EVER-GLORY INTERNATIONAL GROUP, INC. The following discussion and analysis of our financial condition and results of operations for the three and six months endedJune 30, 2020 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),Nanjing Tai Xin Garments Trading Company Limited ("Tai Xin"),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"),Shanghai Yiduo Fashion Company Limited ("Shanghai Yiduo") andXizang He Meida Trading Company Limited ("He Meida"). 18 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;
? 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 June
30, 2020 , we had 935 stores (including store-in-stores), which includes 19
stores that were opened and 185 stores that were closed in the first half year
of 2020. We expect to open an additional 50 to 100 stores in 2020.
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
? Becoming a multi-brand operator.
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.
19
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 2020. 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 has resulted in the reduction of customer traffic and temporary closures of shopping malls as mandated by the provincial governments in various provinces ofChina from late January to March, which has adversely affected our retail business with a decline in sales sinceFebruary 2020 . Our wholesale business is also significantly affected as we are facing a sharp decline in our order quantities. Some of our wholesale clients have 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. 20 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, 2019 filed with theSEC onMarch 30, 2020 ("2019 Form 10-K.") Fair Value Accounting
Accounting Standards Codification ("ASC") 820 "Fair Value Measurements and
Disclosures", establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy
under ASC 820 are described below:
Level 1 Unadjusted quoted prices in active markets that are accessible at
the measurement date for identical, unrestricted assets or
liabilities;
Level 2 Quoted prices in markets that are not active, or inputs that are
observable, either directly or indirectly, for substantially the
full term of the asset or liability;
Level 3 Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable
(supported by little or no market activity).
The fair value of forward exchange contracts is based on broker quotes, if available. If broker quotes are not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price at the reporting date for the residual maturity of the contract using a risk-free interest rate based on government bonds.
As of
Management has estimated that the carrying amounts of non-related party financial instruments approximate their fair values due to their short-term maturities. The fair value of amounts due from (to) related parties is not practicable to estimate due to the related party nature of the underlying transactions.
The Company has adopted ASC 825-10 "Financial Instruments", which allows an entity to choose to measure certain financial instruments and liabilities at fair value on a contract-by-contract basis. Subsequent fair value measurement for the financial instruments and liabilities an entity chooses to measure
will be recognized in earnings. As ofJune 30, 2020 , the Company's financial assets (all Level 1) consist of cash placed with financial institutions and trading securities (nil atDecember 31, 2019 ) with brokerage accounts that management considers to be high quality.
Foreign Currency Translation and Other Comprehensive Income
The reporting currency of the Company is theU.S. dollar. The functional currency ofEver-Glory , Perfect Dream, Ever-Glory HK and Ever-Glory Supply Chain is theU.S. dollar. The functional currency of Goldenway, New Tailun, Catch-luck, Ever-Glory Apparel, Shanghai LA GO GO, Jiangsu LA GO GO, Tianjin LA GO GO, Shanghai Yiduo, Ya Lan, He Meida, Huirui, Taixin, Haian Taixin and Nanjing Rui Lian is the Chinese RMB . For subsidiaries whose functional currency is the RMB, all assets and liabilities were translated at the exchange rate at the balance sheet date; equity was translated at historical rates and items in the statement of comprehensive income were translated at the average rate for the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income. The resulting translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Items in the cash flow statement are translated at the average exchange rate for the period. Use of Estimates In preparing our condensed consolidated financial statements, we use estimates and assumptions that affect the reported amounts and disclosures. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable, but that are inherently uncertain and unpredictable. We are also subject to other risks and uncertainties that may cause actual results to differ from estimated amounts. Significant estimates include the assumptions used to value tax liabilities, derivative financial instruments, the estimates of the allowance for deferred tax assets, and the accounts receivable allowance, and impairment of long-lived assets and inventory write off. 21
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.
