One of the last week's biggest losers was Vipshop Holdings (VIPS 0.70%), shedding 22% of its value after posting disappointing financial results. At least three analysts would go on to downgrade the stock.
The online discounter of brand-name apparel in China has fallen on hard times lately. The stock closed out last week by hitting new 52-week lows in four consecutive trading days, a streak it can extend to five by Monday's close if the sell-off continues. Vipshop was once the toast of growth investors, but now the bears are clearly gaining the upper hand in this battle.
Image source: Vipshop Holdings.
Brands on the run
Revenue rose 18% to $3.1 billion in Vipshop's second quarter. Most retailers would kill for that kind of double-digit growth, but this is Vipshop's weakest showing as a public company. Revenue growth has decelerated for eight consecutive quarters, and this is the first time that Vipshop's top line hasn't posted a gain of at least 24%.
The quarter was an odd mix of growth in the number of shoppers and orders placed. Vipshop grew its active customer count by just 6% over the past year to 29.8 million, but the total orders soared 31% to 111.3 million. Vipshop's shopper base growth is slowing, but those customers are placing a lot more orders. However, the 18% uptick in revenue with that 31% spike in orders means that the value or the average order is shrinking. In short, Vipshop is getting its active customers to place more yet smaller orders. They're spending more -- 12% more, on average -- but the end result isn't helping out on the bottom line where adjusted earnings declined for the quarter.
Margins continue to contract, an unfortunate recent trend in what has become a cutthroat climate for online discounters. Vipshop has had to ramp up marketing and promotional activity to stand out, and that's stinging the bottom line. Adjusted earnings declined 23% to $0.13 a share. Analysts were holding out for a profit of $0.14 a share on an adjusted basis. Vipshop used to routinely trounce analyst profit targets, but it's fallen short in back-to-back quarters -- and it's not a surprise to see the stock take a better than 20% weekly hit in back-to-back quarters.
Vipshop's of decelerating top-line growth will likely to stretch to nine periods. Guidance calls for 13% to 18% in revenue growth for the third quarter. It landed at the low end of its second-quarter outlook, as it was projecting a top-line uptick between 17% and 22%.
Analysts weren't impressed. This was the first full quarter for Vipshop since it brokered a partnership with two of China's biggest dot-com darlings, a deal that should've delivered new opportunities to get its digital storefront noticed by more internet users. Citi, Daiwa, and CLSA analysts downgraded the stock following last week's report, concerned about decelerating revenue growth, thinning margins, and uninspiring guidance for the current quarter. A fourth Wall Street pro -- Fawne Jiang at Benchmark -- slashed her price target on the stock from $19 to $12, but kept her buy rating on the shares.
Value investors may start to circle the wagons here. Vipshop trading at its lowest level in nearly two years finds the online deal maker trading at just 12 times this year's projected earnings and just 10 times next year's profit target. The big problem here is that profitability keeps going the wrong way, and analysts keep hosing down their bottom-line expectations with every passing quarter. Until Vipshop's margins start widening or top-line growth stops decelerating, the best course for growth and value investors may be to wait things out on the sidelines.
