 2022
of % of total of % of total comparedWholesale business U.S. dollars) sales U.S. dollars) sales with 2021 Mainland China $ 9,175 14.2 % $ 7,490 10.6 % 22.5 % Hong Kong 4,293 6.6 4,056 5.7 5.8 United Kingdom 759 1.2 1,053 1.5 (28.0 ) Europe-Other 4,927 7.6 4,146 5.9 18.8 Japan 5,145 7.9 3,405 4.8 51.1 United States 5,578 8.6 3,069 4.3 81.8
Total Wholesale business 29,877 46.1
23,219 32.8 28.7
Retail business 34,896 53.9 47,595 67.2 (26.7 )
Total sales $ 64,773 100.0 % $ 70,814 100.0 % (8.5 )%
Total sales for the three months ended
20
Sales generated from our wholesale business contributed 46.1% or $29.9 million
of our total sales for the three months ended March 31, 2022 , an increase of
28.7% compared to $23.2 million in the three months ended March 31, 2021 . This
increase was primarily attributable to increased sales in Mainland China, Hong
Kong , Japan and the United States , and other European markets partially offset
by decreased sales in the United Kingdom .
Sales generated from our retail business contributed 53.9% or $34.9 million of
our total sales for the three months ended March 31, 2022 , a decrease of 26.7%
compared to 67.2% or $47.6 million in the three months ended March 31, 2021 .
This decrease was primarily due to the decrease in same-store sales.
Total retail store square footage and sales per square foot for the three months
ended
2022 2021
Total store square footage 956,623 1,001,864
Number of stores 848 921
Average store size, square feet 1,128 1,088
Total store sales (in thousands of
$ 36 $ 48
Same-store sales and newly opened store sales for the three months ended
2022 2021
(In thousands of U.S. dollars)
Sales from stores opened for a full year $ 27,758 $ 35,885
Sales from newly opened store sales $ 2,735 $ 3,933
Sales from e-commerce platform $ 2,916 $ 3,440 Other* $ 1,487 $ 4,337 Total$ 34,896 $ 47,595
* Primarily sales from stores that were closed in the current reporting period.
We remodeled or relocated 137 stores in year 2021, and 5 stores during the three months endedMarch 31, 2022 . We plan to relocate or remodel 50-100 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. 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.
21
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 March 31, 2022 and 2021.
Growth
(Decrease)
Three Months Ended March 31, in 2022
2022 2021 compared
(In thousands of U.S. dollars, except for percentages) with 2021
Wholesale Sales $ 29,877 100.0 % $ 23,219 100.0 % 28.7 %
Raw Materials 13,374 44.8 10,385 44.7 28.8
Labor 445 1.5 333 1.4 33.6
Outsourced Production Costs 10,205 34.2 7,833 33.7 30.3
Other and Overhead 141 0.5 105 0.5 34.3
Total Cost of Sales for Wholesale 24,165 80.9 18,656 80.4 29.5
Gross Profit for Wholesale 5,712 19.1
4,562 19.6 25.2
Net Sales for Retail 34,896 100.0 47,595 100.0 (26.7 )
Production Costs 16,050 46.0 19,764 41.5 (18.8 )
Rent 7,186 20.6 9,959 20.9 (27.9 )Total Cost of Sales for Retail 23,236 66.6 29,723 62.4 (21.8 ) Gross Profit for Retail 11,660 33.4
17,873 37.6 (34.8 )
Total Cost of Sales 47,401 73.2 48,379 68.3 (2.0 )
Gross Profit $ 17,372 26.8 % $ 22,435 31.7 % (22.6 )%
Raw material costs for our wholesale business were 44.8% of our total wholesale
business sales in the three months ended March 31, 2022 , compared with 44.7% in
the three months ended March 31, 2021 . There were no significant changes.
Labor costs for our wholesale business were 1.5% of our total wholesale business
sales in the three months ended March 31, 2022 , compared with 1.4% in the three
months ended March 31, 2021 . There were no significant changes.
Outsourced production costs for our wholesale business were 34.2% of our total
wholesale sales in the three months ended March 31, 2022 , compared with 33.7% in
the three months ended March 31, 2021 . This increase in percentage was primarily
attributable to higher outsourced labor costs.
