SOKO Fitness & Spa Group first quarter revenue increases 42% to $9.1 million

Oct 13 2010

SOKO Fitness & Spa Group, Inc. (OTC Bulletin Board: SOKF) ("SOKO"), an operator of fitness centers and beauty salons and spas in Northeast China as well as suburban Beijing, today announced its financial results for the first quarter of fiscal 2011, ended August 31, 2010.

First Quarter Financial Highlights: -- Revenue totaled $9.1 million, an increase of 42% over $6.4 million in the same period a year ago. -- Gross profit increased 42% to $6.0 million, compared with $4.2 million, in the same period a year ago. Gross margin was 66% for the first quarter of both fiscal 2011 and 2010. -- Operating income improved by 25% year-over-year to $2.9 million, compared with operating income of $2.3 million in the same period a year ago. -- Net income (after including other income and expense) improved by 35% year-over-year to $3.1 million, or $0.14 per diluted share, compared with $2.3 million, or $0.13 per diluted share in the same period a year ago. -- Increased total fitness club members 40% year-over-year and 13% sequentially to approximately 20,500, and beauty salon and spa clients 16% year-over-year and 7% sequentially to approximately 22,700. -- Cash and cash equivalents of $24.5 million as of August 31, 2010, an increase of $6.4 million over May 31, 2010. -- Introduces preliminary guidance for fiscal 2011 ending May 31, 2011. Company expects revenue of $38-$42 million, an increase of approximately 27-40% over fiscal 2010.

First Quarter and Recent Business Highlights: -- Appointed Mr. Colin Sung as an independent director and Chairman of the Company's Audit Committee. -- Expanded Yoga Wave Brand with the opening of the Company's first Yoga facility in Beijing, located in Westin's five-star Chaoyang Hotel. -- Expanded the Company's education offerings, in conjunction with Bin Xian vocational technology and education center, for beauty training and education programs.

"We achieved strong results during the first quarter of fiscal 2011, with record top and bottom line growth reflecting the ongoing implementation of our expansion strategy," said Tong Liu, Chief Executive Officer of SOKO. "While our focus remains on our core markets in Northeastern China, positive results from our initial expansion efforts in Beijing have given us confidence that we can effectively replicate our business model in new markets in China. Another area that we believe presents significant growth potential is the luxury hotel market, and in an effort to capitalize on this opportunity, we opened our second hotel-based facility and first yoga center in Beijing, located in Westin's Chaoyang Hotel. Initial customer reaction to Yoga Wave Westin has been positive and we look forward to ramping up this facility in a manner consistent with our other fitness and yoga centers."

"In addition to the progress we have made with our fitness and spa businesses, we recently made progress in advancing our training and education capabilities through the formation of a cooperation agreement with Bin Xian Vocational Technology and Education Center in suburban Harbin. We believe this relationship will augment our education and training capabilities and will serve as an important tool through which to recruit new employees for our fitness and beauty centers," continued Mr. Liu.

Mr. Liu added, "We have also taken steps to strengthen our corporate governance and internal controls, which will be an important element of our continued growth. I would like to congratulate Mr. Colin Sung on his appointment as both an independent director and Audit Committee Chairman. Colin brings to us a wealth of experience in governance and accounting practices, as well as deep financial and operational expertise, and we look forward to his contributions as a member of our Board."

First Fiscal Quarter Financial Summary

Total revenue for the three months ended August 31, 2010 was $9.1 million, an increase of 42%, compared with revenue of $6.4 million for the three months ended August 31, 2009. The increase in revenue was primarily attributable to an increase the number of fitness center members and spa and salon clients, as well as increased revenue per fitness center member and spa and salon client.

During the three months ended August 31, 2010, spa and beauty services and products, including beauty school tuition, accounted for 79% of revenue, with fitness centers accounting for 21% of revenue for the quarter.

Gross profit for the three months ended August 31, 2010 was $6.0 million, compared with $4.2 million for the three months ended August 31, 2009. The increase was primarily attributable to the expansion of facilities, an increase in the number of clients and members in existing facilities and the addition of new services. Gross margin was flat at 66% compared with the same period a year ago.

Selling, general and administrative expenses for the three months ended August 31, 2010 was $3.1 million, compared with $1.9 million for the three months ended August 31, 2009. The increase in SG&A expense was primarily attributable to an increase in the number of facilities in the first quarter of fiscal 2011 compared with the year-ago period.

Net income for three months ended August 31, 2010 increased 35% year-over-year to $3.1 million, or $0.14 per diluted share, based on 21.8 million weighted average diluted shares outstanding, compared with $2.3 million, or $0.13 per diluted share, based on 18.2 million weighted average diluted shares outstanding, for the same period a year ago.

As of August 31, 2010, SOKO had cash and cash equivalents of $24.5 million compared with $18.1 million on May 31, 2010 and $3.6 million on August 31, 2009. The sequential-quarter increase in cash and cash equivalents was related to operating cash flow of approximately $8.7 million, while the year-over-year increase was the result of cash flow from operations and the company's non-brokered private placement completed in April 2010.

Fiscal 2011 Guidance:

SOKO also introduced preliminary gross revenue guidance for fiscal year 2011 in the range of $38 million to $42 million, which, if achieved, would represent year-over-year growth of approximately 27-40%. SOKO expects that this revenue growth will be driven by a combination of new facility openings, an increase in the number of members and clients at its existing fitness and spa facilities and an increase in average revenue per customer.

During fiscal 2011, SOKO plans to open up to 16 new or acquired facilities (up from an estimate of 10 or more made earlier this year). These facilities will be either wholly-owned or majority controlled by SOKO but could also be minority owned or operated under a management agreement. Some of the new facilities are expected to be in SOKO's core markets of Heilongjiang and Liaoning Provinces where Harbin and Shenyang are located, respectively. SOKO expects that capital expenditures associated with these facilities will be fully funded from cash on hand and operating cash flow. By the end of fiscal 2011, SOKO expects its customer base to increase to 22,000 fitness center members and 26,500 spa and beauty clients. This compares with 18,000 fitness center members and 21,000 spa and beauty clients at the end of fiscal 2010.

Commenting on SOKO's outlook, Mr. Liu added, "Fiscal 2010 was an extremely positive year for SOKO, both strategically and operationally, and we believe we are well positioned to achieve continued strong growth in fiscal 2011. In addition to our expansion into new markets, we will continue to further establish SOKO's leadership position in our core markets of Northeastern China's second tier cities. Growth in our core markets is being driven by an expansion of China's upper and middle classes, as well as increasing affluence across the entire Chinese population. We offer a highly desirable suite of services to this important demographic and believe we can leverage our reputation, broad range of services and growing base of facilities as we continue to attract new customers and build brand equity, allowing us to capture the significant, untapped market potential that we believe exists in China for our services."

SOKO currently operates 21 facilities in Northeastern China and Beijing, including 11 beauty salons and spas, one non-surgical medical beauty center, eight fitness centers and yoga studios, including two fitness centers in suburban Beijing and one yoga studio in central Beijing, and one beauty school. As of August 31, 2010, SOKO had approximately 20,500 fitness club members, and approximately 22,700 beauty salon and spa clients. SOKO currently has 3 facilities under construction or engaged in pre-opening activities.