Results of Operations for the three months ended
The following table summarizes our results of operations for the three months endedJune 30, 2020 and 2019. 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, 2020 2019 (In thousands of U.S. dollars, except for percentages) Sales$ 50,086 100.0 %$ 77,316 100.0 % Gross Profit$ 14,445 28.8 %$ 28,986 37.5 % Operating Expense$ 18,597 37.1 %$ 27,036 35.0 %
(Loss) Income From Operations$ (4,152 ) (8.3 )%$ 1,950
2.5 % Other Income$ 618 1.2 %$ 1,278 1.7 % Income tax expense$ 266 0.5 %$ 1,455 1.9 % Net (Loss) Income$ (3,800 ) (7.6 )%$ 1,773 2.3 % Revenue
The following table sets forth a breakdown of our total sales, by region, for
the three months ended
Growth
2020 2019 (Decrease)
in 2020
(In thousands of % of (In thousands of % of compared
Wholesale business U.S. dollars) total sales U.S. dollars) total sales with 2019
Mainland China $ 3,111 6.2 % $ 6,491 8.4 % (52.1 )%
Hong Kong China 2,054 4.1 6,463 8.4 (68.2 )
Germany 48 0.1 877 1.1 (94.5 )
United Kingdom 471 0.9 2,038 2.6 (76.9 )
Europe-Other 3,612 7.2 4,224 5.5 (14.5 )
Japan 2,205 4.4 1,311 1.7 68.2
United States 10,549 21.1 15,847 20.5 (33.4 )
Total Wholesale business 22,049 44.0 37,251 48.2 (40.8 )
Retail business 28,037 56.0 40,065 51.8 (30.0 )
Total sales $ 50,086 100.0 % $ 77,316 100.0 % (35.2 )%
22
Sales for the three months endedJune 30, 2020 were$50.1 million , a 35.2% decrease compared with the three months endedJune 30, 2019 . This decrease was primarily attributable to a 40.8% decrease in sales in our wholesale business and a 30.0% decrease in our retail business. Sales generated from our wholesale business contributed 44.0% or$22.0 million of our total sales for the three months endedJune 30, 2020 , a 40.8% decrease compared with 48.2% or$37.3 million in the three months endedJune 30, 2019 . This decrease was primarily attributable to a decrease in sales inHong Kong ,Germany , Europe-Other, Mainland China,United Kingdom andUnited States , partially offset by an increase in sales inJapan . Sales generated from our retail business contributed 56.0% or$28.0 million of our total sales for the three months endedJune 30, 2020 , a 30.0% decrease compared with 51.8% or$40.1 million in the three months endedJune 30, 2019 . This decrease was primarily due to a decrease in the numbers of stores and
same store sales. Costs and Expenses
Cost of Sales and Gross Margin
Cost of goods sold includes the direct raw material cost, direct labor cost, and manufacturing overhead including depreciation of production equipment and rent, consistent with the revenue earned. Cost of goods sold excludes warehousing costs, which historically have not been significant. The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the three months endedJune 30, 2020 and 2019. Growth (Decrease) in Three months ended June 30, 2020 2020 2019 Compared (In thousands of U.S. dollars, except for percentages) with 2019
Net Sales for Wholesale Sales$ 22,049 100.0 %
$ 37,251 100.0 % (40.8 )% Raw Materials 8,614 39.1 16,376 44.0 (47.4 ) Labor 299 1.4 398 1.1 (25.0 )
Outsourced Production Costs 8,623 39.1 14,409 38.7 (40.2 ) Other and Overhead 152 0.7 55 0.1 178.0 Total Cost of Sales for Wholesale 17,688 80.3 31,238 83.9 (43.4 ) Gross Profit for Wholesale 4,361 19.7
6,013 16.1 (27.5 )
Net Sales for Retail 28,037 100.0 40,065 100.0 (30.0 )
Production Costs 13,865 49.5 10,084 25.2 37.5
Rent 4,088 14.3 7,008 17.5 (41.7 )Total Cost of Sales for Retail 17,953 63.8 17,092 42.7 5.0 Gross Profit for Retail 10,084 36.2
22,973 57.3 (56.1 )
Total Cost of Sales 35,641 71.2 48,330 62.5 (26.3 )
Gross Profit $ 14,445 28.8 % $ 28,986 37.5 % (50.2 )%
Raw material costs for our wholesale business were 39.1% of our total wholesale
business sales in the three months ended June 30, 2020 , compared with 44.0% in
the three months ended June 30, 2019 . The decrease was mainly due to lowerraw material prices. Labor costs for our wholesale business were 1.4% of our total wholesale business sales in the three months endedJune 30, 2020 , compared with 1.1% in the three months endedJune 30, 2019 . The marginal increase was mainly due to a higher average employee salaries in 2020. 23
Outsourced production costs for our wholesale business for the three months endedJune 30, 2020 decreased 40.2% to$8.6 million from$14.4 million for the three months endedJune 30, 2019 . Outsourced production costs accounted for 39.1% of our total wholesale business sales in the three months endedJune 30, 2020 , a 40.2% decrease from the three months endedJune 30, 2019 . This increase in percentage was primarily attributable to higher average employee salaries at our outsourced manufacturing factories. Overhead and other expenses for our wholesale business accounted for 0.7% of our total wholesale business sales for the three months endedJune 30, 2020 , compared with 0.1% of total wholesale business sales for the three months endedJune 30, 2019 . Wholesale business gross profit for the three months endedJune 30, 2020 was$4.4 million compared with$6.0 million for the three months endedJune 30, 2019 . Gross profit accounted for 19.7% of our total wholesale sales for the three months endedJune 30, 2020 , compared with 16.1% for the three months endedJune 30, 2019 . The decrease was mainly due to higher average employee salaries. Production costs for our retail business were$13.9 million for the three months endedJune 30, 2020 compared with$10.1 million during the three months endedJune 30, 2019 . Retail production costs accounted for 49.5% of our total retail sales in the three months endedJune 30, 2020 , compared with 25.21% for the three months endedJune 30, 2019 . The decrease in percentage was due to decrease in overall purchase costs.
