The following discussion and analysis of our financial condition and results of operations for the three and six months endedJune 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"),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. 17
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 mainlandChina );
? 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 mainlandChina . 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 inChina . As ofJune 30, 2022 , we had 816 stores (including store-in-stores), which includes 11 stores that were opened and 75 stores that were closed in the first half year of 2022. We expect to increase an additional 50 to 100 stores in 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 inChina ; ? Expanding our retail network throughoutChina ;
? 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 inAugust 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. InDecember 2020 , the Partnership invested in a public company in
China . 18 InSeptember 2021 , Goldenway signed an agreement and promised to invest approximately$7.5 million (RMB 50.0 million ) in a Chinese private company for 20% shares of the investee. As ofJune 30, 2022 , Goldenway advanced approximately$3.0 million (RMB 20.0 million ) to the investee. 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. 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. 19
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.
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 endedJune 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 June 30, 2022 2021 (In thousands of U.S. dollars, except for percentages) Sales$ 63,812 100.0 %$ 60,555 100.0 % Gross Profit$ 20,409 32.0 %$ 18,392 30.4 % Operating Expense$ 17,196 26.9 %$ 22,165 36.6 % Income (Loss) From Operations$ 3,213 5.0 %$ (3,773 ) (6.2 )% Other Income $ 113 0.2 %$ 3,088 5.1 % Income tax expense $ 926 1.5 %$ 1,086 1.8 % Net Income (Loss)$ 2,400 3.8 %$ (1,771 ) (2.9 )% Revenue
The following table sets forth a breakdown of our total sales, by region, for
the three months ended
Growth 2022 2021 (Decrease) 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 $ 5,816 9.1 % $ 4,356 7.2 % 33.5 % Hong Kong China 3,659 5.7 2,914 4.8 25.6 United Kingdom 4,760 7.5 2,485 4.1 91.5 Europe-Other 7,985 12.5 5,913 9.8 35.0 Japan 1,493 2.3 1,550 2.6 (3.7 ) United States 18,716 29.3 9,209 15.2 103.2 Total Wholesale business 42,429 66.5 26,427 43.6 60.5 Retail business 21,383 33.5 34,128 56.4 (37.3 ) Total sales $ 63,812 100.0 % $ 60,555 100.0 % 5.4 %
Sales for the three months ended
Sales generated from our wholesale business contributed 66.5% or$42.4 million of our total sales for the three months endedJune 30, 2022 , a 60.5% increase compared with 43.6% or$26.4 million in the three months endedJune 30, 2021 . This increase was primarily attributable to an increase in sales in MainlandChina ,Hong Kong ,United Kingdom , Europe-Other andUnited States , partially offset by a decrease in sales inJapan . Sales generated from our retail business contributed 33.5% or$21.4 million of our total sales for the three months endedJune 30, 2022 , a 37.3% decrease compared with 56.4% or$34.1 million in the three months endedJune 30, 2021 . This decrease was primarily due to outbreak of COVID-19 . The outbreak inChina resulted in the reduction of customer traffic and temporary closures of shopping malls as mandated by the provincial governments in various provinces ofChina , which had adversely affected our retail business with a decline in sales. 21 Costs and Expenses
Cost of Sales and Gross Margin
Cost of goods sold includes the direct raw material cost, direct labor cost, and manufacturing overhead including depreciation of production equipment and rent, consistent with the revenue earned. Cost of goods sold excludes warehousing costs, which historically have not been significant. The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the three months endedJune 30, 2022 and 2021. Growth (Decrease) in Three months ended June 30, 2022 2022 2021 Compared (In thousands of U.S. dollars, except for percentages) with 2021
Net Sales for Wholesale Sales$ 42,429 100.0 %
$ 26,427 100.0 % 60.5 % Raw Materials 16,701 39.4 11,407 43.2 46.4 Labor 475 1.1 386 1.4 23.1
Outsourced Production Costs 17,117 40.3 10,943 41.4 56.4 Other and Overhead 149 0.4 95 0.4 56.8 Total Cost of Sales for Wholesale 34,442 81.2 22,831 86.4 50.9 Gross Profit for Wholesale 7,987 18.8
3,596 13.6 122.1 Net Sales for Retail 21,383 100.0 34,128 100.0 (37.3 ) Production Costs 6,075 28.4 13,390 39.2 (54.6 ) Rent 2,886 13.5 5,942 17.4 (51.4 )
Total Cost of Sales for Retail 8,961 41.9 19,332 56.6 (53.6 ) Gross Profit for Retail 12,422 58.1
14,796 43.4 (16.0 ) Total Cost of Sales 43,403 68.0 42,163 69.6 2.9 Gross Profit$ 20,409 32.0 %$ 18,392 30.4 % 11.0 % Raw material costs for our wholesale business were 39.4% of our total wholesale business sales in the three months endedJune 30, 2021 , compared with 43.2% in the three months endedJune 30, 2021 . The decrease was mainly due to lower
raw material prices.
