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Friday, August 26, 2011

LJ International Revenue Up 26%, Profit Up 59%, Led by China Retail Business

The Enzo retail chain in China is a stellar performer for  LJ International.

Hong Kong-based jewelry manufacturer and retailer, LJ International Inc., reported Thursday that operating revenue in the second quarter increased 26 percent to $41.5 million. Gross profit increased 59 percent to $20.6 million. Operating income increased 13 percent to $3.3 million. Net income for the period ended June 30 rose 67 percent to $3.85 million.

It was the company’s retail division in China led the way showing exceptionally strong sales and offsetting a decline in its international wholesale business due the sluggish economy in the U.S. and Europe.

The company, which owns the Enzo store chain in China, reported that second quarter retail sales increased 70 percent year-over-year to $28.4 million. Same store sales for the period increased 61 percent for the period, ended June 30. Enzo added 16 new stores in the second and since then added another 12 stores to boost its branded retail chain to 166 stores. LJ International said it will continue to aggressively expand its retail network in China.

LJ International’s wholesale revenue fell 19 percent to $13.16 million year-over-year. Sales from the U.S. and Europe decreased 26 percent and 6 percent year-over-year, respectively, representing 71 percent and 20 percent of wholesale revenue. Meanwhile, sales from Asia and other markets grew 49 percent and represented 9 percent of wholesale revenue for the period. The company distributes a full complement of jewelry lines under the Lorenzo brand name to fine jewelers, department stores, national jewelry chains and electronic and specialty retailers in North America and Western Europe.

“Our solid financial performance came in ahead of our expectation, mainly driven by the stronger than expected performance of Enzo, the retail business arm targeting affordable luxury segment,” said Yu-Chuan Yih, LJ International chairman and CEO. “Consumer and luxury product markets are widely perceived to be two of the fastest growing sectors in the expanding Chinese economy. Enzo, with solid financial strengths, will continue to expand its retail network, deepening penetration in its affluent first and second tier city network while strengthening its presence in the third tier cities. We are well on track to operate a network of about 200 stores at the end of the year and have scheduled to add approximately 26 stores by the end of the third quarter, bringing the number to about 180 stores.”

Yu-Chuan Yih added, “Amid an intricate macro environment which impacts the wholesale markets, we remain a key partner of our long-standing wholesale customers, which has warranted stable sales throughout the economic cycle. We will focus on strengthening collaboration with core customers to better align product strategy and design with the changing preferences of the end consumers, to add value to our strong relationship with leading wholesale customers; and our high quality of products and services would continue to help us maintain a steady growth in the wholesale business amidst unfavorable market conditions.”

In its outlook the company said it expects a 19 percent to 25 percent increase in gross revenue, year-over-year, to $42.5 million and $44.5 million. This outlook is fueled by an expected 33 to 38 percent increase in retail sales in the range of $28 to $29 million for the period. Wholesale revenue is expected to be $14.5 million to $15.5 million, representing a flat growth rate to an increase of 6 percent for the period.

More financial highlights for the second quarter after the jump:

Gross profit margin in the second quarter 2011 was 50 percent, an expansion of 11 percentage points primarily due to the margin expansion of retail business.

Retail gross profit in the second quarter was up 97 percent year-over-year to $18.8 million. Retail gross profit margin in the second quarter was 66 percent, a year-over-year expansion of 9 percentage points. The increase in retail gross profit margin was primarily due to a more favorable sales mix, with more sales of colored gemstone items, the company said.

Wholesale gross profit in the second quarter fell 47 percent to $1. 7million. Wholesale gross profit margin in the second quarter fell 14 percent, down from 21 percent in the second quarter 2010. The decline in wholesale gross profit and gross profit margin was primarily due to a change of costing methodology.

Sales, general and administrative expenses in the second quarter 2011 increased 66 percent year-over-year to $10.2 million. As a percentage of operating revenue, SG&A expenses were 25 percent, compared to 19 percent in the second quarter 2010. The increase was primarily due to an increase in investment in marketing campaign and marketing team to support the continued strengthening of brand building.

Rental expenses in the second quarter 2011 increased 98 percent year-over-year to $6.1 million. As a percentage of operating revenue, rental expenses were 15 percent, compared to 9 percent in the second quarter 2010. The increase was primarily due to rental costs are mostly sales-linked and trended up as retail revenue saw a significant increase during the quarter. The increase was partly due to the increase in rental space as a result of expansion of retail network.

Depreciation in the second quarter 2011 was $960,000, up 101 percent year-over-year.

Operating expenses, including SG&A expenses, rental, net gain (loss) on derivatives and depreciation, increased 73 percent year-over-year to $17.2 million in the second quarter. As a percentage of operating revenue, operating expenses were 42 percent, compared with 30 percent in the second quarter 2010.

Operating income in the second quarter 2011 increased 13 percent year-over-year to $3.3 million.

Operating margin in the second quarter 2011 was 8 percent, compared to 9 percent in the same period 2010.

Operating income from retail business in the second quarter 2011 was US$4.4 million, up 106 percent year-over-year. Retail operating margin was 16 percent, compared to 13 percent in the second quarter 2010.

Operating loss from wholesale business in the second quarter 2011 was $660,000 compared to an operating income of $1.15 million in the second quarter 2010. The operating loss from wholesale business in the second quarter was impacted by the reduced revenue caused by change in sales return provision and a reduced gross profit caused by revised inventory valuation.

Net other revenue in the second quarter 2011 amounted to $1.24 million, compared to an expense of US$0.20 million in the second quarter 2010.

Income tax expenses in the second quarter 2011 were $740,000, compared to $450,000 in the second quarter 2010, mainly due to a smaller amount of tax benefits for retail business during the period.

Net income from operating businesses and excluding non-recurring items and derivative gain from warrants is forecast to be in the range of $3.5 million to $4 million, a 9 percent to 25 percent year-over-year increase.

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