Due To The Implementation Of The Transformation Plan, Urban Beauty Expects Annual Loss Of Not Less Than 980 Million Yuan.

City Beauty (02298) announced that in 2019, due to the slowdown in China's economic and internal demand, the group's business activities are facing adversity. This negatively affects the performance of the consumer oriented apparel industry and group.

The board of directors of the company believes that the existing operation mode of the group in the past could enable the group to expand the marketing network rapidly and seize the market share and become the leader of the Chinese clothing industry. However, it has not been able to respond quickly to the structural adjustment of the industry in terms of diversification of sales channels, product quality and product mix.

The board also noted that the rapid expansion of the past led to an increase in the stock of self owned stores and franchisees. In addition, some of the business strategies adopted by the group (for example, the fast fashion sexy clothing products) failed to meet the different needs of customers. As a result, store performance and profitability have been adversely affected, and the financial situation of the group and its franchisees has weakened. The Board understands that many dealers can hardly solve this situation by improving their internal operations only by themselves.

In recent months, in order to improve its performance, the group has taken a number of measures, including but not limited to:

(a) in August 2019, Mr. Xiao Jiale, who has many years of experience in China's garment industry, appointed the new chief executive officer and other senior managers to lead and drive the group's strategic measures and enhance its implementation capability and efficiency; and

(b) the Boston consulting company was appointed in August 2019 to review the business strategy, brand operation mode and inventory management of the group, and to assist in the formulation and implementation of the group's business strategy.

The Boston consulting company submitted its findings to the group at the end of October 2019, with detailed financial and operational improvement proposals for the group to consider and take further actions.

In November 2019 and December, the board of directors and Xiao Jia Le, together with other senior management members of the group, discussed the group's transformation plan and took the following actions to invest in brand and product development, improving product prices and planning, optimizing the cost structure and creating better distribution channels for the group, including:

(b) in the fourth quarter of 2019, it opened a shopping center store with "family concept" as its theme and opened seventh generations of personal clothing stores in a brand new image in December 2019 to attract consumers.

(c) to strengthen investment in e-commerce channels and expand business territory to fill domestic market gaps; and

(d) strictly control costs and reduce unnecessary expenses.

New advertising and new image stores are being accepted by consumers. Therefore, in the foreseeable future, more new advertising and more new image stores will be launched.

The Board believes that these actions will gradually restore the steady profitability of the group and its franchisees.

In addition, in December 2019, after considering the group's transformation plan measures, the actual financial performance and the applicable accounting standards, the board of directors and Xiao Jia Le decided to set the following accounting provisions for the group's financial statements:

(a) it is expected that the group will face actual difficulties in selling overdue inventories to franchisees and retail customers in the foreseeable future, with a one-time reduction of about 650 million yuan to 700 million yuan in inventory.

(b) in response to the transformation plan, the total amount of arrears of major clients of the one-time exemption group amounts to about 310 million yuan to 350 million yuan; and

(c) closure of retail shops with multiple losses, resulting in a total cost of 20 million yuan to 30 million yuan, including confiscated deposits, reduced building decoration and various staff severance costs.

The announcement said the board understood that the above provision was large and would have a serious financial impact on its performance in 2019. The board stressed that the proposed accounting provision is a one-time nature and necessary measures for the foundation of the group's fiscal opportunities in the future.

In addition, according to the preliminary assessment of the unaudited consolidated management account of the group in the first 11 months of 2019, and the proposed one-off accounting provision, it is expected that the deficit will not be less than RMB 980 million yuan in 2019, while the profit after tax in 2018 will be about 378 million yuan.