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Is the 'Shopify of China' Losing Its Momentum?

By Leo Sun - Aug 27, 2020 at 8:45AM

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The e-commerce services company Baozun expects slower growth in the third quarter.

Baozun's (BZUN -0.94%) stock recently stumbled after the Chinese e-commerce services provider followed up its second-quarter earnings beat with soft guidance for the third quarter.

Baozun's revenue rose 26% annually to 2.15 billion yuan ($305 million) during the second quarter, beating estimates by $4 million. Its adjusted net income surged 73% to 146 million yuan ($20.7 million), or $0.35 per ADS -- which also topped expectations by $0.11.

But in the third quarter, Baozun expects its revenue to rise just 16% to 20% annually, well below expectations for 24% growth. Does that outlook indicate Baozun, which is often dubbed the "Shopify of China," is losing its momentum?

An e-commerce app on a smartphone with a shopping cart in the background.

Image source: Getty Images.

A balanced play on China's e-commerce market

Baozun helps companies establish an online presence in China with e-commerce websites, fulfillment services, IT services, marketing campaigns, customer service tools, and more.

But unlike its Canadian peer, Shopify, which generates most of its revenue from small to medium-sized businesses, Baozun mainly serves multinational companies like Starbucks and Nike. Chinese e-commerce giants Alibaba (BABA -1.22%) and JD.com (JD -0.89%) also integrate Baozun's services into their online marketplaces.

Baozun originally fulfilled merchants' orders with a capital-intensive "distribution-based" model. However, it gradually replaced that model with its higher-margin "non-distribution" model, which allows merchants to directly ship their products to consumers. Baozun's first-mover's advantage in e-commerce services, its diverse base of big customers, and the ongoing expansion of its margins all made it a well-balanced play on China's booming e-commerce market.

Firing on all cylinders

Baozun's numbers improved across the board in the second quarter. Its gross merchandise volume (GMV), or the value of all goods sold across its platform, rose 31% annually -- accelerating from its 18% growth in the pandemic-stricken first quarter.

Parcels in a warehouse.

Image source: Getty Images.

Within that total, Baozun's non-distribution GMV (92% of its total GMV) rose 34%. Its distribution GMV (8% of its GMV) grew just 9%. Its take rate, or the percentage of each sale it retains as service revenue, expanded from 9.7% to 10.4%.

The healthy growth of its non-distribution business, along with tighter cost controls and a rising take rate, boosted its operating margin year-over-year from 6.1% to 8.7%.

Baozun's total number of GMV brand partners also rose 19% annually to 241. Baozun generated robust GMV growth from sportswear, luxury goods, and fast-moving consumer goods brands, and it noted the June 18 promotional period (originally launched by JD as an annual sale) lifted sales of its weaker men's and women's apparel brands during the quarter. That growth was partly offset by weaker sales of consumer electronics.

But is Baozun losing its momentum?

Baozun expects its GMV to grow just 15% annually in the third quarter. It attributes that deceleration to seasonal declines in certain markets and its ongoing slowdown in the consumer electronics market.

Specifically, Baozun is pivoting away from lower-margin electronics brands, which might generate higher GMV growth, toward higher-margin electronics brands, which usually generate slower GMV growth. During the second-quarter earnings conference call in mid-August, CFO Robin Lu declared the adjustment was necessary to generate "more profitable GMV" and boost its margins over the long term.

Baozun already started that shift in the second quarter. As a result, its product sales gross margin contracted 310 basis points year-over-year. Baozun also blames that decline on a higher mix of new brands and deeper discounts (especially during the June 18 campaign) after the COVID-19 crisis.

However, Baozun largely offset that gross margin contraction with the aforementioned expansion of its operating margin -- which supported its big earnings beat.

Limited visibility for now

Baozun's growth will decelerate in the third quarter, but it didn't offer any clear insights into the fourth quarter, which will include Alibaba's annual "Singles Day" sale on Nov. 11.

Lu noted there would be a seasonal lull, exacerbated by the aftermath of COVID-19, between the two shopping holidays on June 18 and Nov. 11. In other words, Baozun could follow up a lackluster third quarter with blowout fourth-quarter numbers. Wall Street's forecasts, which call for Baozun's revenue to grow 28% annually in the fourth quarter and for its earnings to double -- favor that bullish scenario.

Analysts expect Baozun's revenue and earnings to rise 25% and 55%, respectively, for the full year -- which are stellar growth rates for a stock that trades at just 28 times forward earnings.

Still an undervalued growth stock

Investors should always be skeptical of analysts' forecasts, but I think the market overreacted to Baozun's third-quarter guidance. Baozun offered clear explanations for the slowdown, and its disciplined focus on expanding its margins should be praised instead of punished.

I believe Baozun's slowdown will be temporary, and its growth should accelerate again in the fourth quarter as Singles Day brings back shoppers. Baozun's stock looks cheap relative to its growth, and its post-earnings plunge could represent a great buying opportunity.

 

Leo Sun owns shares of JD.com. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Baozun, JD.com, Nike, Shopify, and Starbucks. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Baozun Stock Quote
Baozun
BZUN
$8.45 (-0.94%) $0.08
JD.com, Inc. Stock Quote
JD.com, Inc.
JD
$54.70 (-0.89%) $0.49
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$89.63 (-1.22%) $-1.11
Shopify Inc. Stock Quote
Shopify Inc.
SHOP
$34.20 (-7.22%) $-2.66

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