EVER-GLORY INTERNATIONAL GROUP, INC. The following discussion and analysis of our financial condition and results of operations for the three and nine months endedSeptember 30, 2021 should be read in conjunction with the Financial Statements and corresponding notes included in this Quarterly Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Special Note Regarding Forward-Looking Statements in this report. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," "target", "forecast" and similar expressions to identify forward-looking statements. Overview Our Business
We are a retailer of branded fashion apparel and leading global apparel supply
chain solution provider based in
We classify our businesses into two segments: Wholesale and Retail. Our wholesale business consists of wholesale-channel sales made principally to domestically and international recognized brands, and department stores located throughoutEurope , theU.S. ,Japan andthe People's Republic of China ("PRC"). We focus on well-known, middle-to-high end casual wear, sportswear, and outerwear brands. Our retail business consists of retail-channel sales directly to consumers through retail stores located throughout the PRC as well as sales via online stores at Tmall, Dangdang mall, JD.com, VIP.com and etc. Although we have our own manufacturing facilities, we currently outsource most of the manufacturing to our long-term contractors as part of our overall business strategy. We believe outsourcing allows us to maximize our production capacity and maintain flexibility while reducing capital expenditures and the costs of keeping skilled workers on production lines during slow seasons. We oversee our long-term contractors with our advanced management solutions and inspect products manufactured by them to ensure that they meet our high-quality control standards and timely delivery requirement. Wholesale Business We conduct our original design manufacturing ("ODM") operations through seven wholly owned subsidiaries which are located in theNanjing Jiangning Economic and Technological Development Zone andShang Fang Town in theJiangning District inNanjing ,Jiangsu province,China , Chuzhou,Anhui province,China andSamoa :Ever-Glory International Group Apparel Inc. ("Ever-Glory Apparel"),Goldenway Nanjing Garments Company Limited ("Goldenway"),Nanjing New-Tailun Garments Company Limited ("New Tailun"),Nanjing Catch-Luck Garments Co., Ltd. ("Catch-Luck"),Chuzhou Huirui Garments Co., Ltd. ("Huirui),Nanjing Tai Xin Garments Trading Company Limited ("Tai Xin"),Haian Tai Xin Garments Trading Company Limited ("Haian Tai Xin"),Nanjing Rui Lian Technology Company Limited ("Nanjing Rui Lian"),Ever-Glory Supply Chain Service Co., Limited ("Ever-Glory Supply Chain") andEver-Glory International Group (HK) Ltd. ("Ever-Glory HK"). Retail Business
We conduct our retail operations throughShanghai LA GO GO Fashion Company Limited ("LA GO GO"),Jiangsu LA GO GO Fashion Company Limited ("Jiangsu LA GO GO"),Tianjin LA GO GO Fashion Company Limited ("Tianjin LA GO GO"),Shanghai Ya Lan Fashion Company Limited ("Ya Lan"),Nanjing Tai Xin Garments Trading Company Limited ("Tai Xin"), andXizang He Meida Trading Company Limited ("He Meida"). He Media was closed inApril 2021 .
18
Business Objectives
Wholesale Business
We believe the enduring strength of our wholesale business is mainly due to our consistent emphasis on innovative and distinctive product designs that stand for exceptional styling and quality. We maintain long-term, satisfactory relationships with a portfolio of well-known and mid-class global brands.
The primary business objective for our wholesale segment is to expand our portfolio into higher-class brands, expand our customer base and improve our profit. We believe that our growth opportunities and continued investment initiatives include:
? Expanding our global sourcing network;
? Expanding our overseas low-cost manufacturing base (outside of mainland
China );
? Focusing on high value-added products and continuing our strategy to produce
mid-to-high end apparel;
? Continuing to emphasize product design and technology utilization;
? Seeking strategic acquisitions of international distributors that could
enhance global sales and our distribution network; and
? Maintaining stable revenue increase in the markets while shifting focus to
higher margin wholesale markets such as mainland China .
Retail Business
The business objectives for our retail segment are to establish leading brands
of women's apparel and to build a nationwide retail network in China . As of
September 30, 2021 , we had 893 stores (including store-in-stores), which
includes 83 stores that were opened and 126 stores that were closed in the three
quarters of 2021. We had 31 stores that were opened and 69 stores that were
closed during the three months ended September 30, 2021 .
