Is Baozun Stock Sell-off A Buying Opportunity?

The e-commerce services and brand management company's revenue rose 7.7% in the fourth quarter, as it announced plans to open a net 40 new Gap clothing stores in China this year

Key Takeaways:

• Baozun reported its first net profit in more than three years in last year's fourth quarter, as its brand management and e-commerce services business posted strong growth
• The company had 152 Gap stores across China at the end of last year, and plans to open another 40 net new stores in 2025

The latest quarterly report from Baozun Inc. (BZUN.US; 9991.HK) had something for everyone. Its topline revenue continued to grow at a respectable rate, and its network of China-based Gap clothing stores posted same-store sales growth – a rare feat in the current environment of weak consumer sentiment. On the bottom line, the company also reported its first quarterly profit in more than three years and promised 2025 would be "transformative."

But investors weren't buying into any of that. The stock fell 12.7% on Thursday after the latest earnings announcement, throwing a damper on what otherwise looked like a very respectable report. Even after the selloff the stock is still up 15% over the last six months, which seems to show the investment community is becoming more confident in the company.

Reflecting that, five of seven analysts polled by Yahoo Finance rate Baozun a "buy," while the other two rate it a "hold." But investors don't think nearly as highly of the company, giving it a price-to-sales (P/S) ratio of just 0.17. By comparison, The Gap Inc. (GAP.US) trades at 0.52, and rival retailer Giordano (0709.HK) trades at 0.63. The discrepancies get even worse when we compare Baozun to other e-commerce services providers, which is Baozun's other main business. Domestic rival Weimob (2013.HK) trades at a P/S ratio of 3.12, while U.S. giant Salesforce (CMS.US) trades at 7.18.

To better understand why investors are so down on Baozun, we need to trace the company's history. It began as a provider of software services to e-commerce merchants, and was closely tied to Alibaba's (BABA.US; 9988.HK) ecosystem. To this day, Alibaba remains one of its major shareholders. But that business has largely stagnated in recent years.

More recently, the company made headlines in 2023 when it purchased Gap's China operations, launching Baozun's move into brand management. Not long afterwards, it also formed a joint venture with Authentic Brands Group to bring the U.S. brand owner's Hunter brand to Asia.

The move into brand management initially raised a lot of eyebrows due to its relative distance from Baozun's core service of providing e-commerce services. That brand management business also created a drag on Baozun's overall performance initially, as the company closed many Gap stores and tried to reposition the brand to make it more competitive. Those efforts appear to be finally yielding some results, and the brand management business now accounts for about a fifth of Baozun's revenue.

The company's total revenue rose 7.7% year-on-year in the fourth quarter to 3 billion yuan ($414 million) from 2.78 billion yuan, as it reported a second consecutive year of annual revenue growth for all 2024 after the figure contracted in 2021 and 2022. Fulfillment costs were flat year-on-year, while sales and marketing costs rose 17%.

As those two factors offset each other, the company reported a 100,000 yuan profit for the quarter, marking its first net profit since the second quarter of 2021. Chairman Vincent Qiu indicated the momentum is continuing in 2025, as analysts forecast the company will report an annual profit this year – its first since 2020.

"The year 2025 marks a combination of our strategic transformation and sets the stage for future growth," Qiu said on the company's earnings call. "We have strengthened our senior management team to drive this next phase."

Gap expansion

Next, we'll take a closer look at the company's two main businesses, starting with its newer brand management business that is entering a growth mode after an initial period of retrenchment. The Gap-brand stores still make up the bulk of that business, though Baozun said it recently opened its first Hunter outlets in Shanghai and Malaysia.

Product sales for its brand management business, mostly from Gap stores, rose 17.3% in the fourth quarter year-on-year to 535 million yuan from 456 million yuan a year earlier.

The company said it opened 40 new Gap stores in the second half of last year, including 16 in the fourth quarter, bringing its total to 152 Gap stores across China by the end of 2024. It said it plans to open another 50 Gap stores this year, which, when combined with closure of underperforming outlets, would give it 40 net new stores for the year.

Notably, the company said its Gap stores reported "low single digit same-store sales growth" in the fourth quarter, which looks quite promising in the current economic climate where many retailers are reporting declines. In one other noteworthy development, the company said it is working with franchisees to expand the chain into second-tier cities – a strategy increasingly used by many brands for expansion into China's smaller cities.

"While we opened new stores throughout the year, we also strategically closed underperforming locations to optimize our offline network, making 2024 a year of structural upgrades," said Ken Huang, CFO of Baozun Brand Management, on the earnings call. "Looking ahead, we plan to accelerate our expansion by prioritizing high traffic locations that maximize sales potential."

Huang added that following the recent openings of a Hunter store in Shanghai, the company is looking to expand that brand into other Chinese markets, such as Beijing, Shenzhen and Hangzhou.

On the e-commerce side, the company said its services revenue rose 9.3% year-on-year to 1.89 billion yuan in the fourth quarter from 1.73 billion a year earlier, fueled by double-digit gains for its online store operations and marketing services. But that was partly offset by a 4.3% decline for its e-commerce product sales to 572 million yuan from 598 million yuan a year earlier, as weak consumer sentiment hit that part of the business.

The positive performance by the brand management business, combined with strong results from e-commerce services offset the weakness in e-commerce sales, lifting Baozun's operating income to 73.2 million yuan from 6.4 million yuan a year earlier. And as we've already noted, the company also returned to a profit after more than three years of losses.

So, why the stock selloff? The one slightly worrisome sign was a drop in the gross margin for Baozun's brand management business, which fell to 50.4% in the fourth quarter from 52.9% a year earlier, with the company blaming store discounts offered as part of promotions. But such a small decline in one part of its business doesn't seem to justify the big stock selloff. Accordingly, the shares could have some potential upside if 2025 turns out to be as transformational as the company hopes.