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2019-11-14 11:23:15

Introduction

On Tuesday, November 12, the day after Singles' Day, Baozun announced its Singles' Day GMV (gross merchandising volume, or basically the accumulated amount of everything that is sold). And the results were mindblowing. In this article, we have a look at the results and what they could mean for Baozun's Q3 2019 earnings results and we have another look at the valuation of Baozun.

The Singles' Day Results

Baozun's GMV came in at RMB10.06B or $1.45B. If you don't agree with the adjective 'mindblowing', just consider that Baozun has sold more than 52% of its total market cap ($2.77B) in one (1) day!

Source: Baozun Q2 2019 earnings slides

As you can see from this comparison with 2018, Baozun's GMV was up 53.6% from last year’s Singles' Day, when GMV came in at RMB6.55 billion.

While 53.6% is already impressive, the news is actually even better. Singles' Day 2019 didn't include the GMV of an electronics brand that Baozun stopped servicing during the third quarter of 2019. The reason is that the company wanted 'to optimize its brand portfolio towards higher-quality growth'. I think this might be Huawei, as it has a big impact on the GMV numbers. But the take-rate was probably too low. I think it is the same company Vincent Qiu, Baozun's CEO referred to when he said on the Q2 conference call:

After thorough consideration and as part of our strategy to focus on high quality GMV, we will strategically convert one of our electronics GMV brand partner into a non-GMV partner during the third quarter. Instead of handling their store operations, we will provide IT and marketing solutions to continue our support to this brand. We believe optimizing our brand portfolio towards high quality GMV will ensure the effective and efficient usage of our resources, so we can capture additional market opportunities to drive future growth.

To get a more accurate comparison, you should take out the GMV of the electronics brand from the 2018 numbers. Then the GMV for Singles' Day 2019 would have increased by 76% YoY. Impressive, by all means.

Strategic change

In July, so at the start of Q3, Alibaba (BABA), launched its Tmall Flagship Store 2.0. Baozun is a privileged partner of Alibaba and Alibaba also has a 17% stake in the company. Baozun is the only partner that can use Alibaba's AI data pool, which gives them an advantage versus its competitors. That and its first-mover advantage, of course. Nearly 100 of the clients of Baozun were upgraded to the new platform. That's almost half of Baozun's brand partners. I expect that the rest will follow soon.

Tmall Flagship Store 2.0 allows brands to customize their engagement with customers, manage creative marketing strategies, personalize content, etc. This work is, of course, done by Baozun. The big advantage is that the return is much more multi-channel-friendly and that has its results for the sales of the brands.

Baozun noted in its press release:

We are excited to see that many leading brands within our portfolio ranked first in terms of total order value within their respective verticals. The combination of our cutting-edge IT infrastructure, integrated marketing capabilities, extensive analysis of big data, sophisticated warehousing and logistics networks, and deep insight into consumers helped brands engage with consumers more effectively and are all essential elements powering our success.

This bodes well for Baozun's Q3 earnings. After all, Alibaba had a great Singles' Day sales too, raking in $38B in sales and JD (NASDAQ:JD) another $30B. Don't forget that Baozun works on both platforms.

Before we go any further, I want to explain Baozun's business model. I will start with an image from Baozun's Q2 2019 earnings slides:

So, there are essentially two kinds of revenue streams for Baozun: product sales, which are gross revenue, and services revenues, which are net revenue. The services revenue is divided between the service fee model and the consignment model. The service fee model is essentially the fee companies pay Baozun to take care of IT, store operations, marketing, and customer service. The consignment model is more or less (in an analogy with FBA) FBB: fulfilled by Baozun.

The distribution model is gross in that sense that Baozun first has to pay for the products before it can sell them. This is the original model of Amazon (NASDAQ:AMZN): first-party selling or 1P.

There has been a shift in Baozun's model over the last few quarters, with more and more revenue from the services model, which I liked because the take rates are higher there. But, in Q2 2019, we saw that product sales revenue rose quicker than services revenue. The company stated that the acceleration of the sales revenue came from new partners, the increased popularity of brand partners' products, and especially 'Baozun's increasingly effective marketing and promotional campaigns'.

I think that the strategic shift also explains the tepid reaction investors had after the huge growth of Singles' Day for Baozun. The fact that GMV grows so much indicates that Baozun walks down the path of sales growth rather than margin expansion. I expressed before too that I liked the higher margins of services. But I have come to realize that focusing on sales expansion is not a bad tactical choice at all. After all, this probably plays on the real power of Baozun (and China in general): scalability. Its partners become bigger in China and so does Baozun. I think Baozun has a sound business strategy: lure in the big brands with a modest flat fee for IT services and then take a percentage of their ever-increasing sales.

In a way, it's more like Shopify's (SHOP) model but with a higher take rate. Shopify asks a very low flat fee ($29 in the basic plan) for its service (the software to put up a shop) and then takes a cut of the GMV (2% under the basic plan). Baozun's take rate is much higher, 9.7% in Q2 2019, because it still focuses on big clients and also takes more care of them, but the system stays the same. Baozun has a strategic plan for the future, which the company has communicated for quite a while now:

Baozun Q2 2019 earnings slides

While Baozun has been very vocal about 3, strengthening its IT and big data analysis, I have the feeling that it is now shifting to step 4: the enhancement of warehousing and fulfillment. Vincent Qiu, Baozun's CEO, said on the Q2 conference call that Baozun is upgrading its warehouses.

What this means for Baozun's Q3 earnings

Can the Singles' Day numbers and the strategic change that was already visible in Q2 teach us something about the upcoming Q3 2019 results, which are announced on November 21? I think so.

I think the trend of high GMV growth will continue. The decision to stop working with the big electronics brand will have an impact on the GMV but I still expect around 50% growth YoY.

The good news is that the impact of this discontinuation with the big partner for the revenue will be limited because that was exactly the reason the collaboration was stopped: the take rate for Baozun was too low. Revenue growth will come more from GMV than from services. And that's fine. Although the margins are thinner here, the scalability is a lot higher.

The revenue is expected to come in at $218.22M for Q3, up 36% YoY from the $160.36M of Q3 2018. I wouldn't be surprised if Baozun is able to beat this revenue consensus. After all, the Tmall Flagship Store 2.0 seems to do well.

As for EPS, the consensus is $0.15, up 25% YoY. I don't think that Baozun will beat significantly here. A beat or a slight miss are both possible as the company has said it will invest in its warehouses. I'm also curious to see how many brand partners Baozun has been able to bring in. There has been an acceleration in the last few quarters in the number of brands that have been brought in.

Conclusion

Baozun has announced great Singles' Day numbers again and the trend that was started in Q2 will likely continue: more GMV growth than services growth. This is a perfectly understandable strategy of Baozun's management since this source of revenue has much easier scalability than services. Margins are higher there, but tailoring solutions for clients one by one isn't as scalable as taking a fee from the ever-increasing revenue of products the brands sell through the stores you set up.

On November 21, next Thursday, before the market opens, Baozun announces its Q3 results. Let's see if the trends are confirmed.

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Disclosure: I am/we are long BZUN, BABA, SHOP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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