We believe that our growth opportunities and continued investment initiatives include:
? Building our retail brand to be recognized as a major player in the
mid-to-high end women's apparel market in China ;
? Expanding our retail network throughout China ;
? Improving our retail stores' efficiency and increasing same-store sales;
? Continuing to launch retail flagship stores in Tier-1 cities and increasing
our penetration and coverage in Tier-2 and Tier-3 cities; and
? Taking advantage of our position as a multi-brand operator.
The Company had idle cash and cash equivalent in operation. In order to realize the capital preservation and appreciation, Ever-Glory Apparel invested in a Partnership inAugust 2020 . As a limited partner of the Partnership,Ever-Glory Apparel does not have the right to kick-out and appointment of general manager. Therefore,Ever-Glory does not have ability to exercise significant influence. In the meantime, the Company entered an agreement with the GP and an individual that the Company has the privilege to sell the ownership interests in the Partnership to GP or the individual for the consideration of the average net asset value ten days prior to the closing date, if the Company is not able to withdraw any part of the original investment from the Partnership during the optional withdrawal period. If the Company opts to withdraw entire investment during the optional withdrawal period, the GP will compensate up to 8% of annual return on investment. If the return on investment is in excess of 8% for any portion of the investment withdrawn during the optional withdrawal period, then 20% of the return in excess of 8% will be shared with the individual. The Company may also continue to invest in the Partnership beyond the optional withdrawal period, but none of above agreement with the GP and the individual is in place. InDecember 2020 , the Partnership invested in a public company in
China . 19
InSeptember 2021 , Goldenway signed an agreement and promised to invest in a Chinese private company. Goldenway advanced$0.8 million (RMB 5.0 million ) inSeptember 2021 for 20% shares of the investee. The investee completed the registration inOctober 2021 . As ofSeptember 30, 2021 the investment advances were recorded as the other non-current assets. Goldenway and the investee are in the process of finalizing the detail terms for the whole investment.
Seasonality of Business
Our business is affected by seasonal trends, with higher levels of wholesale sales in our third and fourth quarters and higher retail sales in our first and fourth quarters. These trends primarily result from the timing of seasonal wholesale shipments and holiday periods in the retail segment. Collection Policy Wholesale business
For our new customers, we generally require orders placed to be backed by letters of credit. For our long-term and established customers with good payment track records, we generally provide payment terms between 30 to 180 days following the delivery of finished goods.
Retail business For store-in-store shops, we generally receive payments from the stores between 60 to 90 days following the date of the register receipt. For our own flagship stores, we receive payments on the same day of the register receipt. For sales from e-commerce platforms such as Tmall, Dangdang mall, JD.com, VIP.com and etc., we generally receive payments between 5 to 15 days following the date
of the register receipt. Global Economic Uncertainty Our business is dependent on consumer demand for our products. We believe that the significant uncertainty in the global economy and the slowdown of economies inthe United States andEurope have increased our clients' sensitivity to the cost of our products. We have experienced continued pricing pressure. If the global economic environment continues to be weak, these worsening economic conditions could have a negative impact on our sales growth and operating margins in our wholesale segment in 2020 and 2021. In addition, economic conditions inthe United States and other foreign markets in which we operate could substantially affect our sales profitability, cash position and collection of accounts receivable. Global credit and capital markets have experienced unprecedented volatility and disruption. Business credit and liquidity have tightened in much of the world. Some of our suppliers and customers may face credit issues and could experience cash flow problems and other financial hardships. These factors currently have not had an impact on the timeliness of receivable collections from our customers. We cannot predict at this time how this situation will develop and whether accounts receivable may need to be allowed for or written off in the coming quarters. Our results of operations could be adversely affected by general conditions in the global economy, including conditions that are outside of our control, such as the impact of health and safety concerns from the outbreak of COVID-19. The outbreak inChina resulted in the reduction of customer traffic and temporary closures of shopping malls as mandated by the provincial governments in various provinces ofChina from late January to March, which had adversely affected our retail business with a decline in sales sinceFebruary 2020 . Our wholesale business was also significantly affected as we were facing a sharp decline in our order quantities. Some of our wholesale clients had also cancelled or postponed existing orders. Due to the Chinese factories' shutdowns and traffic restrictions during the outbreak inChina and potential shutdowns and traffic restrictions in the countries where our suppliers are located, our supply chain and business operations of our suppliers may be affected. Disruptions from the closure of supplier and manufacturer facilities, interruptions in the supply of raw materials and components, personnel absences, or restrictions on the shipment of our or our suppliers' or customers' products, could have adverse ripple effects on our manufacturing output and delivery schedule. We also face difficulties in collecting our accounts receivables due to the effects of COVID-19 on our customers and risk gaining a large amount of bad debt. Global health concerns, such as COVID-19, could also result in social, economic, and labor instability in the countries and localities in which we or our suppliers and customers operate. 20
AlthoughChina has already begun to recover from the outbreak of COVID-19, the epidemic continues to spread on a global scale and there is the risk of the epidemic returning toChina in the future, thereby causing further business interruption. While the potential economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock. If our future sales continue to decline significantly, we may risk facing bankruptcy due to our recurring fixed expenses. The extent to which COVID-19 impacts our results will depend on many factors and future developments, including new information about COVID-19 and any new government regulations which may emerge to contain the virus, among others. Despite the various risks and uncertainties associated with the current global economy, we believe our core strengths will continue to allow us to execute our strategy for long-term sustainable growth in revenue, net income and operating cash flow.
