DDL.US
Dingdong returns to revenue growth

China’s leading online grocer’s return to growth in the first quarter follows an overhaul that saw it withdraw from smaller markets to focus on larger cities

Key Takeaways:

  • Dingdong’s revenue grew slightly in the first quarter, ending more than a year of revenue contraction
  • The company recorded its second quarterly net profit since its listing and said it expects both revenue and profit to post “considerable year-over-year growth” this year

  

By Doug Young

Grocery story or tech company?

Investors are having a hard time answering that question when it comes to Dingdong (Caymen) Ltd. (DDL.US), China’s leading online grocer, which on Monday reported a return to revenue growth in this year’s first quarter after a year of contraction, as well as only its second GAAP profit since going public in 2021. Despite that, the company’ stock sank 16% after the results were announced, showing investors were hoping for more.

We should point out that even after the selloff, the stock is still up 21% so far this year and has rallied 67% from a low in January, feeding off a recent broader rally for offshore-listed Chinese stocks. Still, its forward price-to-earnings (P/E) ratio of 18 is the same as larger U.S.-based grocery giant Kroger’s (KR.US) 18, but is behind the 25 for Walmart (WMT.US).

The bottom line is that Dingdong is a grocery seller, a sector famous for razor-thin margins and stiff competition due to difficulty among rivals in differentiating their products. Dingdong pointed out on its earnings call that it’s tough to reduce delivery costs that are one of its main expenses, and that one area where it’s making some progress is in cutting out middlemen involved in many parts of its supply chain.

Dingdong has also acknowledged that it’s better to focus on larger, wealthier cities where consumers are less cost-conscious. It began pulling out of smaller markets where it was losing big money last year, resulting in revenue contraction throughout the year.

With impact from the withdrawals winding down, the company said it expects to return to a growth track this year. “We have raised our expectations for both net profit and scale, and are anticipating considerable year-over-year growth for the second quarter and this year,” said founder and CEO Liang Changlin in the company’s results announcement. Liang didn’t elaborate on the meaning of “scale,” though presumably he is referring to revenue.

Dingdong has also been trying to beef up its margins by providing more of its own private-label products, which tend to carry higher margins and are one of the few areas where it can differentiate itself from rivals. But it made little mention of those efforts in its latest results, with CFO Wang Song only noting on the earnings call that the company is “actively working on improving our private label product development capabilities.”

So, where does that leave this company in the eyes of investors?

Despite the recent broader bullishness on U.S.-listed China stocks, analysts remain decidedly mixed on Dingdong. Only five out of nine polled by Yahoo Finance rate it a “buy” or “strong buy,” with the other four rating it a “hold” or “underperform.” Still, their average price target of $2.65 for the stock implies some upside from its latest close of $1.82.

All that said, we’ll take a closer look at the company’s latest financials that look relatively solid. At the highest level, its gross merchandise value (GMV) rose 1.4% to 5.53 billion yuan ($764 million), while its same-store GMV rose by a larger 4.4% year-on-year for the three-month period. The company noted that the first two months of 2023 were still affected by the pandemic, and pointed out GMV rose 6.5% year-on-year this year in March, the first month when year-ago consumption patterns were more normal and made for better comparisons.

Revenue rises

The improving GMV helped Dingdong post a tiny first-quarter revenue gain to 5.02 billion yuan from 5 billion yuan the previous year. Before that, the last time the company reported a similar year-on-year revenue gain was the fourth quarter of 2022, before it began its slimming down campaign.

Shanghai-based Dingdong is profitable in its home region of East China, which includes Shanghai, as well as adjacent Zhejiang and Jiangsu provinces. It noted that order volume per station rose by double-digit percentage amounts in all three of those places in March, while also pointing out that its losses in the Southern Chinese cities of Guangzhou and Shenzhen, and also in Beijing, all experienced “rapid reduction.”

Notably, the company stands to benefit in Beijing following the demise of former rival Missfresh (MFLTY.US), which was a dominant player in the Chinese capital, also its hometown. Dingdong also faces competition from rival services operated by leading takeout delivery company Meituan (3690.HK) and e-commerce giant PDD (PDD.US), though both of those are more focused on smaller markets.

Dingdong said its operating costs and expenses were roughly flat at 5.05 billion yuan in the latest quarter, versus 5.04 billion yuan a year earlier. Its fulfillment expenses fell 3.9% year-on-year during the quarter, dropping their share of total revenue to 22.8% from 23.9% a year earlier, as it benefited from larger order sizes. The lower fulfillment expenses were offset by increases of more than 20% in sales and marketing and general and administrative expenses.

The bottom line was that the company reported a sixth consecutive quarterly non-GAAP profit, which excludes costs related to employee stock-based compensation. And significantly, it also reported its second-ever GAAP profit of 12.3 million yuan since going public in 2021, reversing a 52.4 million yuan loss a year earlier.

The company also said it is quite solid in terms of finances, noting it was cash flow-positive in the first quarter, representing a third consecutive quarter in positive territory for that metric.

And what do we make of the company’s previously mentioned proclamation that it now anticipates “considerable year-over-year growth for the second quarter and this year” in both “scale” and net profit? Analysts polled by Yahoo Finance weren’t expecting much, at least in terms of revenue growth, forecasting only 2% growth in the second quarter and 4.3% for the whole year.

It’s quite possible we might see some upward revisions to those forecasts in the weeks ahead, and perhaps even one or two ratings upgrades. At the end of the day, Dingdong does seem to be sharpening its focus by concentrating on big cities where it can operate profitably, and also on improving its efficiency by gaining more direct control of its supply chain. It will always be a grocer when all is said and done, but that doesn’t mean it can’t become a leader in the huge Chinese grocery market.

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