China 3C Group (”China 3C” or the ”Company”) [[CHCG.OB]], a retailer and wholesale distributor of consumer and business products in China, today announced financial results for the first quarter of 2009.
Net sales for the first quarter of 2009 increased 13.6% to $77.4 million compared to $68.2 million for the same period of the prior year. This 13.6% sales increase for the first quarter was a result of an increase in sales from three of the Company’s major operating subsidiaries. The Company also benefitted from lower sales in the prior year period due to weather-related issues which created a backlog in the company’s distribution channels resulting in lower sales for the first quarter of 2008. The Company’s retail business generated approximately 68.5% of sales while the wholesale business generated approximately 31.5% of sales in the first quarter.
Among the Company’s four major operating subsidiaries, the net combined retail and wholesale revenue contribution of each subsidiary was as follows:
— WangDa (cell phones) first quarter 2009 revenue increased over 18.2% to $25.7 million compared to the prior year period. First quarter gross profit margin for WangDa was 11.5%.
— Joy & Harmony (consumer electronics) first quarter 2009 revenue increased over 17.8% to $19.3 million compared to the prior year period. First quarter gross profit margin for Joy & Harmony was 11.2%.
— SanHe (appliances) first quarter 2008 revenue was roughly flat at $16.6 million compared to the prior year period. First quarter gross profit margin for SanHe was 19.6%.
— YongXin (communications/office electronic equipment) first quarter 2009 revenue increased 20.5% to $15.8 million compared to the prior year period. First quarter gross profit margin for YongXin was 10.7%.
Gross profit for the first quarter of 2009 was $10.1 million compared to $10.5 million in the same period of the prior year. First quarter 2009 gross margin was 13.0% compared to 15.5% for the same period of the prior year. The lower gross margin was due to lower unit product sales for many electronic products due to the highly competitive environment while the Company’s consumer product purchases from suppliers remained flat.
Selling, general and administrative expense for the first quarter of 2009 totaled $5.5 million, or approximately 7.1% of net sales, compared to $3.0 million, or approximately 4.4% of net sales, for the same period of the prior year. The increase was primarily due to an increase in base salary for all staff, an increase in marketing expenses and additional expenses incurred to upgrade the sales counters in retail stores to enhance the corporate image. The increase was also attributable to higher management fees as a percentage of sales that were charged by certain department store chains.
Income from operations for the first quarter of 2009 was $4.6 million, or 5.9% of net sales, compared to income from operations of $7.6 million for the first quarter of 2008, or 11.1% of net sales.
Net income was $3.4 million, or $0.07 per diluted share, for the first quarter of 2009, compared to $5.8 million, or $0.11 per diluted share, for the first quarter of 2008.
The Company’s cash position decreased 11% to $28.7 million compared to $32.2 million at the end of December 31, 2008. The cash decrease was largely due to the $7.3 million payment for the Jinhua Baofa acquisition made in the first quarter. The Company does not currently have any debt.
Mr. Zhenggang Wang, Chairman and Chief Executive Officer, commented, “The economic downturn has resulted in a more competitive environment within our store-in-store business in the first quarter of 2009, which resulted in lower average unit prices on many of our consumer products as well as higher management fees charged by several of our department store chain customers. The competitive pressures associated with a challenging market environment are a natural trend that we have been anticipating for some time and we are pleased with our diversification efforts since the start of the year. We added the Jinhua Baofa logistics company to our business which facilitated our entry into the franchise store business and allows us to better control our margins and profitability. We remain optimistic that the competitive pressures in our store-in-store business will ease as the economy rebounds and with our strong balance sheet, which includes no debt, healthy cash balance and positive operating cash flow, we believe our company is well positioned to expand our market position. In the first quarter, we made investments in many of our store locations by expanding our marketing efforts, improving employee compensation, and upgrading store designs. We are hopeful these efforts can improve productivity and yield better profits. Ensuring that our store-in-stores maintain the right level of revenue and profitability standards is of the highest priority. As part of this effort, we closed 25 stores in the first quarter and now have 990 store-in-store locations. We will consider additional reductions to our store count in the near future if certain stores do not meet our performance standards.”
”Our strong balance sheet not only allows us to support our store-in-store locations, it provides us with the flexibility to pursue new business opportunities that can further enhance our position in China’s consumer electronic marketplace. We continue to make good progress with our franchise plan and are on plan to open up 15 direct stores and 15 franchise stores in the second half of 2009 and plan to open 100 additional franchise stores in 2010. We have identified several potential store locations and are in the process of converting them into more comprehensive stores that will carry branded consumer electronic products and product lines supplied through our wholesale unit. The locations of these potential stores are in cities with minimal large-format electronic retail competition, which we believe will allow us the opportunity to maximize pricing and margin opportunities in such locations.”
”We believe the build out of a franchise model will provide us with many unique opportunities compared to our existing model including better brand visibility, store format flexibility and greater operational control. We expect to close our acquisition of Jinhua Baofa in the near future and we intend to be able to utilize their expansive logistic network to meet the needs of our future franchisees and direct flagship stores.”
”We continue to focus on opportunities that can enhance our store-in-store performance including the ongoing introduction of new, higher margin products and negotiating new leasing terms for rent. We expect this segment to serve as the primary contributor to both our revenue and profit for the near future. As our franchise plan continues to roll out, we believe that we will see additional upside to our revenue and profit performance as we increase the number of direct stores and franchise stores. We look forward to updating you on our progress as we move through 2009 and we believe that our strong wholesale position and retail store-in-stores and franchise stores provide us with the right platform to increase our market opportunity in China’s consumer electronics market,” concluded Mr. Wang.
The Company intends to conduct a conference call to further discuss its business operations including its franchise store plans in the coming 2-3 weeks.
About China 3C Group
China 3C is a leading wholesale distributor and retailer of 3C merchandise: computers, communication products and consumer electronics. The Company specializes in wholesale distribution and retail sales of 3C products in Eastern China, focusing on products that make life more comfortable, convenient and connected. The Company’s goal is to become the number one retailer of 3C products in China. For more information, visit http://www.china3cgroup.com .
Forward-looking Statements
Certain statements set forth in this press release constitute “Forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We have included and from time to time may make in our public filings, press releases or other public statements, certain forward-looking statements, including, without limitation, those under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or words or expressions of similar meaning. You are cautioned not to place undue reliance on these forward- looking statements. In addition, our management may make forward-looking statements to analysts, investors, representatives of the media and others. These forward-looking statements are not historical facts and represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and beyond our control. There can be no assurance that such forward-looking statements will prove to be accurate and China 3C Group undertakes no obligation to update any forward-looking statements or to announce revisions to any of the forward-looking statements.