Summary of Critical Accounting Policies
We have identified critical accounting policies that, as a result of judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operation involved could result in material changes to our financial position or results of operations under different conditions or using different assumptions. The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP") have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC onMarch 30, 2021 ("2020 Form 10-K.") Estimates and Assumptions In preparing our condensed consolidated financial statements, we use estimates and assumptions that affect the reported amounts and disclosures. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable, but that are inherently uncertain and unpredictable. We are also subject to other risks and uncertainties that may cause actual results to differ from estimated amounts. Significant estimates in 2021 and 2020 include the assumptions used to value tax liabilities, the estimates of the allowance for deferred tax assets, and the accounts receivable allowance, and impairment of long-lived assets and inventory write-offs.
Recently Issued Accounting Pronouncements
InJune 2016 , the FASB issued ASU No. 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"; InNovember 2019 , the FASB issued ASU No. 2019-10 "Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates"; InMarch 2020 , the FASB issued ASU No. 2020-03 "Codification Improvements to Financial Instruments"; which modifies the measurement of expected credit losses of certain financial instruments. This ASU is effective for fiscal years and interim periods within those years beginning afterDecember 15, 2022 . The Company is currently assessing the impact of this ASU on its consolidated financial statements.
The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company's consolidated financial statements.
21
Results of Operations for the three months ended
The following table summarizes our results of operations for the three months endedSeptember 30, 2021 and 2020. The table and the discussion below should be read in conjunction with our condensed consolidated financial statements and the notes thereto appearing elsewhere in this report. Three Months Ended September 30, 2021 2020 (In thousands of U.S. dollars, except for percentages) Sales$ 94,406 100.0 %$ 79,908 100.0 % Gross Profit$ 23,210 24.6 %$ 23,673 29.6 % Operating Expense$ 23,910 25.3 %$ 20,814 26.0 %
(Loss) Income From Operations$ (700 ) (0.7
)%$ 2,859 3.6 % Other (Expenses) Income$ (572 ) (0.6 )% $ 187 0.2 % Income tax expense$ 1,945 2.1 % $ 822 1.0 % Net (Loss) Income$ (3,217 ) (3.4 )%$ 2,224 2.8 % Revenue
The following table sets forth a breakdown of our total sales, by region, for
the three months ended
Growth
(Decrease)
in 2021
% of % of compared
2021 total sales 2020 total sales with 2020
(In thousands (In thousands
of of
Wholesale business U.S. dollars) U.S. dollars)
Mainland China $ 16,376 17.3 % $ 7,171 9.0 % 128.4 %
Hong Kong China 9,153 9.7 12,019 15.0 (23.8 )
United Kingdom 2,020 2.1 7,116 8.9 (71.6 )
Europe-Other 8,846 9.4 8,690 10.9 1.8
Japan 8,435 8.9 3,124 3.9 170.0
United States 17,372 18.5 6,945 8.7 150.1Total Wholesale business 62,202 65.9
45,065 56.4 38.0
Retail business 32,204 34.1 34,843 43.6 (7.6 )
Total sales $ 94,406 100.0 % $ 79,908 100.0 % 18.1 %
Sales for the three months endedSeptember 30, 2021 were$94.4 million , an 18.1% increase compared with the three months endedSeptember 30, 2020 . This increase was primarily attributable to a 38.0% increase in sales in our wholesale business, partially offset by a 7.6% decrease in our retail business. Sales generated from our wholesale business contributed 65.9% or$62.2 million of our total sales for the three months endedSeptember 30, 2021 , a 38.0% increase compared with 56.4% or$45.1 million in the three months endedSeptember 30, 2020 . This increase was primarily attributable to an increase in sales in Mainland China, Europe-Other,Japan andUnited States partially offset by a decrease in sales inHong Kong andUnited Kingdom . 22
