LJ International Expects Accelerated Growth and Outlines Expansion Strategy In Special Letter to Shareholders
August 22 2005 - 12:00PM
PR Newswire (US)
Chairman and CEO Expects Significant Contributions in Revenues and
Earnings From ENZO Retail Stores in China HONG KONG and LOS
ANGELES, Aug. 22 /Xinhua-PRNewswire-FirstCall/ -- LJ International,
Inc. (Nasdaq/NMS: JADE), one of the fastest-growing jewelry
companies in the world, today announced that its Chairman and CEO,
Yu Chuan Yih, has issued a Special Letter to Shareholders to update
investors on the current status of the Company and, more
importantly, to offer management's view on the Company's growth
strategy and prospects going forward. The text of the letter
follows: 'Dear Shareholder, It has been a pivotal 14 months since I
last wrote you with a review of our progress and an assessment of
the future. Back then, LJ International (Nasdaq/NMS: JADE) (LJI)
had just recorded a banner year of sales growth and was achieving
consistent profitability. Its next big strategic move, into the
retail Chinese market, was getting under way. As I said at the
time, LJI had earned the right to be called, once again, a true
growth company. This time around, I can again report strong revenue
growth and steady net income. The main difference is that we are
well along in executing our China strategy, and we can expect the
pace of our expansion there to accelerate in the remainder of 2005
and beyond. As expected, this effort has had a short- term impact
on margins, as we absorb the startup costs of our new retail stores
in China. For those who take a longer view of the Chinese consumer
jewelry market and of our role in it, whichever jewelry company is
the first and fastest to penetrate the Chinese market will have the
biggest opportunity in what is a historic time for China -- and we
intend to be that company. A Historic Time to Invest in China I
cannot predict future global economics, of course, but I can tell
you this: China is growing in wealth and economic clout, and the
growth shows no signs of stopping. Its rate of GDP expansion,
recently pegged at 9.5% annually, is by far the fastest growing
among major nations. The recent bid by the Chinese firm CNOOC for
the U.S. oil company Unocal, later withdrawn for political rather
than business reasons, was just one sign of how China's wealth and
economic power are on the rise. I'm confident that China's growth
will continue and that it will lift many millions of workers and
business people into a state of real affluence, where they will be
eager customers for the types of products that we sell. China is
mostly known to the rest of the world as a manufacturing
powerhouse. But it is also a huge, fast-growing market for
retailers. According to a report early this year by Business Week,
the nation's overall retail business has risen 15% annually for the
past 20 years, reaching about $628 billion in 2004. That makes it
the third largest retail market in the world. The mega store chain
Carrefour, one of our customers, is now ranked fifth among
retailers in China, with some 240 stores there doing $1.8 billion
in sales at the end of 2004. Wal-Mart, ranked 16th in the Business
Week report, has recently announced plans to nearly double the
number of its China stores -- from the current 48 to 90 by the end
of 2006. The expansion of these foreign-based chains is being
spurred by China's participation in the World Trade Organization
(WTO), which has led the government to lift most restrictions on
retail outlets, including limits on what they can sell and their
share of foreign ownership. But regulatory change is only part of
the story. The other part is economic. The world's retail leaders,
such as Wal- Mart, are casting their votes of confidence in the
future of the Chinese retail market, which holds huge promise for
those who know how to appeal to the Chinese consumer. With its
longstanding ties to China through business operations and personal
backgrounds, LJI has that knowledge. LJI: A History of Strong
Financial Performance To review our recent results briefly, LJI has
continued to exceed it sales goals. In 2004, our revenue totaled
$77.4 million, which was 33% above the $58.2 million recorded in
2003. The increase exceeded the 26% sales jump we saw from 2002 to
2003. In the first half 2005, revenue increased by 19%, to $36.5
million from $30.8 million in the first half of 2004. In the latest
quarter -- the second quarter ending June 30, 2005 -- we recorded
$19.1 million in sales, up 17.3% from the second quarter of 2004
and more than $1 million over our previous guidance range. As
expected, net income has fallen in the first half of 2005 as a
direct result of the start-up expenses related to the opening of
our ENZO retail stores in China. It was $0.02 per fully diluted
share in each of the first two quarters, compared to $0.04 in the
second quarter of 2004 and $0.03 in the first. For all of 2004, EPS
rose 16%, to $0.22 from $0.19 in 2003. We expect LJI to return to
such EPS growth rates -- or better -- after the ENZO Division hits
break-even points (an event we expect in 2006) and starts adding to
LJI's bottom line. One of the gratifying things about these numbers
is that they show how well LJI's sales have been doing apart from
our China growth initiative. That is, we have continued to expand
sales sharply in our established markets even as we move into new
ones. We continue to enjoy solid relationships with our major
customers, most of whom are continuing to expand their business
with us. These include the three largest U.S. home-shopping
networks, two-thirds of the largest U.S. jewelry chains and some of
the world's largest retailers. Each of these new customers has the
potential to match or exceed our top customer as a buyer of our
products. China Sales Begin to Make Their Mark During 2004, we
