Baozun hit by big-ticket buying slowdown

The e-commerce services company said its electronic product sales plunged 67% in the first quarter, while its appliance sales fell 36%

Key Takeways:

• Baozun’s revenue declined 14% in the first quarter, excluding first-time contributions starting in February from its recent purchase of Gap’s China operations
• The company made several strategic moves in Southeast Asia during the quarter, as it aims to move beyond its home China market 

By Doug Young

The latest financial report from e-commerce services provider Baozun Inc. (BZUN.US; 9991.HK) is providing the latest evidence of a growing theme in China these days, namely that cautious consumers are refraining from big-ticket spending. We’ve seen this theme quite regularly during the first-quarter earnings season for cars and real estate, which are two of the most expensive big-ticket items for ordinary consumers.

Now, Baozun is showing the trend also extends down the food chain to home appliances and electronics as well. By comparison, cheaper items like fast-moving consumer goods and personal care products are the hot ticket these days, showing people are still willing to spend on these cheaper everyday items.

At the same time, Baozun has unveiled a new international expansion strategy as it attempts to sell its popular tools for e-commerce merchants outside China. That campaign appears to build on the company’s purchase earlier this year of clothing retailer Gap’s (GPS.US) China stores, which is taking Baozun away from its roots as a software as a service (SaaS) provider to an integrated provider of such services as well as retail brand operator.

The strategy is aimed at diversification, and makes a certain degree of sense since brands like Gap can become major new customers for Baozun’s core e-commerce services. Also on the diversification front, the company has released an encouraging progress report that shows it is making steady progress in lowering its reliance on Alibaba (BABA.US; 9988.HK), one of its largest stakeholders and also a major source of business via its Tmall online marketplace.

We’ll review each of these points in more detail shortly. But the weak consumer sentiment and resulting decline in big-ticket spending seemed to weigh most heavily on investors’ minds after the report’s release. Baozun’s New York-listed shares fell 10% after the report came out last Thursday, though they pared some of those losses the next day.

The stock is down 27% so far this year – and has lost more than half of its value from a February peak when offshore-listed Chinese stocks were rallying sharply. Even so, the stock is still valued quite strongly with a price-to-earnings (P/E) ratio of 37, based on analyst forecasts for its profit this year. That’s behind an inflated 185 ratio for Shopify (SHOP.US), but ahead of the 32 for Salesforce (CRM.US).

What’s more, the company counts at least three major institutions, JPMorgan, Morgan Stanley and Schroders as major shareholders with 5% or more of its stock. So, clearly investors haven’t given up on Baozun just yet, despite the rocky road it’s currently facing in China.

Baozun’s top-line revenue wasn’t particularly encouraging, down 4.9% year-on-year to 1.89 billion yuan ($267 million) in the first quarter. Excluding revenue of 189 million yuan from its Gap China operations, which Baozun just began adding in February, the company’s revenue would have declined 14% for the quarter. Still, that’s an improvement from the nearly 20% revenue decline in last year’s fourth quarter when consumer sentiment was quite low due to stiff Covid restrictions that only ended in early December.

Sagging demand for home appliances, electronics

Baozun breaks its revenue into two major categories: its original e-commerce services, and its newer product sales. Within those two, its core e-commerce services, which account for about two-thirds of its revenue, actually performed relatively well during the quarter. That category fell by 6% to 1.22 billion yuan, mostly due to the sale of a loss-making unit during the period. Excluding that effect, revenue from services would have been nearly flat.

The big weakness came in revenue from product sales, which fell about 30% excluding Gap store sales that only began contributing revenue in February. The worst performer for the product sales category was electronics, which plummeted 67% year-on-year to 43.6 million yuan. Appliance sales also tumbled 36% to 225.3 million yuan, as consumers avoided this kind of big-ticket buying.

By comparison, sales of fast-moving consumer goods rose 25% during the quarter, while beauty and cosmetics sales were also up by 6%.

The company commented on its earnings call that it was seeing improving consumption trends in April and May, though it didn’t provide any detail.

Baozun’s bottom line wasn’t extremely encouraging either, with the company reporting losses on an operating and net basis. It also swung into the red on a non-GAAP basis, which typically excludes employee-based stock compensation. On that basis it reported a non-GAAP loss of 13.1 million, reversing a 1.2 million yuan profit a year earlier.

Next, we’ll look at the Gap chain’s China business, which Baozun purchased for a relatively modest sum of about $40 million in a deal that closed in February. That chain has struggled due to stiff competition and also weak spending during the pandemic, and was down to 118 stores when the purchase closed – about half the chain’s total in March 2021.

Baozun officials disclosed that they plan to slowly start expanding the chain again, aiming to open 10 stores this year. They also added the chain “significantly narrowed its operating losses in the first quarter,” though didn’t provide any detail on when it might start operating profitably.

Last, we’ll briefly mention Baozun’s purchase of a minority interest in a lifestyle brand owner called Asia Ltd., and its opening of an online store in Singapore. This particular brand doesn’t appear to be very big, and the Singapore opening also looks relatively minor. But both indicate that Baozun wants to move beyond China, and Southeast Asia is its first stop in that direction.

“This is an important first step for bringing our battle-tested technology to the global market,” Chairman Vincent Qiu said on the call. “Our technology is an important piece of the foundation we are putting in place to build up our presence in the growing e-commerce market in Southeast Asia.”

At the end of the day, Baozun seems to be moving in a broadly positive direction, even though some might question its decision to buy the struggling Gap brand in China. Its biggest challenge will be weathering China’s sluggish economy, and investors will be watching closely to see if big-ticket consumer buying improves in the coming quarters.

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