Sales generated from our retail business contributed 34.1% or$32.2 million of our total sales for the three months endedSeptember 30, 2021 , a 7.6% decrease compared with 43.6% or$34.8 million in the three months endedSeptember 30, 2020 . This decrease was primarily due to a decrease in the e-commerce sales. Costs and Expenses
Cost of Sales and Gross Margin
Cost of goods sold includes the direct raw material cost, direct labor cost, and manufacturing overhead including depreciation of production equipment and rent, consistent with the revenue earned. Cost of goods sold excludes warehousing costs, which historically have not been significant. The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the three months endedSeptember 30, 2021 and 2020. Growth (Decrease) in 2021 Three months ended September 30, Compared 2021 2020 with 2020 (In thousands of U.S. dollars, except for percentages)
Net Sales for Wholesale Sales$ 62,202 100.0 %
$ 45,065 100.0 % 38.0 % Raw Materials 29,507 47.4 20,435 45.3 44.4 Labor 422 0.7 366 0.8 15.3
Outsourced Production Costs 20,967 33.7 14,915 33.1 40.6 Other and Overhead 1,090 1.8 157 0.3 545.3 Total Cost of Sales for Wholesale 51,986 83.6 35,873 79.6 44.9 Gross Profit for Wholesale 10,217 16.4
9,192 20.4 11.2
Net Sales for Retail 32,204 100.0 34,843 100.0 (7.6 )
Production Costs 12,632 39.2 13,212 37.9 (4.4 )
Rent 6,579 20.4 7,150 20.5 (8.0 )Total Cost of Sales for Retail 19,210 59.7 20,362 58.4 (5.7 ) Gross Profit for Retail 12,993 40.3
14,481 41.6 (10.3 )
Total Cost of Sales 71,196 75.4 56,235 70.4 26.6
Gross Profit $ 23,210 24.6 % $ 23,673 29.6 % (2.0 )%
Raw material costs for our wholesale business were 47.4% of our total wholesale
business sales in the three months ended September 30, 2021 , compared with 45.3%
in the three months ended September 30, 2020 . The increase was mainly due to
higher raw material purchase prices.
Labor costs for our wholesale business were 0.7% of our total wholesale business
sales in the three months ended September 30, 2021 , compared with 0.8% in the
three months ended September 30, 2020 .
Outsourced production costs for our wholesale business for the three months
ended September 30, 2021 increased to $21.0 million from $14.9 million for the
three months ended September 30, 2020 . Outsourced production costs accounted for
33.7% of our total wholesale business sales in the three months ended September
30, 2021 , a 40.6% increase from the three months ended September 30, 2020 . This
increase in percentage was primarily attributable to higher labor costs.
23
Overhead and other expenses for our wholesale business accounted for 1.8% of our
total wholesale business sales for the three months ended September 30, 2021 ,
compared with 0.3% of total wholesale business sales for the three months ended
September 30, 2020 .
Wholesale business gross profit for the three months ended September 30, 2021
was $10.2 million compared with $9.2 million for the three months ended
September 30, 2020 . Gross profit accounted for 16.4% of our total wholesale
sales for the three months ended September 30, 2021 , compared with 20.4% for the
three months ended September 30, 2020 . The decrease was mainly due to an
increase in wholesale raw material prices and outsourced production costs.
Production costs for our retail business were $12.6 million for the three months
ended September 30, 2021 compared with $13.2 million during the three months
ended September 30, 2020 . Retail production costs accounted for 39.2% of our
total retail sales in the three months ended September 30, 2021 , compared with
37.9% for the three months ended September 30, 2020 . The decrease in amountwas due to decrease in sales.
