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Why Baozun Stock Is in Trouble

By Jeremy Bowman and Brian Withers – Dec 15, 2021 at 8:56AM

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The Chinese e-commerce stock turned in another disappointing earnings report.

Baozun (BZUN -5.26%), a Chinese e-commerce stock, has been struggling for a while now. In addition to the broader challenges in the Chinese market, the company's growth has nearly ground to a halt.

In this episode of "Beat and Raise" recorded on Dec. 1, Fool contributors Jeremy Bowman and Brian Withers review Baozun's third quarter and discuss what was lacking.

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Brian Withers: You're going to kick us off, Jeremy with Baozun. I always say it Baozun. Am I saying it right?

Jeremy Bowman: I don't know actually. I think I say Baozun.

Withers: It could be. [laughs] Well, how did they do?

Bowman: Yeah, I'll take it away. Baozun is [laughs] a Chinese e-commerce company. Let me just my screen share. They're not as much of a direct seller, they call themselves a partner for brands so if you're multinational company like Nike or Starbucks, I think Microsoft, some of those, and you want to do business in China. Then they help you out with the marketing, distribution, IT, navigating the ins and outs of Chinese regulations. That's their bread and butter. Their report wasn't very good, they missed on both top and bottom line here, you can see their revenue grew just 3.8% to $294.7 million so that was short of $303.9 million estimates. They also reported, this is pretty ugly, $0.19 adjusted loss per share. Sorry, that should be what the consensus was and profit.

Most of this was for a write-down of accounts receivable, which had to do with one distributor partner. It's a one-off thing, if you back that out, they were breakeven, but still that's pretty weak. This company has historically been profitable. This is actually their first adjusted loss in the quarter, so not great. Their outlook, they didn't give an outlook so that's that, saw it was down seven percent yesterday on the report. Their earnings came out yesterday morning. It actually bounced back today. I couldn't really find any reason other than a Citibank analyst lowered their price target but reiterated a buy rating so that might have helped, but no news driving that.

Some highlights I think mostly the results were pretty weak, but some positives maybe. Their GMV, gross merchandise volume, is divided between non-distribution, which is what they handled for their brand partners, and they also have their own first-party sales that they've been moving away from. The service side was, GMV, was still up pretty strong, 53 percent. They announced a new $50 million share buyback program so they are trying to take advantage of the fact that the stock has fallen a lot. Cainiao, which is Alibaba's logistics division took a 30% stake in Baotong. Baotong is Baozun's logistics division. Alibaba's already an investor in Baozun and they have a pretty close relationship so this is just strengthening that. I thought this was a positive sign -- two new partner storefronts are up, meaning JD, and Alibaba, Tmall. Some of the Chinese e-commerce marketplaces up pretty strongly from 461 to 736.

Some of the concerns here, I think sluggish revenue growth which a company blamed on macroeconomic headwinds and a weak consumer environment, some more difficult regulations. You saw some of that, too, with like Alibaba, but their revenue is still in the 20% range, so I think I'd definitely be more concerned about Baozun barely growing at this point, the write-down was about $12 million. As I said, that was the first adjusted quarterly loss. That was maybe a one-off thing, but you don't really hear that too much so that might indicate either weakness with some of their customers or maybe the company's accounting is a little off.

Their top line was helped by acquisitions. They acquired, I believe, Full Jet and then eFashion, two luxury apparel companies over the last year. But even with that, their growth is still pretty slow and they blame that for some of their bottom-line weakness. You look at the chart over here, it's been not great year for Baozun, down 60% year to date and even steeper from their peak back in February. The stock has struggled. They're a much smaller company than some of the big Alibabas and Tencents and those today. I don't think they've face as many headwinds directly, but they're still dealing with some of that, but yes, but I'd be concerned if I was a shareholder right now.

Withers: Certainly I was a shareholder in the past as I trim down my Chinese holdings, Baozun was one of the ones that I chose to let go and it has struggled a bit as it was transitioning from its first-party business to that asset-light business, which I thought was a really good move for them. I don't know if it's been not as attractive for brand partners, and they've also been trying to up their game where their existing customers running marketing campaigns and things like that. It just seems like if you can't succeed in the largest e-commerce market in the world with e-commerce services, I don't now.

Bowman: There's definitely some execution issues there too, and then I think maybe on a larger scale, some of their customers might be a little nervous with some of the regulations and such.

Withers: It doesn't sound like they mentioned supply chain issues as part of the issues that they're facing the quarter.

Bowman: Yeah, I didn't see that come up. I don't think it's directly a supply chain issue.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Brian Withers owns JD.com. Jeremy Bowman owns Alibaba Group Holding Ltd., JD.com, Nike, and Starbucks. The Motley Fool owns and recommends Baozun, JD.com, Microsoft, Nike, Starbucks, and Tencent Holdings. The Motley Fool recommends the following options: short January 2022 $115 calls on Starbucks. The Motley Fool has a disclosure policy.

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