VLOV Inc, which designs, sources and markets VLOV-brand fashion-forward apparel for men aged 18-45 in the People's Republic of China, announced its financial results for the fourth quarter and full year ended December 31, 2010.
Qingqing Wu, Chairman and CEO of VLOV, commented, "The strength of our fourth quarter financial results is attributable to our continuing efforts to offer more upscale products, with an emphasis on higher margin goods. Our Spring sales fair, held in December, met with exceptional response from our distributors, resulting in higher than anticipated orders at the end of the fourth quarter. At the same time, we have maintained a sharp focus on controlling costs, which helped drive operating margins of 23.5%."
"In the third quarter of 2010 we began to outsource 100% of our manufacturing, which allows the Company to focus more resources on design, marketing and advertising. As part of this initiative, our distributors continue to be very supportive by closing counter- and concession-type points of sale and opening stand-alone VLOV stores that more effectively showcase our enhanced, premium brand image. We are confident this strategy will enable the Company to generate improved gross profit and gross margin over the long-term. As of December 31, 2010, our distributors operated 526 POS and 36 stand-alone store locations.
Results for the year ended December 31, 2010 vs. the year ended December 31, 2009
Net Sales (amounts in thousands, in U.S. Dollars, except for percentages)
Net sales were $73,834 for the year ended December 31, 2010 compared with $64,343 for 2009, an increase of $9,491 or 14.75%. We generate revenue primarily from the sales of our apparel to our distributors, who retail them throughout northern, central and southern China. These retail locations, also known as points of sales ("POS"), include counters, concessions, stand-alone stores and store-in-stores.
We design and create samples, which are presented to our distributors at our biannual previews for their selection and purchase based on what they believe will sell most effectively in their POS. Additionally, we set guidelines for our distributors as to how our products are to be advertised and displayed.
We believe that our sales are driven by marketing and advertising as well as by creating fashionable designs. We do not own or operate any VLOV retail locations ourselves; the POS are established and owned by our distributors, each of whom operates its network of POS directly or through third-party retail operators. The increase in our sales was primarily attributable to increased sales in the Shandong, Liaoning, Sichuan and Fujian Provinces, as well as increased advertising.
We have continued to upscale our product offerings to our distributors and have been working with our distributors to sell our products primarily via stand-alone stores and store-in-stores and not through counters and concessions as we believe that stand-alone stores and store-in-stores strengthen our brand image with consumers. In this regard, our distributors have collectively closed more than 200 counters and concessions since March 31, 2010 and have opened 36 stand-alone stores as of December 31, 2010 that reflect our upscale brand image.
During the third quarter of 2010 we began to fully outsource our manufacturing to third parties. Our products are manufactured on our behalf, based on orders for our products that we receive from our distributors, which orders are based on the clothing samples we design and create.
Historically, we outsourced to two types of manufacturers: (1) sub-contractors, which require us to provide them with the raw materials for our products, and (2) O.E.M. manufacturers, which supply their own raw materials. Beginning in 2009, we have shifted our outsourcing entirely to O.E.M. manufacturers.
As we shifted away from sub-contract manufacturing and manufacturing product ourselves entirely to O.E.M. manufacturing in 2010, the components of our cost of sales have correspondingly shifted. Raw material costs accounted for 1.50%, of our total net sales in 2010, compared with 4.72% in 2009. With the shift to O.E.M. manufacturing, O.E.M. finished goods cost, representing our purchase of finished products from the O.E.M. manufacturers, correspondingly increased accounting for 57.37% of our total net sales in 2010, compared with 56.89% in 2009.
Labor cost accounted for 0.38% of our total net sales in 2010, compared with 1.82% in 2009. The decrease was primarily attributable to our increase in outsourcing our manufacturing to third parties.
Overhead and other expenses were 0.16% of our total net sales in 2010, compared with 0.42% for 2009. The decrease was primarily attributable to our increase in outsourcing our manufacturing to third parties.
Total cost of sales for 2010 was $43,863, an increase of 6.77% from $41,080 for 2009. As a percentage of total net sales, our cost of sales decreased to 59.41% of total net sales for 2010, down from 63.85% of total net sales for 2009. Consequently, gross margin as a percentage of total net sales increased to 40.59% for 2010 from 36.15% for 2009. Our gross margin increased due to the increased outsourcing of our manufacturing to third parties as well as focusing production and marketing on higher margin items such as suits, down jackets and leather jackets.