Rent costs for our retail business for the three months endedSeptember 30, 2021 were$6.6 million compared with$7.2 million for the three months endedSeptember 30, 2020 . Rent costs for our retail business accounted for 20.4% of our total retail sales for the three months endedSeptember 30, 2021 , compared with 20.5% for the three months endedSeptember 30, 2020 . There were no significant changes. Gross profit in our retail business for the three months endedSeptember 30, 2021 was$13.0 million and gross margin was 40.3%. Gross profit in our retail business for the three months endedSeptember 30, 2020 was$14.5 million and gross margin was 41.6%. The decrease was primarily due to increased production costs and write off obsolete inventories. Total cost of sales for the three months endedSeptember 30, 2021 was$71.2 million , a 26.6% increase from$56.2 million for the three months endedSeptember 30, 2020 . Total cost of sales as a percentage of total sales for the three months endedSeptember 30, 2021 was 75.4%, compared with 70.4% for the three months endedSeptember 30, 2020 . Gross margin for the three months endedSeptember 30, 2021 was 24.6% compared with 29.6% for the three months endedSeptember 30, 2020 .
Selling, General and Administrative Expenses
Our selling expenses consist primarily of local transportation, unloading charges, product inspection charges, salaries for retail staff and decoration and marketing expenses associated with our retail business.
Our general and administrative expenses include administrative salaries, office
expense, certain depreciation and amortization charges, repairs and maintenance,
legal and professional fees, warehousing costs and other expenses that are not
directly attributable to our revenues.
Costs of our distribution network that are excluded from cost of sales consist
of local transportation and unloading charges and product inspection charges.
Accordingly, our gross profit amounts may not be comparable to those of other
companies who include these amounts in cost of sales.
Increase
(Decrease)
in 2021
Three Months Ended September 30, Compared
2021 2020 to 2020
(In thousands of U.S. dollars, except for percentages)
Gross Profit $ 23,210 24.6 % $ 23,673 29.6 % (2.0 )%
Operating Expenses:
Selling Expenses 14,443 15.3 12,996 16.3 11.1General and Administrative Expenses 9,467 10.0 7,818 9.8 21.1 Total 23,910 25.3 20,814 26.0 14.9 (Loss) Income from Operations $ (700 ) (0.7 )%
$ 2,859 3.6 % (124.5 )% 24 Selling expenses for the three months endedSeptember 30, 2021 increased 11.1% to$14.4 million from$13.0 million for the three months endedSeptember 30, 2020 . The increase was attributable to the higher travelling expenses.
General and administrative expenses for the three months ended
(Loss) Income from Operations
(Loss) income from operations for the three months endedSeptember 30, 2020 decreased 124.5% to($0.7) million from$2.9 million for the three months endedSeptember 30, 2020 . (Loss) income from operations accounted for (0.7%) and 3.6% of our total sales during the three months endedSeptember 30, 2021 and 2020. Interest Expense Interest expense for the three months endedSeptember 30, 2021 was$1.2 million , a 74.0% increase compared with the same period in 2020. The increase was due to the increased bank loans. Income Tax Expenses Income tax expense was$1.9 million and$0.8 million for the three months endedSeptember 30, 2021 and 2020, respectively. The increased income tax expenses are mainly due to some subsidiaries are profitable and there are higher income tax expenses but other subsidiaries are loss. Net (Loss) Income
Net (loss) income for the three months endedSeptember 30, 2021 was($3.2) million , a 244.9% decrease compared with the same period in 2020. Our basic and diluted (loss) earnings per share were ($0.22 ) and$0.15 for the three months endedSeptember 30, 2021 and 2020, respectively. Results of Operations for the nine months endedSeptember 30, 2021 and 2020 The following table summarizes our results of operations for the nine months endedSeptember 30, 2021 and 2020. The table and the discussion below should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this report. Nine Months Ended September 30, 2021 2020 (In thousands of U.S. Dollars, except for percentages) Sales$ 225,776 100.0 %$ 188,350 100.0 % Gross Profit 64,038 28.4 54,157 28.8 Operating Expense 69,475 30.8 58,675 31.2
(Loss) Income From Operations (5,437 ) (2.4