opened a new China retail operation, ENZO, and began selling
jewelry direct to consumers at our own Mainland outlets. The first
of these was a high-end jewelry showroom in Hong Kong, opened last
spring. It was followed in the Fall by two stores in Shanghai, one
of them being the ENZO flagship store. We are stepping up the pace
in 2005, having opened four new stores in May and expect five more
by the end of this year, including our recently announced 8,000
square-foot store in Macau -- which will represent the single
largest retail jewelry store across all of the Greater China
Region. What will this mean for sales and earnings? While I cannot
predict volume with certainty, our knowledge of the Chinese market
and of jewelry retailing in general leads us to expect that each
new store will generate a significant new revenue steam when fully
on-line. Because of the phased-in schedule of openings, this would
result in an overall revenue contribution of about $1.5 million
from the China stores in 2005 and exponentially more in the years
ahead. As I mentioned, the early phase of our China expansion has
pressured margins somewhat as we expected. As the expansion
proceeds, however, we expect it to have the opposite impact as our
retailing profile rises. Our overall gross profit was running at
just over 20% in 2004. Because of our China branding strategy and
direct-to-consumer retailing, we expect gross margins to be much
higher on products sold through our ENZO stores. We think it is
reasonable to expect these margins to be at least 50%, so that even
a modest boost in revenue from this area should have a definite
positive impact on the bottom line. For these reasons, we aim to
reach the break-even point at our ENZO operations in 2006, with the
unit becoming fully profitable in 2007. We believe these
incremental financial contributions from our ENZO stores should
enable us to accelerate our earnings growth at a rate LJI hasn't
experienced before. Expansion Continues in Older Markets In short,
the future should look very bright to anyone with a mid- to
long-term view. In our business, and given our multi-year growth
strategy, that is the only reasonable view to take. We also see no
reason to expect a significant drop-off in growth and profitability
in the rest of our operations. In fact, the trend among our
existing major customers and in our oldest markets has been very
encouraging. Of our top 10 customers in 2004, seven increased sales
with us and four increased sales by more than 20%. One of our
largest customers, QVC London, boosted sales by 64%, to $8.5
million from $5.2 million. And we've seen very impressive sales
expansion among newer customers such as Wal-Mart. During 2004, our
sales to Wal-Mart increased 60%, growing to become our fourth
largest customer. As the world's largest retailer, Wal- Mart
represents enormous growth potential for us, and the same could be
said of several other retailers with whom we have formed
relationships in recent years, such as HSN and ShopNBC. We built
our business largely on sales to QVC, which continues to be a
strong partner for us. But each of these new customers has the
potential to match or exceed QVC as a buyer of our products. As for
core geographic markets, our 2004 sales in the U.S. (which accounts
for slightly less than three-quarters of our revenue) rose 31%
year-over-year to $56.2 million. Sales in Europe rose 63%, to $13.0
million from $7.9 million. I would like to close with a thought
about expectations and time-frames. We expect great things in the
future, and so should you, our shareholders. In the near term,
you'll probably be hearing news about LJI and its initiatives that
should raise your expectations even higher. But any market will see
volatility and uncertainty, which may rattle those who do not know
the market well, or who may not have the financial strength to ride
out bumps. China is no exception. As I write this, there is
considerable uncertainty about the future of exchange rates between
China and its trading partners. By extension, there is uncertainty
about whether China will retain its price advantages in
manufacturing. Without dismissing such short-range concerns, I see
no dramatic break in the rising pattern of robust business
expansion that, really, has been consistent in China ever since the
government decided decades ago to scrap its old economic doctrine
and choose growth through capitalism. In China and in the rest of
the world, there is no foretelling the next shock. But I have seen
the global economy roll with the punches many times, and I believe
that it will continue to grow -- providing LJ International with
plenty of opportunities to continue growing with it. Yours truly,
Yu Chuan Yih Chairman and CEO' Forward looking statements: Except
for the historical information, the matters discussed in this press
release may contain forward-looking statements, including, but not
limited to, factors relating to future sales. These forward-looking
statements may involve a number of risks and uncertainties. Actual
results may vary significantly based on a number of factors,
including, but not limited to, uncertainties in product demand, the
impact of competitive products and pricing, changing economic
conditions around the world, release and sales of new products and
other risk factors detailed in the company's most recent annual
report and other filings with the Securities and Exchange
Commission. For further information: AT LJI: AT INVESTOR RELATIONS
INTL: Betty Ho Haris Tajyar Vice President, Corporate Development
Managing Partner Tel: 011-852-2170-0001 Tel: 818-382-9702 Email:
Email: DATASOURCE: LJ International, Inc. CONTACT: Betty Ho of LJ
International, +011-852-2170-001, or ; Haris Tajyar of Investor
Relations Intl, +818-382-9702 or , for LJ International Web site:
http://www.ljintl.com/
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