JADE LJ International, Inc. (MM)

HONG KONG, Sept. 6, 2012 /PRNewswire/ -- LJ International Inc. (NASDAQ: JADE), ("LJI" or "the Company") a leading colored gemstone and diamond jeweler with retail and wholesale businesses, today announced its unaudited financial results for the second quarter and first half year ended June 30, 2012.

Key Financial Highlights:

Second Quarter 2012:

• Retail revenue was US$27.76 million, up 3% year-over-year.
• ENZO added 17 new stores.
• Comparable store sales decreased by 27% year-over-year, on top of a 61% increase last year.
• Wholesale revenue was US$14.99 million, up 14% year-over-year.
• Sales from the U.S. up 6% year-over-year, representing 66% of wholesale revenue. Sales from Europe, and Asia and other markets increased 37% and 24%, respectively, representing 25% and 9% of wholesale revenue, respectively.

First Half 2012:

• Retail revenue was US$64.48 million, up 23% year-over-year.
• ENZO added 23 retail stores, expanding the retail network to 225 stores at the end of June 2012. Among the new stores, 4, 12 and 7 are in tier one, tier two and tier three cities, respectively.
• Wholesale revenue was US$30.48 million up 6% year-over-year.
• Sales from the U.S. decreased 3%, representing 65% of wholesale revenue. Sales from Europe and Asia and other markets increased 35% and 13% year-over-year, respectively, representing 27% and 8% of wholesale revenue, respectively.

Yu-Chuan Yih, Chairman and Chief Executive Officer of LJ International, commented on the results. "In the face of a bleak global economy and decelerated Chinese economic growth, the jewelry sector has seen a prominent slowdown in the second quarter, especially in discretionary gem set items, and has affected the industry as a whole. As a jeweler with close to half our revenue exposure in gem-set jewelry, we felt a greater impact than jewelers with a higher proportion on gold jewelry."

"We responded to this challenge on multiple fronts. First, we cut our marketing expenses to below 6% over sales. Second, we developed and launched more diamond and gem-set jewelry at a lower entry price point range to capture a broader segment of consumers and sustain a similar margin profile to protect our profitability. Third, we realigned our stores by replacing the non-performing stores with new openings in much better locations which carried a broader appeal. With our core competencies of innovative design and craftsmanship, we achieved across-the-board revenue growth in all markets for our wholesale business, resulting in a performance in line with our expectations.

"We believe these strategic initiatives will ensure we are best positioned to capitalize on growth opportunities in market upturns."

Second Quarter and First Half 2012 Unaudited Financial Results

Operating Revenue Performance Impacted by Continued Decelerating Retail Growth

Operating revenue in the second quarter 2012 increased 6% year-over-year to US$42.75 million from US$40.17 million. Operating revenue in the first half 2012 increased 17% year-over-year to US$94.96 million from US$81.28 million. 

Retail revenue(1) in the second quarter 2012 saw a year-over-year increase of 3% to US$27.76 million from US$27.00 million, representing 65% of operating revenue. Retail revenue in the first half rose 23% to US$64.48 million from US$52.52 million, representing 68% of operating revenue. Discretionary items like gem-set jewelry see a more pronounced impact amidst uncertain economic outlook. The modest increase in the second quarter was primarily a result of addition of new stores and expanded product portfolio, mitigating the decline in same store sales impacted by headwinds in retail sales environment. The growth rate was also impacted by a challenging prior-year comparison which saw a 62% increase.

Wholesale revenue in the second quarter 2012 was US$14.99 million, grew 14% year-over-year from US$13.16 million, accounting for 35% of operating revenue. Wholesale revenue in the first half was US$30.48 million, up 6% year-over-year, accounting for 32% of operating revenue. The growth in the second quarter was primarily a result of the addition of a new customer, and in part because of a lower revenue base recorded the same quarter last year impacted by the adoption of a more prudent sales return provision treatment.

Gross Margin Softened As Retail Gross Margin Moderated in Expansion of Product Portfolio

Gross profit in the second quarter 2012 was US$20.51 million compared to US$20.52 million in the same period of 2011. Gross profit in the first half 2012 increased 16% year-over-year to US$46.74 million from US$40.19 million.

Gross profit margin in the second quarter 2012 was 48%, compared to 51% in the second quarter 2011. Gross profit margin in the first half 2012 was 49%, compared to 50% in the first half 2011. The contraction in gross profit margin was primarily due to a lower retail gross profit margin as a result of change in product mix.

