Key highlights:
- Shein shares sank after its first earnings report since going public
- Its market value fell to about $17 billion, down from $26 billion at its September 1 IPO
- Shares have dropped 27.3% since their Hong Kong debut at HK$48.56
Fast-fashion retailer Shein dropped 14% on Tuesday after the company posted a 67% fall in quarterly profit. This was its first set of results since going public, raising concerns among investors about shrinking profit margins and slowing growth.
Shein profit margins get squeezed hard
Shein’s adjusted net profit came in at $228 million for the second quarter, down 67% compared to the same period last year, according to WSJ. Its profit margin shrank too, falling to 2.1% from 6.2% a year earlier.
Part of the reason behind this squeeze was rising costs. Conflict in the Middle East pushed up jet fuel and freight prices, which hit Shein especially hard. The company relies on flying cheap clothing to shoppers around the world.
Fulfillment costs jumped 18.1%, a bigger increase than analysts at Jefferies had expected. This is particularly worrying since the cost increase happened before the new European fees came into effect.
Jefferies analysts said Shein’s earnings for the quarter ended June 30 came in over 10% below the lowest estimate suggested by the company’s IPO prospectus.
European sales take a big hit
Europe was one of the weakest spots in the firm’s results. Revenue from the region fell 13.9% to $3.77 billion during the quarter. Sales in the US also dropped, falling 6% to $2.5 billion.
This was attributed to some policies implemented by the company. Shein raised prices and cut back on online advertising amid the new fees the European Union began charging on low-value e-commerce parcels starting July 1.
These fees add 3 euros per product category, meaning a shopper buying four different types of items in one order could face up to 12 euros in extra charges.
The firm said these European fees could end up hurting its business even more than a similar rule that was implemented in the United States last year,
To make matters worse, the EU is also planning to add a further 2-euro handling fee on these parcels starting November 1. Shein’s overall sales for the quarter still rose slightly, up 0.9% year-over-year to $11.08 billion, thanks to growth in Latin America.
Shares continue sliding since the IPO
Tuesday’s drop pushed its market value down to about $17 billion, a fall from the $26 billion valuation it had when it went public in Hong Kong on September 1.
Since its stock market debut, the shares have dropped 27.3% from the offer price of HK$48.56. The weak earnings report gave investors little reason to feel more confident about the stock’s near-term prospects.
Looking ahead, Shein’s leadership laid out plans to try to turn things around. CEO and Chair Yangtian Xu said one of the company’s priorities going forward is building up its inventory levels in Europe.
The company has already invested in warehouse space in Poland, including a logistics hub in Wroclaw that opened in December with 740,000 square meters of warehouse space. Real estate firm CTP also said it leased the retailer an additional 66,000 square meters of warehouse space in Poland this year.
Shein also said it plans to move into higher-priced clothing lines to help boost profitability. He also hinted that the company may expand its portfolio of brands, potentially through acquisitions.
“As the product mix shifts towards brands at higher price points, the platform’s overall average selling price will rise accordingly,” he said. “Our vision is to become a richly diversified brand collection that meets consumers’ varied needs across multiple price points and occasions.”
Source:: Shein Stock Slumps to Record Low as Quarterly Profit Falls 67%