Rent costs for our retail business for the three months endedJune 30, 2020 were$4.1 million compared with$7.0 million for the three months endedJune 30, 2019 . Rent costs for our retail business accounted for 14.3% of our total retail sales for the three months endedJune 30, 2020 , compared with 17.5% for the three months endedJune 30, 2019 . The decrease was primarily attributable to the decline in number of stores. Gross profit in our retail business for the three months endedJune 30, 2020 was$10.1 million and gross margin was 36.2%. Gross profit in our retail business for the three months endedJune 30, 2019 was$23.0 million and gross margin
was 57.3%. Total cost of sales for the three months endedJune 30, 2020 was$35.6 million , a 26.3% decrease from$48.30 million for the three months endedJune 30, 2019 . Total cost of sales as a percentage of total sales for the three months endedJune 30, 2020 was 71.2%, compared with 62.5% for the three months endedJune 30, 2019 . Gross margin for the three months endedJune 30, 2020 was 28.8% compared with 37.5% for the three months endedJune 30, 2019 .
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.
24
Increase
(Decrease) in
Three Months Ended June 30, 2020
2020 2019 Compared
(In thousands of U.S. dollars, except for percentages) to 2019
Gross Profit $ 14,445 28.8 % $ 28,986 37.5 % (50.2 )%
Operating Expenses:
Selling Expenses 12,626 25.2 19,699 25.5 (35.9 )General and Administrative Expenses 5,971 11.9 7,337 9.5 (18.6 ) Total 18,597 37.1 27,036 35.0 (31.2 ) (Loss) Income from Operations$ (4,152 ) (8.3 )%
$ 1,950 2.5 % (312.8 )% Selling expenses for the three months endedJune 30, 2020 decreased 35.9% to$12.6 million from$19.7 million for the three months endedJune 30, 2019 . The decrease was attributable to the marketing expenses associated with the promotion of the retail brand. General and administrative expenses for the three months endedJune 30, 2020 decreased 18.6% to$6.0 million from$7.3 million for the three months endedJune 30, 2019 . The decrease was attributable to the decline in number of stores. (Loss) Income from Operations Loss from operations for the three months endedJune 30, 2020 was$4.2 million , a decrease of 312.8% from$2.0 million of income for the three months endedJune 30, 2019 . Loss from operations for the three months endedJune 30, 2020 accounted for 8.3% of our total sales, while income from operations for the three months endedJune 30, 2019 accounted for 2.5% of our total sales. Interest Expense
Interest expense for the three months endedJune 30, 2020 was$0.6 million , a 38.7% increase compared with the same period in 2019. The increase was due
to the increased bank loans. 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, except for He Meida, are subject to income tax at the 25% statutory rate.
He Meida incorporated inXizang (Tibet) Autonomous Region is subject to income tax at 15% statutory rate. The local government has implemented an income tax reduction from 15% to 9% valid throughDecember 31, 2020 .
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. 25 Net (Loss) Income Net loss for the three months endedJune 30, 2020 was ($3.8 million ), a 304.3% decrease compared with the same period in 2019. Our basic and diluted (loss) earnings per share were ($0.26 ) and$0.13 for the three months endedJune 30, 2020 and 2019, respectively.