Retail gross profit in the second quarter 2012 was down 8% year-over-year to US$17.34 million. Retail gross profit in the first half 2012 increased 13% year-over-year to US$39.77 million. Retail gross profit margin in the second quarter 2012 was 63%, compared to 69% in the same period of 2011. Retail gross profit margin in the first half 2012 was 62%, compared to 67% in the same period of 2011. The contraction in retail gross profit margin was in part due to the change in product mix, and a coherent sales and product strategy was adopted to meet the different and changing needs of customers, and a more moderate gross margin level was resulted as anticipated. This was also in part due to the gross margin in the same quarter last year was exceptionally high due to the sale of a number of large-ticket items.

Wholesale gross profit in the second quarter 2012 was US$3.18 million, up 79% year-over-year. Wholesale gross profit in the first half 2012 was US$6.98 million, up 37% year-over-year. Wholesale gross profit margin in the second quarter 2012 was 21%, compared to 14% the same quarter 2011. Wholesale gross profit margin in the first half 2012 were 23%, compared to 18% the same period 2011. The change was primarily due to the lowered base impacted by a change of costing methodology in the same quarter 2011. 

SG&A Expenses Increased at Decelerated Rate while Maintaining Necessary Investment

Selling, general and administrative expenses (SG&A) in the second quarter 2012 increased 23% year-over-year to US$20.12 million from US$16.31 million. As a percentage of operating revenue, selling, general and administrative expenses were 47%, compared to 41% in the second quarter 2011. Selling, general and administrative expenses in the first half 2012 increased 43% year-over-year to US$44.32 million from US$30.96 million. As a percentage of operating revenue, selling, general and administrative expenses were 47%, compared to 38% in the first half 2011. The increase was primarily due to higher rental expenses and investment to upgrade internal control over financial reporting, marketing expenses was kept at a similar level while supporting new store openings.

Among the SG&A, rental expenses in the second quarter 2012 increased 10% year-over-year to US$6.72 million from US$6.09 million. As a percentage of operating revenue, rental expenses were 16%, compared to 15% in the second quarter 2011. Rental expenses in the first half 2012 increased 29% year-over-year to US$15.16 million from US$11.77 million. As a percentage of operating revenue, rental expenses were 16%, compared to 14% in the same period last year. The increase was in part due to the fact that more stores are paying minimum rental and in part due to the increase in rental space as a result of expansion of retail network.

Depreciation in the second quarter 2012 was US$1.33 million, up 38% year-over-year from US$0.96 million. Depreciation in the first half 2012 was US$2.61 million, up 42% year-over-year from US$1.84 million. Higher depreciation was primarily a result of more stores started depreciation.

Operating expenses, including selling, general and administrative expenses, net gain (loss) on derivatives and depreciation, increased 25% year-over-year to US$21.63 million in the second quarter 2012 from US$17.27 million. As a percentage of operating revenue, operating expenses were 51%, compared to 43% in the second quarter 2011. Operating expenses in the first half 2012 increased 44% year-over-year to US$47.10 million from US$32.75 million. As a percentage of operating revenue, operating expenses were 50%, compared to 40% in the first half 2011.

Operating Loss Impacted by Softened Revenue Growth

Operating loss in the second quarter 2012 was US$1.12 million, compared to an operating income of US$3.25 million in the same period of 2011. Operating loss in the first half 2012 was US$0.36 million, compared to operating income of US$7.44 million in the same period of 2011.

Operating loss from retail business in the second quarter 2012 was US$0.45 million, compared to an operating income of US$4.35 million in the same period of 2011. Operating income from retail business in the first half 2012 was US$0.69 million, compared to US$7.90 million in the same period of 2011.

Operating loss from wholesale business in the second quarter 2012 was US$0.26 million, compared to US$0.66 million in the second quarter 2011. Operating income from wholesale business in the first half 2012 was US$0.34 million, up 18% year-over-year from US$0.29 million.

Net other losses in the second quarter 2012 amounted to US$0.82 million, compared to net other gains of US$1.24 million in the second quarter 2011. Net other losses in the first half 2012 was US$1.57 million, compared to net other gains of US$1.05 million in the same period 2011. The losses were primarily due to a lower gain in fair value of warrants and options liabilities and higher interest expenses.

Income tax benefit in the second quarter 2012 was US$0.03 million, compared to an expense of US$0.74 million in the second quarter 2011. Income tax expenses in the first half 2012 were US$0.15 million, compared to US$1.40 million in the first half 2011.