Labor costs for our wholesale business were 1.1% (0.5 million) of our total
wholesale business sales in the three months ended
Outsourced production costs for our wholesale business for the three months endedJune 30, 2022 increased by 56.4% to$17.1 million from$10.9 million for the three months endedJune 30, 2021 . Outsourced production costs accounted for 40.3% of our total wholesale business sales in the three months endedJune 30, 2022 , compare with 41.4% in the three months endedJune 30, 2021 . There were no significant changes in percentage of sales. 22 Overhead and other expenses for our wholesale business accounted for 0.4% of our total wholesale business sales for the three months endedJune 30, 2022 , compared with 0.4% of total wholesale business sales for the three months endedJune 30, 2021 . Wholesale business gross profit for the three months endedJune 30, 2022 was$8.0 million compared with$3.6 million for the three months endedJune 30, 2021 . Gross profit accounted for 18.8% of our total wholesale sales for the three months endedJune 30, 2022 , compared with 13.6% for the three months endedJune 30, 2021 . The increase was mainly due to purchase a large amount raw materials at lower prices. Production costs for our retail business were$6.1 million for the three months endedJune 30, 2022 compared with$13.4 million during the three months endedJune 30, 2021 . Retail production costs accounted for 28.4% of our total retail sales in the three months endedJune 30, 2022 , compared with 39.2% for the three months endedJune 30, 2021 . The decrease in amount was due to lower sales in 2022 because of COVID-19.
Rent costs for our retail business for the three months endedJune 30, 2022 were$2.9 million compared with$5.9 million for the three months endedJune 30, 2021 . Rent costs for our retail business accounted for 13.5% of our total retail sales for the three months endedJune 30, 2022 , compared with 17.4% for the three months endedJune 30, 2021 . The decrease was primarily attributable to the rent reduction in 2022 for the influence of COVID-19. Gross profit in our retail business for the three months endedJune 30, 2022 was$12.4 million and gross margin was 58.1%. Gross profit in our retail business for the three months endedJune 30, 2021 was$14.8 million and gross margin
was 43.4%. Total cost of sales for the three months endedJune 30, 2022 was$43.4 million , a 2.9% increase from$42.2 million for the three months endedJune 30, 2021 . Total cost of sales as a percentage of total sales for the three months endedJune 30, 2022 was 68.0%, compared with 69.6% for the three months endedJune 30, 2021 . Gross margin for the three months endedJune 30, 2022 was 32.0% compared with 30.4% for the three months endedJune 30, 2021 .
Selling, General and Administrative Expenses
Our selling expenses consist primarily of local transportation, unloading charges, product inspection charges, salaries for retail staff and decoration and marketing expenses associated with our retail business.
Our general and administrative expenses include administrative salaries, office expense, certain depreciation and amortization charges, repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable to our revenues. Costs of our distribution network that are excluded from cost of sales consist of local transportation and unloading charges and product inspection charges. Accordingly, our gross profit amounts may not be comparable to those of other companies who include these amounts in cost of sales. Increase (Decrease) in Three Months Ended June 30, 2022 2022 2021 Compared (In thousands of U.S. dollars, except for percentages) to 2021 Gross Profit$ 20,409 32.0 %$ 18,392 30.4 % 11.0 % Operating Expenses: Selling Expenses 11,675 18.3 14,503 24.0 (19.5 )
General and Administrative Expenses 5,521 8.7 7,662 12.7 (27.9 ) Total 17,196 26.9 22,165 36.6 (22.4 ) Income (loss) from Operations$ 3,213 5.0 %
$ (3,773 ) (6.2 )% 185.1 % Selling expenses for the three months endedJune 30, 2022 decreased by 19.5% to$11.7 million from$14.5 million for the three months endedJune 30, 2021 . The decrease was attributable to the decreased average salaries and decreased business trips. General and administrative expenses for the three months endedJune 30, 2022 decreased by 27.9% to$5.5 million from$7.7 million for the three months endedJune 30, 2021 . The decrease was attributable to the decreased publicity expense and the depreciation of RMB . 23
Income(Loss) from Operations
Income from operations for the three months endedJune 30, 2022 was$3.2 million , an increase of 185.1% from$3.8 million of loss for the three months endedJune 30, 2021 . Income from operations for the three months endedJune 30, 2022 accounted for 5.0% of our total sales, while the three months endedJune 30, 2021 accounted for 6.2% of our total sales. Interest Expense
Interest expense for the three months ended
Income Tax Expenses
Income tax expense was
The Company's operating subsidiaries are governed by the Income Tax Law of the
PRC concerning
All PRC subsidiaries are subject to income tax at the 25% statutory rate.
