QKL Stores Inc. Announces Second Quarter 2012 Financial Results

QKL Stores Inc. (the "Company")

, a leading regional supermarket chain in Northeastern China and Inner Mongolia, today announced its financial results for the second quarter ended June 30, 2012. Mr. Zhuangyi Wang, Chairman and CEO, said, "The second quarter was a period in which we focused on improving efficiency in our business. Our existing stores opened for more than a year continued to show stable gross profit margin of 17.5% which helps support the ramp up period of our newer stores, which typically take longer to reach profitability. "We plan to open 3 additional stores this year. Most of the new stores we will open in the future will be located in the Heilongjiang Province where we have stronger relationships with local vendors and the cost of goods is slightly lower than the other two provinces (Liaoning and Jilin) in which we operate. "As our new store opening plan modifies from the first half of the year, we believe that preliminary new store opening expenses will decrease in the coming quarters as our total store sales rise, labor & utility costs stabilize and new store marketing expenses ease. For the remaining two quarters of 2012, we believe our gross margin will remain stable in the 17%-17.5% range, operating expenses as a percent of total revenue will move back into the 14%-15% range and we'll return to profitability with net income as a percent of total revenue in the 0.5%-1.0% range. "As QKL expands its market presence in northeast China, we are uniquely positioned against our local competitors through our large product offering, strong supplier relationships, efficient distribution network and state-of-the-art IT system. We are comfortable with our opportunities in the second half of the year and believe we'll see an improvement in operating expenses and profit growth from the current quarter." Second Quarter 2012 Financial Results Revenue in the second quarter of 2012 decreased by 0.3% to $83.2 million from $83.5 million in the second quarter of 2011. Revenue performance reflected the growth of 46 comparable stores, which have been open for at least one year before the beginning of the comparison period, or by April 1, 2011, as well as sales generated from the opening of 7 new stores since April 1, 2011. Same-store sales were approximately $77.0 million in the second quarter of 2012, representing an increase of 3.6% from $74.3 million in the second quarter of 2011.The 7 new stores opened since April 1, 2011 generated approximately $6.2 million in the second quarter of 2012. Gross profit decreased 0.4% year-over-year to $14.6 million, compared to $14.6 million in the prior year period. Gross margin for the second quarter of 2012 is likely to be between 17.0% and 17.5%. The change in gross profit was primarily attributable to net sales decreased by $0.2 million in the second quarter of 2012 compared to the second quarter of 2011. Operating expenses decreased 1.4% to $14.5 million compared to $14.7 million in the prior year period. This was primarily a result of higher preliminary expenses for new stores in the prior year period. The Company reported a net income of approximately $9,611, or $0.001 per diluted share, compared with net loss of $32,867, or $(0.003) per diluted share, for the same period in 2011. This increase was due to lower selling expenses related to new store openings in the second quarter of 2012. As of June 30, 2012, the Company had $26.0 million in unrestricted cash and bank loans of $3,164,707, compared to $36.0 million as of June 30, 2011 with no bank loans. As of June 30, 2012, the Company operated 53 stores totaling 286,000 sq. meters compared to 51 stores totaling 275,000 sq. meters in the prior year period. As a result of the Reverse Stock Split, the number of outstanding shares of common stock of the Company was reduced to 10,527,637 shares. Fractional stockholdings were rounded up to the nearest whole number. Each shareholder's percentage ownership interest in the Company and proportional voting power remains unchanged after the Reverse Stock Split except for minor changes and adjustments resulting from rounding of fractional interests. The rights and privileges of the holders of common stock are substantially unaffected by the Reverse Stock Split. Net cash provided by operating activities for the six month ended June 30, 2012 and 2011 was $22.4 million and $26.0 million, respectively. The decrease in cash provided by operating activities for the six month ended June 30, 2012 compared to the same period in 2011 primarily reflects net cash inflow caused by the increase in accrued expenses, and a decrease of inventories. The increase in accrued expenses was in line with the increase in operating expenses due to inflation and new store openings. The decrease of inventories was caused by reducing the inventories on hand after the peak Chinese New Year season. The decrease of other receivables is largely attributable to the recovery of money from vendors.