Net loss in the second quarter 2012 was US$1.91 million, compared to a net income of US$3.75 million in the second quarter 2011. Basic and diluted loss per share were both US$0.15, compared to basic and diluted earnings per share of both US$0.05, in the second quarter 2011.

Net loss in the first half 2012 was US$2.08 million, compared to a net income of US$7.09 million. Basic and diluted loss per share were both US$0.25, compared to basic and diluted earnings per share of both US$0.16, in the same period 2011.

Balance Sheet Remains Sound

Cash, and bank balance and restricted cash totaled US$23.35 million on June 30, 2012, compared to US$25.52 million on December 31, 2011.

Trade receivables were US$28.73 million on June 30, 2012, compared to US$42.81 million on December 31, 2011. The change reflected the pattern of seasonality in both businesses.

Inventories increased 7% to US$184.76 million on June 30, 2012, from US$173.39 million on December 31, 2011. The inventory was increased to support the opening of new stores.

Working capital (current assets minus current liabilities) amounted to US$146.63 million on June 30, 2012, compared to US$150.21 million on December 31, 2011.

The Third Quarter and 2012 Guidance:

The third quarter is traditionally a stronger quarter than the second quarter, the Company expects operating revenue for the third quarter 2012 to be higher than that of second quarter and expects a modest year-over-year growth in revenue.  

With the market slow down, the Company revises its expectations for retail revenue for full year 2012, anticipating it to be in the range of US$130 million to US$133 million, which represents a 15% to 18% year-over-year growth. Wholesale revenue is expected to maintain at a similar level as in 2011. This represents our current and preliminary view, which is subject to change.

Conference call

The Company's senior management will host a conference call on Thursday, September 6, 2012 at 8:00 a.m. (Eastern)/ 5:00 a.m. (Pacific)/ 8:00 p.m. (Beijing/Hong Kong) to discuss its quarterly results and recent business activities. To access the conference call, please dial:

Please dial in 10 minutes before the scheduled starting time. Replay of the conference call will be available from 11:00 pm on September 6, 2012 HKT until September 14, 2012 HKT by dialing the following numbers:

The Company will also broadcast a live audio webcast of the conference call. The webcast will be available at the following: http://edge.media-server.com/m/p/skkx4z99/lan/en

About LJ International Inc.

LJ International Inc. (LJI) (NASDAQ:JADE) is engaged in the designing, branding, marketing and distribution of its full range of jewelry. It has built its global business on a vertical integration strategy, and an unwavering commitment to quality and service. Through its China-based ENZO retail chain stores, LJI is now a major presence in China's fast-growing retail jewelry market. As a wholesaler, it distributes to fine jewelers, department stores, national jewelry chains and electronic and specialty retailers throughout North America and Western Europe. Its product lines incorporate all major categories, including earrings, necklaces, pendants, rings and bracelets. For more information on the Company, visit the Company's website at www.ljintl.com.

Cautionary Note Regarding Forward-Looking Statements: This press release may contain "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.  Forward-looking statements can be identified by words such as "anticipates," "intends," "plans," "seeks," "believes," "estimates," "expects" and similar references to future periods.  Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions.  Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict.  Our actual results may differ materially from those contemplated by the forward-looking statements.  They are neither statements of historical fact nor guarantees or assurances of future performance. We caution you therefore against relying on any of these forward-looking statements. Factors that could cause actual results to differ materially from such statements, as well as additional risk factors, are detailed in the Company's most recent filings with the Securities and Exchange Commission. Any forward-looking statement made by us in this press release speaks only as of the date on which it is made.  We undertake no obligation to publicly update any forward-looking information contained in this press release or with respect to the announcements described herein, except as may be required by law.

Investor Relations contact:

LJ International, Inc.

Mr. Ringo Ng

T: +852-2764 3622

E: ir@ljintl.com 

– FINANCIAL TABLES TO FOLLOW –

(1) Retail revenue (Reclassified/adjusted for 2011)

Adjustment of revenue recognition: Subsequent to the filing of quarterly result for the quarters ended March 31, June 30 and September 30 of 2011 on May 16, August 25 and November 15, 2011 respectively, we identified adjustment requirements on recognition of retail revenue which was related to the trading of color stones. The Q1, Q2 and Q3 figures have been adjusted as below.

SOURCE LJ International Inc.