Chinese e-commerce company Baozun (BZUN 6.77%) reported results for its third quarter on Nov. 21, and the stock got crushed afterward. Shares have dipped roughly 15% since the earnings release, following a miss on top-line results for the period and sales guidance that underwhelmed the market.
With investors already tense due to concerns related to U.S.-China trade disputes and slowing economic growth in China, the quarterly performance clearly didn't do enough to put shareholders at ease -- much less inspire them. That said, investors should take a closer look at the company's quarterly performance and management's comments during the earnings call before abandoning the stock.
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Q3 performance was solid despite the sales miss and stock drop
Sales for the quarter climbed 35.3% year over year to hit roughly 1.5 billion Chinese yuan, or roughly $210.3 million, but fell short of the average analyst target's call for revenue of $214 million. Non-GAAP (adjusted) earnings per diluted share were in line with the average analyst target of $0.14 per share, representing growth of 7.7% compared to the same quarter in 2018.
The table below outlines comparisons for some other key performance metrics:
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Gross merchandise volume (GMV) | 9.1 billion yuan ($1.3 billion) | 6.4 billion yuan | 42.8% |
| Services revenue | 840.8 million yuan ($117.6 million) | 606.2 million yuan | 38.7% |
| Adjusted operating income | 75.9 million yuan ($10.6 million) | 61.2 million yuan | 24.1% |
| Adjusted operating margin | 5.1% | 5.5% | (7.8%) |
Data source: Baozun. Yuan figures converted to U.S. dollars for the third quarter, and quarterly comparisons based on Chinese yuan.
Baozun adds brand partners, but there was a notable departure
Baozun's business model revolves around giving major Western brands an easy way to enter and build their business in the Chinese e-commerce market by providing customizable online stores, order fulfillment, and other support services. It has a few main ways to increase its sales: driving increased merchandise volumes through its platform for existing brand partners, selling partners expanded service offerings, and adding new companies to its client list. That means that the company's net brand partner growth is an important metric to pay attention to each quarter.
Here's CEO Vincent Qiu discussing the company's brand partner additions in the quarter:
During the quarter, we added a net of 11 new brands with a continued focus on generating high-quality and a sustainable growth -- GMV growth, which brings the total number of brand partners to 223 compared to 132 a year ago. The newly added brands are mainly in the high premium apparel and FMCG [fast-moving consumer goods] categories. ... The ramping up in scale of new brands is accelerating as reflected in our strong GMV growth. Our ability to bring more brands on board and drive the incremental contribution to GMV has allowed us to fully offset the impact from seasonality and an electronics brand we'll stop serving during the quarter.
Baozun continues to add new brand partners at a promising clip, with this quarter's net additions coming in just one partner addition behind what it posted in this year's second quarter. What is potentially concerning and might have contributed to the stock's big post-earnings sell-off is a major electronics brand leaving the platform.
There's been no clarification on which brand departed, but the company's statement that its Singles Day (China's biggest shopping holiday) gross merchandise volume conducted through the platform would have increased 76% instead of 53.6% annually if the electronics partner were excluded from the comparison suggests a meaningful departure. Baozun had stated on Nov. 11 that a brand partner had left its online-store platform and impacted Singles Day GMV, but it might have been worse than investors anticipated.
Baozun had suggested in its second quarter that it might transition the now-former electronics brand partner away from its online-store and related offerings and instead just provide information-technology and marketing services. However, based on the prepared remarks in the company's earnings release and comments during the third-quarter earnings call, it appears that partner might have left the platform entirely. The company's platform has historically been pretty sticky, so it's not surprising that investors are disappointed with signs that it's getting less business from some electronics partners.
Guidance misses targets, but Baozun sees healthy e-commerce market
The company guided for fourth-quarter sales to come in between 2.7 billion yuan and 2.75 billion yuan, representing year-over-year growth of 24% at the midpoint of the target. This was significantly lower than the market expected, and analysts reacted to the sales target and other factors by significantly lowering their full-year earnings targets on the stock. The average analyst earnings target for the year fell 17.5% from the average target a week prior to the publication of the company's third-quarter results.
However, the company projected much more encouraging targets on the GMV front and said that this would eventually translate to sales and earnings. Here's Chief Financial Officer Robin Lu on the outlook:
As China's e-commerce industry continues to evolve and become more interactive and engaging, we now expect GMV in the fourth quarter to grow by approximately 45% to 50% year-over-year. Based on our best estimate, as of today, our outlook for 2019 revenue growth is largely unchanged. As it will take a few quarters for the incremental GMV growth to reflect in our revenue and the bottom line growth as our services take hold and scale up.
Lu also said that the company sees the e-commerce market being pretty resilient despite some weakness for the Chinese economy and some fashion-product categories on the platform. Baozun stock trades at roughly 38 times this year's expected earnings after the sell-off.
