Can Dangdang Catch Vipshop in China's Online Retail Niche?

E-Commerce China Dangdang (DANG) will release its quarterly report on Thursday, and investors are bracing for another substantial net loss from the Chinese e-tailer. As competitors Vipshop Holdings (VIPS 1.22%) and LightInTheBox (LITB -3.02%) jockey for position in the potentially lucrative high-growth area, Dangdang has to find ways to accelerate its revenue gains if it wants to hold its position in the industry.

For more than two years after it went public in late 2010, Dangdang was just one more of the many failed Chinese IPOs that plunged after early excitement about the Internet space in China faded; as recently as April, the stock traded at an 85% discount to its IPO price. But recently, Dangdang's shares have doubled as the possibility of a recovery in Chinese economic growth becomes more likely. Can the e-tailer cash in? Let's take an early look at what's been happening with Dangdang over the past quarter and what we're likely to see in its report.

Stats on Dangdang

Source: Yahoo! Finance.

What will Dangdang do to keep Vipshop in sight?
In recent months, analysts have gotten more bullish on Dangdang earnings, trimming loss estimates for the third quarter by about a fourth and cutting full-year 2014 loss projections by 40%. The stock has given back some of its gains from earlier in the summer, though, falling 11% since early August.

Dangdang's second-quarter results show just how hard it has been to satisfy investors. The retailer posted a narrower loss than expected, with revenue climbing 24%, and better margins helped profitability, but investors nevertheless sent share price down by more than 10% in response to the report.

Dangdang has also given shareholders reason to be nervous, having preannounced a warning on the revenue side for the third quarter. Cutting its forecast from $260 million to $250 million, Dangdang let the air out of its summer rally, despite the fact that even the lower forecast still represents a growth rate that most companies would find enviable. Dangdang argues that the move is a deliberate attempt to focus on high-margin products, sacrificing sales growth to improve profitability. Yet that will put the company into more direct competition with some of the giants of the space, including Alibaba's Taobao.

The problem Dangdang faces is that many of its competitors are growing even faster than it is. Vipshop has done a good job of using the flash-sale format to drive much more impressive growth, and the fact that it is profitable while Dangdang isn't is another big draw for investors. Just yesterday, Vipshop announced a 146% jump in revenue, with positive net income reversing a year-ago loss. LightInTheBox hasn't yet reported its third-quarter results, but with expectations for 44% sales growth in 2014, the new entrant to the Chinese e-tail space could quickly give Dangdang a run for its money as well.

In addition, Dangdang suffers simply from a general fear of small Chinese stocks. Assertions from short-sellers that certain Chinese small-caps have artificially inflated financials lead to broader concern about the country's companies, coloring opinions of stocks that haven't even seen any allegations of wrongdoing.

In the Dangdang earnings report, watch to make sure that sales don't come in any worse than the company already projected. If it can start to catch up with Vipshop's higher growth trajectory, Dangdang stands a much better chance of regaining some of its recent losses.

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