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Will Chinese Retail Sales Boost China 3C?

Chinese retail sales jumped 14.8% in April as the country’s economic stimulus helped support domestic demand. However, will these trends help add to China 3C’s (CHCG) bottom line, or will the retailer continue to struggle amid the global economic crisis?

China 3C Group [[CHCG.OB]], a diversified electronics retailer in China, may have reported strong sales during the first quarter, but many investors remain very concerned about the future. The company has yet to address many shareholder questions in a conference call, while there is concern about both the company’s logistics company acquisition and franchising strategy.

Chinese retail sales jumped 14.8% in April from a year earlier, as the country’s economic stimulus helped support domestic demand. However, demand was strongest for food, clothing, autos and housing decoration materials, rather than high end consumer electronics. Meanwhile, manufacturing figures lagged retail sales, which means the trend may begin to moderate.

During the first quarter, China 3C reported a 13.6% jump in sales to $77.4 million, but saw its net income fall from $5.8 million to $3.4 million year-over-year. Meanwhile, the company’s cash position fell 11% to $28.7 million. The company believes that a franchising strategy may be the best way to combat the challenging environment, but some shareholders aren’t so sure.

China 3C’s franchising strategy should help shift some risk to regional store owners, but could result in lower profitability. Since products would be provided to these stores at wholesale prices, there would be less of a profit margin built into each sale. However, the company plans to counter this by focusing on higher margin products and increasing sales through more locations.

In the end, China 3C’s strategy is designed to increase sales, but it could come at the cost of profitability. Given China’s retail sales rebound, this strategy could pay off sooner than expected. However, there are several risks that remain, and management has yet to comprehensively go over questions about the plans with shareholders on a conference call.

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