Why Dangdang Shares Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of E-Commerce China Dangdang (NYSE: DANG  ) were getting dinged today, falling as much as 12% after reporting earnings this morning.

So what: The online retailer saw a 24% increase in the quarter to $243.3 million, ahead of expectations of $235.5 million. Net loss, meanwhile, improved to $0.13 per share, better than estimates of $0.15. Revenue guidance for the current quarter was also better than the analyst view, as Dangdang expects $258 million versus the consensus of $253.3 million. Recapping the quarter, Executive Chairwoman Peggy Yu Yu noted the company's strong sales growth and margin expansion as gross margin improved 400 basis points to 17.1%.

Now what: Considering that Dangdang beat estimates across the board, it's a little surprising to shares falling. However, higher expectations seemed to have been baked into the share price as shares had nearly tripled since May. While Dangdang's margin improvement is encouraging, analysts are projecting losses through 2014, and the experience of other online retailers like Amazon.com and Overstock.com has shown that net margins even for successful e-retailers are paper-thin. This was a solid report for Dangdang, but further share price appreciation seems unwarranted at this point.

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