Results of Operations for the six months ended
The following table summarizes our results of operations for the six months endedJune 30, 2020 and 2019. The table and the discussion below should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this report. Six Months Ended June 30, 2020 2019 (In thousands of U.S. Dollars, except for percentages) Sales$ 108,441 100.0 %$ 165,272 100.0 % Gross Profit 30,483 28.1 58,344 35.3 Operating Expense 37,860 34.9 55,573 33.6
(Loss) Income From Operations (7,377 ) (6.8
) 2,771 1.7 Other Income 1,372 1.3 827 0.5 Income tax expense 493 0.5 2,280 1.4 Net (Loss) Income$ (6,498 ) (6.0 )%$ 1,318 0.8 % Revenue
The following table sets forth a breakdown of our total sales, by region, for
the six months ended
Growth
2020 2019 (Decrease)
in 2020
(In thousands of % of total (In thousands of % of total comparedWholesale business U.S. dollars) sales U.S. dollars) sales with 2019 Mainland China $ 7,764 7.2 % $ 17,246 10.4 % (55.0 )% Hong Kong China 5,045 4.7 7,717 4.7 (34.6 ) Germany 243 0.2 1,726 1.0 (85.9 ) United Kingdom 1,309 1.2 2,838 1.7 (53.9 ) Europe-Other 7,511 6.9 9,453 5.7 (20.5 ) Japan 6,589 6.1 6,248 3.8 5.5 United States 15,876 14.6 20,125 12.2 (21.1 )
Total Wholesale business 44,337 40.9
65,353 39.5 (32.2 )
Retail business 64,104 59.1 99,919 60.5 (35.8 )
Total sales $ 108,441 100.0 % $ 165,272 100.0 % (34.4 )%
Sales for the six months ended June 30, 2020 were $108.4 million , a decrease of
34.4% from the six months ended June 30, 2019 . This decrease was primarily
attributable to a 32.2% decrease in sales in our wholesale business and a 35.8%
decrease in our retail business.
26
Sales generated from our wholesale business contributed 40.9% or $44.3 million
of our total sales for the six months ended June 30, 2020 , a decrease of 32.2%
compared with 39.5% or $65.4 million in the six months ended June 30, 2019 . This
decrease was primarily attributable to decreased sales in Hong Kong China ,
Germany , Mainland China, United Kingdom , the United States and Europe-Other,
partially offset by increased sales in Japan .
Sales generated from our retail business contributed 59.1% or $64.1 million of
our total sales for the six months ended June 30, 2020 , a decrease of 35.8%
compared with 60.5% or $99.9 million in the six months ended June 30, 2019 . This
decrease was primarily due to a decrease in same store sales.
Total retail store square footage and sales per square foot for the six months
ended
2020 2019
Total store square footage 989,034 1,274,661
Number of stores 935 1,235
Average store size, square feet 1,058 1,032
Total store sales (in thousands of
$ 65 $ 78
Same store sales and newly opened store sales for the six months ended
2020 2019
(In thousands of U.S. dollars)
Sales from stores opened for a full year $ 43,678 $ 77,984
Sales from newly opened store sales $ 4,636 $ 7,417
Sales from e-commerce platform $ 7,822 $ 6,197 Other* $ 7,968 $ 8,321 Total$ 64,104 $ 99,919
* Primarily sales from stores that were closed in the current reporting period.
We remodeled or relocated 117 stores in 2019, and 9 stores during the six months endedJune 30, 2020 . We plan to relocate or remodel 50-100 stores in 2020. 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 2020. 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. 27 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, 2020 and 2019. Growth (Decrease) in 2020 Six months ended June 30, 2020 2020 2019 Compared (In thousands of U.S. dollars, except for percentages) with 2019
Net Sales for Wholesale Sales$ 44,337 100.0 %
$ 65,353 100.0 % (32.2 )% Raw Materials 18,704 42.2 27,685 42.3 (32.4 ) Labor 544 1.2 705 1.1 (22.9 )
Outsourced Production Costs 16,993 38.3 24,279 37.2 (30.0 ) Other and Overhead 238 0.5 113 0.2 110.6 Total Cost of Sales for Wholesale 36,479 82.2 52,782 80.8 (30.9 ) Gross Profit for Wholesale 7,858 17.8
12,571 19.2 (37.5 )
Net Sales for Retail 64,104 100.0 99,919 100.0 (35.8 )
Production Costs 29,712 46.3 34,286 34.3 (13.3 )
Rent 11,767 18.4 19,860 19.9 (40.7 )Total Cost of Sales for Retail 41,479 64.7 54,146 54.2 (23.4 ) Gross Profit for Retail 22,625 35.3
45,773 45.8 (50.6 )
Total Cost of Sales 77,958 71.9 106,928 64.7 (27.1 )
Gross Profit $ 30,483 28.1 % $ 58,344 35.3 % (47.8 )%
Raw material costs for our wholesale business were 42.2% of our total wholesale
business sales in the six months ended June 30, 2020 , compared with 42.3% in the
six months ended June 30, 2019 . The decrease was mainly due to lower cost of raw
materials.