) (4,518 ) (2.4 ) Other Income 3,039 1.3 1,559 0.8 Income tax expense 3,759 1.7 1,315 0.7 Net (Loss) Income$ (6,157 ) (2.7 )%$ (4,274 ) (2.3 )% 25 Revenue
The following table sets forth a breakdown of our total sales, by region, for
the nine months ended
Growth
(Decrease)
in 2021
% of total % of total compared
2021 sales 2020 sales with 2020
(In thousands (In thousands
of of
Wholesale business U.S. dollars) U.S. dollars)
Mainland China $ 28,222 12.5 % $ 14,935 7.9 % 89.0 %
Hong Kong China 16,124 7.1 17,063 9.1 (5.5 )
United Kingdom 5,558 2.5 8,425 4.7 (34.0 )
Europe-Other 18,905 8.4 16,443 8.6 15.0
Japan 13,390 5.9 9,714 5.2 37.8
United States 29,650 13.1 22,823 12.1 29.9
Total Wholesale business 111,849 49.5 89,403 47.5 25.1
Retail business 113,927 50.5 98,947 52.5 15.1
Total sales $ 225,776 100.0 % $ 188,350 100.0 % 19.9 %
Sales for the nine months ended
Sales generated from our wholesale business contributed 49.5% or$111.8 million of our total sales for the nine months endedSeptember 30, 2021 , an increase of 25.1% compared with 47.5% or$89.4 million in the nine months endedSeptember 30, 2020 . This increase was primarily attributable to increased sales in Mainland China, Europe-Other,Japan andthe United States , partially offset by decreased sales inHong Kong China andUnited Kingdom ,. Sales generated from our retail business contributed 50.5% or$113.9 million of our total sales for the nine months endedSeptember 30, 2021 , an increase of 15.1% compared with$98.9 million in the nine months endedSeptember 30, 2020 . This increase was primarily due to an increase in same store sales.
Total retail store square footage and sales per square foot for the nine months
ended
2021 2020
Total store square footage 982,683 983,291
Number of stores 893 923Average store size, square feet 1,100 1,065
Total store sales (in thousands of
$ 116 $ 101
Same store sales and newly opened store sales for the nine months ended
2021 2020
(In thousands of U.S. dollars)
Sales from stores opened for a full year $ 89,478 $ 77,727
Sales from newly opened store sales $ 6,950 $ 6,060
Sales from e-commerce platform $ 9,725 $ 10,355
Other* $ 7,774 $ 4,805
Total $ 113,927 $ 98,947 * Primarily sales from stores that were closed in the current reporting period.
26
We remodeled or relocated 54 stores in year 2020, and 113 stores during the nine months endedSeptember 30, 2021 . We plan to relocate or remodel 100 to 150 stores in 2021. Remodels and relocations typically drive incremental same-store sales growth. A relocation typically results in an improved, more visible and accessible location, and usually includes increased square footage. We believe we will continue to have opportunities for additional remodels and relocations beyond 2021. Same-store sales are calculated based upon stores that were open at least 12 full fiscal months in each reporting period and remain open at the
end of each reporting period. Costs and Expenses
Cost of Sales and Gross Margin
Cost of goods sold includes the direct raw material cost, direct labor cost, and manufacturing overhead including depreciation of production equipment and rent, consistent with the revenue earned. Cost of goods sold excludes warehousing costs, which historically have not been significant. The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the nine months endedSeptember 30, 2021 and 2020. Growth (Decrease) in 2021 Nine months ended September 30, Compared 2021 2020 with 2020 (In thousands of U.S. dollars, except for percentages)
Net Sales for Wholesale Sales$ 111,849 100.0 %
$ 89,403 100.0 % 25.1 % Raw Materials 51,299 45.9 39,139 43.8 31.1 Labor 1,141 1.0 910 1.0 25.4
Outsourced Production Costs 39,744 35.5 31,909 35.7 24.6 Other and Overhead 1,290 1.2 395 0.4 226.3 Total Cost of Sales for Wholesale 93,474 83.6 72,353 80.9 29.2 Gross Profit for Wholesale 18,375 16.4
17,050 19.1 7.8
Net Sales for Retail 113,927 100.0 98,947 100.0 15.1
Production Costs 45,784 40.2 42,923 43.4 6.7
Rent 22,480 19.7 18,917 19.1 18.8Total Cost of Sales for Retail 68,264 59.9 61,840 62.5 10.4 Gross Profit for Retail 45,663 40.1
37,107 37.5 23.1
Total Cost of Sales 161,738 71.6 134,193 71.2 20.5
Gross Profit $ 64,038 28.4 % $ 54,157 28.8 % 18.2 %
Raw material costs for our wholesale business were 45.9% of our total wholesale
business sales in the nine months ended September 30, 2021 , compared with 43.8%
in the nine months ended September 30, 2020 . The increase was mainly due to
higher raw material purchase prices.