Perfect Dream was incorporated in the
Ever-Glory HK was incorporated in
The PRC's Enterprise Income Tax Law imposes a 10% withholding income tax for dividends distributed by a foreign invested enterprise in PRC to its immediate holding company outsideChina ; such distributions were exempted under the previous income tax law and regulations. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainlandChina and the jurisdiction of the foreign holding company. The foreign invested enterprise became subject to the withholding tax starting fromJanuary 1, 2008 . Given that the undistributed profits of the Company's subsidiaries inChina are intended to be retained inChina for business development and expansion purposes, no withholding tax accrual has been made. Net Income (Loss)
Net income for the three months ended
Results of Operations for the six months ended
The following table summarizes our results of operations for the six months endedJune 30, 2022 and 2021. The table and the discussion below should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this report. Six Months Ended June 30, 2022 2021 (In thousands of U.S. Dollars, except for percentages) Sales$ 128,585 100.0 %$ 131,369 100.0 % Gross Profit 37,781 29.4 40,828 31.1 Operating Expense 37,876 29.5 45,565 34.7 Loss From Operations (95 ) (0.1 ) (4,737 ) (3.6 ) Other Expense(Income) (556 ) (0.4 ) 3,611 2.7 Income tax expense 2,038 1.6 1,815 1.4 Net Loss$ (2,689 ) (2.1 )%$ (2,941 ) (2.2 )% 24 Revenue
The following table sets forth a breakdown of our total sales, by region, for
the six months ended
Growth 2022 2021 (Decrease) in 2022 (In thousands of % of total (In thousands of % of total compared
Wholesale business U.S. dollars) sales U.S. dollars) sales with 2021 Mainland China $ 14,991 11.7 % $ 11,846 9.0 % 26.5 % Hong Kong China 7,952 6.2 6,971 5.3 14.1 United Kingdom 5,519 4.3 3,538 2.7 56.0 Europe-Other 12,912 10.0 10,059 7.7 28.4 Japan 6,638 5.2 4,955 3.8 34.0 United States 24,294 18.8 12,277 9.3 97.9
Total Wholesale business 72,306 56.2
49,646 37.8 45.6 Retail business 56,279 43.8 81,723 62.2 (31.1 ) Total sales $ 128,585 100.0 % $ 131,369 100.0 % (2.1 )%
Sales for the six months ended
Sales generated from our wholesale business contributed 56.2% or$72.3 million of our total sales for the six months endedJune 30, 2022 , an increase of 45.6% compared with 37.8% or$49.6 million in the six months endedJune 30, 2021 . This increase was primarily attributable to increased sales in all countries we
have wholesale business with.
Sales generated from our retail business contributed 43.8% or$56.3 million of our total sales for the six months endedJune 30, 2022 , a decrease of 31.1% compared with 62.2% or$81.7 million in the six months endedJune 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 six months
ended
2022 2021 Total store square footage 922,423 1,011,506 Number of stores 816 931 Average store size, square feet 1,130
1,086
Total store sales (in thousands of
$ 61 $ 81
Same store sales and newly opened store sales for the six months ended
2022 2021 (In thousands of U.S. dollars) Sales from stores opened for a full year$ 45,514 $ 62,067 Sales from newly opened store sales $ 2,769 $ 7,566 Sales from e-commerce platform $ 5,838 $
6,649 Other* $ 2,158 $ 5,441 Total$ 56,279 $ 81,723
* Primarily sales from stores that were closed in the current reporting period.
We remodeled or relocated 137 stores in year 2021, and 13 stores during the six months endedJune 30, 2022 . We plan to relocate or remodel 50 to 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. 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 six months endedJune 30, 2022 and 2021. Growth (Decrease) in Six months ended June 30, 2022 2022 2021 Compared (In thousands of U.S. dollars, except for percentages) with 2021
Net Sales for Wholesale Sales$ 72,306 100.0 %
$ 49,646 100.0 % 45.6 % Raw Materials 30,075 41.6 21,793 43.9 38.0 Labor 920 1.3 719 1.4 28.0
Outsourced Production Costs 27,322 37.8 18,776 37.8 45.5 Other and Overhead 290 0.4 200 0.4 45.0 Total Cost of Sales for Wholesale 58,608 81.1 41,488 83.6 41.3 Gross Profit for Wholesale 13,698 18.9
8,158 16.4 67.9 Net Sales for Retail 56,279 100.0 81,723 100.0 (31.1 ) Production Costs 22,125 39.3 33,151 40.6 (33.3 ) Rent 10,071 17.9 15,902 19.5 (36.7 )
Total Cost of Sales for Retail 32,196 57.2 49,053 60.0 (34.4 ) Gross Profit for Retail 24,083 42.8
32,670 40.0 (26.3 ) Total Cost of Sales 90,804 70.6 90,541 68.9 0.3 Gross Profit$ 37,781 29.4 %$ 40,828 31.1 % (7.5 )% Raw material costs for our wholesale business were 41.6% of our total wholesale business sales in the six months endedJune 30, 2022 , compared with 43.9% in the six months endedJune 30, 2021 . The decrease was mainly due to lower cost of raw materials.