Labor costs for our wholesale business were 1.2% of our total wholesale business
sales in the six months ended June 30, 2020 , compared with 1.1% in the six
months ended June 30, 2019 . The marginal increase was mainly due to a higher
average employee salaries in 2020.
Outsourced production costs for our wholesale business were 38.3% of our total
sales in the six months ended June 30, 2020 , compared with 37.2% in the six
months ended June 30, 2019 . This increase was primarily attributable to higher
average employee salaries at our outsourced manufacturing factories.
Overhead and other expenses for our wholesale business accounted for 0.5% and
0.2% of our total sales for the six months ended
Gross profit for our wholesale business for the six months endedJune 30, 2020 was$7.9 million , a 37.5% decrease compared with the six months endedJune 30, 2019 . As a percentage of total wholesale business sales, gross profit was 17.8% of our total wholesale business sales for the six months endedJune 30, 2020 , compared with 19.2% for the six months endedJune 30, 2019 . The decrease was mainly due to higher average employee salaries. Production costs for our retail business for the six months endedJune 30, 2020 were$29.7 million compared with$34.3 million for the six months endedJune 30, 2019 . As a percentage of our total retail sales, production costs were 46.3% of our total retail sales for the six months endedJune 30, 2020 , compared with 34.3% for the six months endedJune 30, 2019 . The decrease in amounts was due to decrease in overall purchase costs. Rent costs for our retail business for the six months endedJune 30, 2020 were$11.8 million compared with$19.9 million for the six months endedJune 30, 2019 . As a percentage of total retail sales, rent costs were 18.4% of our total retail sales for the six months endedJune 30, 2020 compared with 19.9% for the six months endedJune 30, 2019 . The decrease in percentage was primarily attributable to decline in number of stores. Gross profit for our retail business for the six months endedJune 30, 2020 was$22.6 million compared with$45.8 million for the six months endedJune 30, 2019 . Gross margin for our retail business for the six months endedJune 30, 2020 was 35.3% compared with 45.8% for the six months endedJune 30, 2019 . Total cost of sales for the six months endedJune 30, 2020 was$78.0 million , a 27.1% decrease compared with the six months endedJune 30, 2019 . As a percentage of total sales, total costs were 71.9% of total sales for the six months endedJune 30, 2020 , compared with 64.7% for the six months endedJune 30, 2019 . Total gross margin for the six months endedJune 30, 2020 was 28.1% compared with 35.3% for the six months endedJune 30, 2019 . 28
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, 2020
2020 2019 Compared
(In thousands of U.S. dollars, except for percentages) to 2019
Gross Profit $ 30,483 28.1 % $ 58,344 35.3 % (47.8 )%
Operating Expenses:
Selling Expenses 26,105 24.1 40,706 24.6 (35.9 )General and Administrative Expenses 11,755 10.8 14,867 9.0 (20.9 ) Total 37,860 34.9 55,573 33.6 (31.9 ) (Loss)Income from Operations$ (7,377 ) (6.8 )%
$ 2,771 1.7 % (366.2 )%
Selling expenses for the six months endedJune 30, 2020 were$26.1 million , a 35.9% decrease compared with the six months endedJune 30, 2019 . The decrease was attributable to the marketing expenses associated with the promotion of
the retail brand.
General and administrative expenses for the six months endedJune 30, 2020 were$11.8 million a 20.9% decrease compared with the six months endedJune 30, 2019 . As a percentage of total sales, general and administrative expenses accounted for 10.8% of total sales for the six months endedJune 30, 2020 , compared with 9.0% of total sales for the six months endedJune 30, 2019 . The decrease in amounts was attributable to the decline in number of stores. (Loss)Income from Operations Loss from operations for the six months endedJune 30, 2020 was$7.4 million , a 366.2% decrease from$2.8 million of income for the six months endedJune 30, 2019 . This decrease was due to decreased sales. Interest Expense
Interest expense was
Income Tax Expense Income tax expense for the six months endedJune 30, 2020 was$0.5 million , a 78.4% decrease compared to the same period of 2019. The decrease was primarily due to deferred tax asset valuation allowance which resulted in a slightly
higher income tax expense. 29 Net (Loss) Income
Net loss for the six months ended
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