Labor costs for our wholesale business were 1.0% of our total wholesale business
sales in the nine months ended September 30, 2021 , compared with 1.0% in the
nine months ended September 30, 2020 .
Outsourced manufacturing costs for our wholesale business were 35.5% or
Overhead and other expenses for our wholesale business accounted for 1.2% and 0.4% of our total wholesale sales for the nine months endedSeptember 30, 2021 and 2020, respectively. 27
Gross profit for our wholesale business for the nine months endedSeptember 30, 2021 was$18.4 million , a 7.8% increase compared with the nine months endedSeptember 30, 2020 . As a percentage of total wholesale business sales, the gross margin was 16.4% of our total wholesale business sales for the nine months endedSeptember 30, 2021 , compared with 19.1% for the nine months endedSeptember 30, 2020 . The decrease in gross margin was mainly due to an increase in raw material prices. Production costs for our retail business for the nine months endedSeptember 30, 2021 were$45.8 million compared with$42.9 million for the nine months endedSeptember 30, 2020 . As a percentage of our total retail sales, production costs were 40.2% of our total retail sales for the nine months endedSeptember 30, 2021 , compared with 43.4% for the nine months endedSeptember 30, 2020 . The increase was due to higher discounts on our past season products in the nine months endedSeptember 30, 2021 compared with the same period of the prior
year of sales.
Rent costs for our retail business for the nine months endedSeptember 30, 2021 were$22.5 million compared with$18.9 million for the nine months endedSeptember 30, 2020 . As a percentage of total retail sales, rent costs were 19.7% of our total retail sales for the nine months endedSeptember 30, 2021 compared with 19.1% for the nine months endedSeptember 30, 2020 . The increase was primarily attributable to higher rent at certain locations. Gross profit for our retail business for the nine months endedSeptember 30, 2021 was$45.7 million compared with$37.1 million for the nine months endedSeptember 30, 2020 . Gross margin for our retail business for the nine months endedSeptember 30, 2021 was 40.1% compared with 37.5% for the nine months
endedSeptember 30, 2020 .
Total cost of sales for the nine months endedSeptember 30, 2021 was$161.7 million , a 20.5% increase compared with the nine months endedSeptember 30, 2020 . As a percentage of total sales, total costs were 71.6% of total sales for the nine months endedSeptember 30, 2021 , compared with 71.2% for the nine months endedSeptember 30, 2020 . Total gross margin for the nine months endedSeptember 30, 2021 was 28.4% compared with 28.8% for the nine months endedSeptember 30, 2020 .
Selling, General and Administrative Expenses
Our selling expenses consist primarily of local transportation, unloading charges, product inspection charges, salaries for retail staff and decoration and marketing expenses associated with our retail business.
Our general and administrative expenses include administrative salaries, office
expense, certain depreciation and amortization charges, repairs and maintenance,
legal and professional fees, warehousing costs and other expenses that are not
directly attributable to our revenues.
Costs of our distribution network that are excluded from cost of sales consist
of local transportation and unloading charges, and product inspection charges.
Accordingly, our gross profit amounts may not be comparable to those of other
companies who include these amounts in costs of sales.
Increase
(Decrease)
in 2021
Nine months ended September 30, Compared
2021 2020 to 2020
(In thousands of U.S. dollars, except for percentages)
Gross Profit $ 64,038 28.4 % $ 54,157 28.8 % 18.2 %
Operating Expenses:
Selling Expenses 44,495 19.7 39,101 20.8 13.8General and Administrative Expenses 24,980 11.1
19,574 10.4 27.6
Total 69,475 30.8 58,675 31.2 18.4
Loss from Operations $ (5,437 ) (2.4 )% $ (4,518 ) (2.4 )% 20.3 %
28
Selling expenses for the nine months ended
General and administrative expenses for the nine months endedSeptember 30, 2021 were$25.0 million a 27.6% increase compared with the nine months endedSeptember 30, 2020 . As a percentage of total sales, general and administrative expenses accounted for 11.1% of total sales for the nine months endedSeptember 30, 2021 , compared with 10.4% of total sales for the nine months endedSeptember 30, 2020 . The increase was attributable to the increased salaries. Loss from Operations
Loss from operations for the nine months ended
Interest Expense Interest expense was$1.9 million and$1.6 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The increase was due to the increased bank loans. Income Tax Expense
Income tax expense for the nine months ended
Net Loss
Net loss was
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