Labor costs for our wholesale business were 1.3% of our total wholesale business
sales in the six months ended
Outsourced production costs for our wholesale business were 37.8% of our total
sales in the six months ended
Overhead and other expenses for our wholesale business accounted for 0.4% and
0.4% of our total sales for the six months ended
Gross profit for our wholesale business for the six months endedJune 30, 2022 was$13.7 million , a 67.9% increase compared with the six months endedJune 30, 2021 . As a percentage of total wholesale business sales, gross profit was 18.9% of our total wholesale business sales for the six months endedJune 30, 2022 , compared with 16.4% for the six months endedJune 30, 2021 . The increase was mainly due to lower cost of raw materials. Production costs for our retail business for the six months endedJune 30, 2022 were$22.1 million compared with$33.2 million for the six months endedJune 30, 2021 . As a percentage of our total retail sales, production costs were 39.3% of our total retail sales for the six months endedJune 30, 2022 , compared with 40.6% for the six months endedJune 30 , 2021.There were no significant changes. Rent costs for our retail business for the six months endedJune 30, 2022 were$10.1 million compared with$15.9 million for the six months endedJune 30, 2021 . As a percentage of total retail sales, rent costs were 17.9% of our total retail sales for the six months endedJune 30, 2022 compared with 19.5% for the six months endedJune 30, 2021 . The decrease in percentage was primarily attributable to the rent reduction in 2022 due to outbreak of COVID-19 inChina . 26
Gross profit for our retail business for the six months endedJune 30, 2022 was$24.1 million compared with$32.7 million for the six months endedJune 30, 2021 . Gross margin for our retail business for the six months endedJune 30, 2022 was 42.8% compared with 40.0% for the six months endedJune 30, 2021 . Total cost of sales for the six months endedJune 30, 2022 was$90.8 million , a 0.3% increase compared with the six months endedJune 30, 2021 . As a percentage of total sales, total costs were 70.6% of total sales for the six months endedJune 30, 2022 , compared with 68.9% for the six months endedJune 30, 2021 . Total gross margin for the six months endedJune 30, 2022 was 29.4% compared with 31.1% for the six months endedJune 30, 2021 .
Selling, General and Administrative Expenses
Our selling expenses consist primarily of local transportation, unloading charges, product inspection charges, salaries for retail staff and decoration and marketing expenses associated with our retail business.
Our general and administrative expenses include administrative salaries, office expense, certain depreciation and amortization charges, repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable to our revenues. Costs of our distribution network that are excluded from cost of sales consist of local transportation and unloading charges, and product inspection charges. Accordingly, our gross profit amounts may not be comparable to those of other companies who include these amounts in costs of sales. Increase (Decrease) in Six months ended June 30, 2022 2022 2021 Compared (In thousands of U.S. dollars, except for percentages) to 2021 Gross Profit$ 37,781 29.4 %$ 40,828 31.1 % (7.5 )% Operating Expenses: Selling Expenses 25,361 19.7 30,052 22.9 (15.6 )
General and Administrative Expenses 12,515 9.7
15,513 11.8 (19.3 ) Total 37,876 29.5 45,565 34.7 (16.9 ) Loss from Operations $ (95 ) (0.1 )%$ (4,737 ) (3.6 )% (98.0 )%
Selling expenses for the six months endedJune 30, 2022 were$25.4 million , a 15.6% decrease compared with$30.1 million in the six months endedJune 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 six months endedJune 30, 2022 were$12.5 million a 19.3% decrease compared with the six months endedJune 30, 2021 . As a percentage of total sales, general and administrative expenses accounted for 9.7% of total sales for the six months endedJune 30, 2022 , compared with 11.8% of total sales for the six months endedJune 30, 2021 . The decrease was attributable to the decreased publicity expense and the depreciation of RMB
. Loss from Operations
Loss from operations for the six months ended
Interest Expense
Interest expense was
Income Tax Expense Income tax expense for the six months endedJune 30, 2022 was$2.0 million , a 12.3% increase compared to the same period of 2021. The increase was primarily due to the higher PRC income which resulted in a higher income tax expense.
27 Net Loss Net loss for the six months endedJune 30, 2022 was$2.7 million , a decrease of 8.7% compared with$2.9 million of net loss from the same period in 2021. Basic and diluted loss per share was$0.18 and$0.20 for the six months endedJune 30, 2022 and 2021, respectively.
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