LITB LightInTheBox Holding

Sector financial performance:

This china-based company, who primarily sells, by itself and though its own websites, general merchandise products ( apparel and garden products), has been grouped into online retail& service sector in merchandise industry.

Almost all companies in this sector in our analysis have experienced fast growth in terms of direct products sales between 2015 and first half of 2017 (double digits growth rate) as reflected from the increased sales volumes. This can be attributed to the lower purchasing costs (price/shipping) in North America or strong natural demands in China. Correspondingly, the service revenue of some of companies where apply increased as well as the sales of third-party seller who use their marketplace increased quickly.

Products sales of most companies in this sector grew slowly or decreased in 2017 in US market and some rebounded back on the track of 2015/16 in 2018. The slowing growth of 2017 in direct products sales of many companies in China market seems to be continuing after entering 2018 and presents a more clearly downward growth trend since 2015for those China-based companies probably due to increasing pressure on price resulted from competition.

Direct sales gross margins (merchandise margin) of companies that focus on US market decreased significantly probably due to the lower price and shipping costs. Benefiting from economy scales and getting better of retail market and from leverage of other expenses such as fulfillment as a result of fast increase in revenue from service, some of US companies have been seeing the improved operating margin and cash flow. However, in China market, due to increasingly intensive competition, most of companies experienced shrinking margins and decrease in cash flow as compared with 2016.

The current average gross margin (direct sales gross margin) is about 15% with a range in 5-28% down from about 17% three years ago. The current average gross margin (products and service) is about 23% with a range in 7-36% up from about 17% three years ago(fulfillment expenses included). At the same time, as companies continued to increase investments in selling& marketing and technology innovation when facing intensive competition since 2017, the average SG&A as percentage of sales (currently average 18.5% with a range 6-32%) and average technology& content as percentage of sales (currently average 5% with a range of 2-13%) got worse in 2018. Therefore, under the help from improved gross margin, the average operating margin firstly went up above 0% from -3% in 2017 (12 months trailing data) and down back to -1% in 2018.

According to our analysis, the current companies’ enterprise price/EBI ratios vary from 100 to 200 and enterprise price/sales ratios vary between 0.4 and 4.5.

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Company performance:

The net sales of products (more than 90% of total sales) rebounded in 2017, after the significant decline in 2015 and 2016, primarily as a result of increase in sale orders/volumes from repeat customers and continuing increase from new customers. However, probably due to increase in price, sales volume and sales both decreased in 2018.

The second three months of fiscal 2018 compared with the same period of 2017(ended 20180630)

Net sales decreased about 29% due to decrease of about 50% in product orders and decrease of 25% in service.

The first three months of fiscal 2018 compared with the same period of 2017(ended 20180331)

Net sales decreased about 3.6% due to decrease of about 20% in product orders and decrease in service.

The fiscal 2017 compared with 2016

Net sales increased about 9% primarily due to increase of about 12% in sales as a result of increase in sales from repeated customers and new customers offset by decrease in service.

The first six months of fiscal 2017 compared with the same period of 2016

Net sales increased about 13% benefiting from increase of about 21% in product orders.

Fiscal 2016 compared with 2015

Net sales decreased about 10% primarily due to decrease of about 26% in sales orders as a result of decrease in sales from repeated customers. The average unit price increased.

Fiscal 2015 compared with 2014

Net sales decreased about 15% primarily due to decrease in sales orders as a result of decrease in sales from repeated customers and decrease in unit price.

The increase in sales volume/order in 2017 is probably a result of reducing price and we thus see a decrease of about 120 basis points in gross margin of products sold (excluding fulfillment costs). However, because this company managed to reduce its SG&A as percentage of sales by about 800 basis points primarily due to saving from selling and marketing, this company’s operating margin still gained increase to about -3% in 2017 from -8% of 2014. However, merchandise margin continued to narrow to about 27% in second quarter of 2018 and caused operating margin down by about 500 basis point to -8% in 2018 from one year before, which caused a significant decrease in cash flow.

Stock price

This stock currently has a stock price/sales ratio of about 0.24 ($1.06). We think that its stock is being relatively overvalued considering that sales decreased in 2018 while continuing promotions. The increase in its sales has been at cost of lower price and thus less profit. There are many uncertainties in predicting when its expenses can be leveraged by the increase sales and thus offset the shrinking gross margins.