Overhead and other expenses for our wholesale business accounted for 0.5% and
0.5% of our total wholesale business sales for the three months ended March31, 2022 and 2021, respectively. Gross profit for our wholesale business for the three months endedMarch 31, 2022 was$5.7 million , an increase of 25.2% compared to the three months endedMarch 31, 2021 . Gross margin was 19.1% for the three months endedMarch 31, 2021 , a decrease of 0.5% compared to 19.6% for the three months endedMarch 31, 2021 . The decrease in gross margin was mainly due to the increased outsourced production costs. Production costs for our retail business were$16.0 million during the three months endedMarch 31, 2022 compared to$19.8 million during the three months endedMarch 31, 2021 . As a percentage of retail sales, retail production costs accounted for 46.0% of our total retail sales in the three months endedMarch 31, 2022 , compared to 41.5% of total retail sales in the three months endedMarch 31, 2021 . The increase in percentage was due to higher discounts on our products endedMarch 31, 2022 compared with the same period of the prior year. Rent costs for our retail business were$7.2 million for the three months endedMarch 31, 2022 compared to$10.0 million for the three months endedMarch 31, 2021 . As a percentage of retail sales, rent costs accounted for 20.6% of our total retail sales for the three months endedMarch 31, 2022 , compared to 20.9% of total retail sales for the three months endedMarch 31, 2021 . The decrease was primarily attributable to lower rent at certain locations. Gross profit in our retail business for the three months endedMarch 31, 2022 was$11.7 million and gross margin was 33.4%. Gross profit in our retail business for the three months endedMarch 31, 2021 was$17.9 million and gross margin was 37.6%. The decrease in gross margin was primarily due to increased production costs. 22 Total cost of sales for the three months endedMarch 31, 2022 was$47.4 million , compared to$48.4 million for the three months endedMarch 31, 2021 , an decrease of 2.0%. As a percentage of total sales, cost of sales increased to 73.2% of total sales for the three months endedMarch 31, 2022 , compared to 68.3% of total sales for the three months endedMarch 31, 2021 . Consequently, gross margin decreased to 26.8% for the three months endedMarch 31, 2022 from 31.7% for the three months endedMarch 31, 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.
Three Months Ended March 31,
2022 2021
(In thousands of U.S. dollars, except for (Decrease)
percentages) Increase
Gross Profit $ 17,372 26.8 % $ 22,435 31.7 % (22.6 )%
Operating Expenses
Selling Expenses 13,686 21.1 15,548 22.0 (12.0 )General and Administrative Expenses 6,994 10.8
7,851 11.1 (10.9 ) Total Operating Expenses 20,680 31.9 23,399 33.0 (11.6 ) Loss from Operations$ (3,308 ) (5.1 )%$ (964 ) (1.4 )% 243.2 % Selling expenses decreased 12.0% to$13.7 million for the three months endedMarch 31, 2022 from$15.5 million for the three months endedMarch 31, 2021 . The decrease was attributable to the decreased salaries. General and administrative expenses decreased 10.9% to$7.0 million for the three months endedMarch 31, 2022 from$7.9 million for the three months endedMarch 31, 2021 . As a percentage of total sales, general and administrative expenses decreased to 10.8% of total sales for the three months endedMarch 31, 2022 , compared to 11.1% of total sales for the three months endedMarch 31, 2021 . The decrease was attributable to the decreased salaries. Loss from Operations
Loss from operations was$3.3 million for the three months endedMarch 31, 2022 , compared to$1.0 million for the three months endedMarch 31, 2021 . As a percentage of sales, loss from operations accounted for 5.1% of our total sales for the three months endedMarch 31, 2022 , an increase of 3.7% compared to 1.4% for the three months endedMarch 31, 2021 as a result of decreased gross profit. Interest Expense Interest expense was$0.6 million for the three months endedMarch 31, 2022 , an increase of 24.6% compared to the same period in 2021. The increase was due to the increased bank loans. 23 Income Tax Expenses
Income tax 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
Ever-Glory Supply Chain Service Co., Limited was incorporated in Hongkong, and under the current laws of Hongkong, its income tax rate is 8.25% when its profit is underHKD 2.0 million and its income tax rate is 16.5% when its profit is overHKD 2.0 million . 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 endedMarch 31, 2022 and 2021 was$5.1 million and$1.2 million , respectively. Our basic and diluted loss per share were$0.34 and$0.08 for the three months endedMarch 31, 2022 and 2021, respectively.
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