Today isn't a good day for E-Commerce China Dangdang
Shares of the Chinese e-tailer opened 9% lower -- trading nearly 20% lower at one point -- after posting disappointing quarterly results.
The good news is that net revenue soared by a better-than-expected 53% to $122.3 million. Dangdang also continues to make progress in establishing itself as more than just a Web-based bookseller with hundreds of thousands of stocked titles. General merchandise sales have grown from 14.7% of net revenue to a thicker 24.2% slice over the past year.
The move away from books is a mixed blessing, as Amazon.com
The downside to stocking larger items is that they require more warehousing space and sport thinner gross margins. These are daggers to Dangdang's bottom line. Gross margins have shrunk from 19.8% to 14.3% over the past year, as opening new warehouses and trying to stand out by offering same-day delivery in some cities are jacking up fulfillment costs. Cost of revenue and fulfillment expenses alone swallowed down 99% of Dangdang's net revenue.
The end result is that Dangdang's loss widened despite the solid growth in this seemingly scalable model. The fast-growing online retailer's deficit of $0.06 is three times larger than analysts were expecting.
One analyst applauded the company during this morning's call for its emphasis on growth over current profitability, though today's market actions suggest that investors don't see it that way.
Dangdang now joins social networking site Renren
If there's any silver lining here it's that Amazon has been through this before, and lived to laugh at the bears. It was Amazon that was derisively mocked for its crummy gross margins and wrecking fulfillment as a profit center with its subsidized shipping promotions.
Things obviously worked out well for Amazon. It would be a mistake to argue that Dangdang -- described by many as the Amazon.com of China -- will diligently follow in those footsteps. However, at least it can rightfully be suggested that the transition has panned out perfectly in one prolific case.
The next few years will be both exciting and challenging for Dangdang. As a bonus, today's investors can get in for less than last December's IPO buyers.
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Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin online stocks for a long time. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.