Denim and chino specialist Novel Denim Holdings Ltd on Monday reported an expected second quarter loss of $3.6 million, or 40 cents per diluted share, citing its failure to improve garment production efficiencies for its woes.

The Hong Kong-based company said in the quarter to September 30 net sales fell 5.6 per cent to $37.5m from $39.8m in the year-ago period with garment sales slumping 40.6 per cent to $19.4m from $32.6m in 2001.

Novel, which last year posted a quarterly profit of $3.6m, said that plunge in garment sales was partially offset by a 153 per cent leap in third party fabric revenues to $18m from $7.1m in the year prior.

"During the past quarter we concentrated on improving our garment production efficiencies following events earlier in the year, by reallocating resources and reassessing production plans with the expectation of improving profitability within our garment operations," said CEO and president KC Chao.

"While garment production has not returned to expected levels, due partially to a shortfall in garment shipments during September, we believe we are on the path toward recovery. Our fabric division has been performing, and contributed positively to earnings during the quarter.

"We are particularly pleased with the results and trend of our fabric dyeing and printing operations in China, where we have been increasing direct sales and marketing efforts to customers in the US and Asia."

The company has opened its garment manufacturing facility in South Africa and is currently training its new employees with the expectation to begin producing garments for sale to the US at the start of the fourth quarter.

It added that assuming current production levels, it expects to report diluted earnings per share of $0.03 to $0.07 in each of the third and fourth quarters of the current fiscal year on flat or slightly down sales.