Sector financial performance:

This company, who primarily sells, by itself and though its own websites, general merchandise products ( home and garden products primarily), 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:

Growth in sales orders turned into negative number in 2017 after two years’ fast increase while the average order size continued to increase due probably to promotions. The growth seems to come back on track in 2018 as more spending in marketing implying that the decline in 2017 may be only due to other factors than weak demand.

The first six months of fiscal 2018 compared with the same period of 2017

Net sales increased about 7.4% (11.8% for 2Q) benefiting from increase of 5% (7% for 2Q) in order size and increase of 8% (9% for 2Q) in orders.

Fiscal 2017 compared with 2016

Net sales decreased about 3%.

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

Net sales increased about 1.2% benefiting from increase of 5% in order size offset by decrease in orders.

Fiscal 2016 compared with 2015

Net sales increased about 9% primarily due to increase of about 4% in sales orders and increase of 6% in order size as a result of increased promotion.

Fiscal 2015 compared with 2014

Net sales increased about 11% primarily due to increase of about 4% in sales orders and increase of 8% in order size as a result of increased promotion.

Due to the products sales’ shifting to higher margins (service), we thus see an increase of about 70 basis points in gross margin of (including fulfilment costs). However, due to increased spending in selling and marketing, its SG&A as percentage of sales increased by about 240 basis points, this company’s operating margin was dragged down to -1.3% in 2017 ( 12 months trailing). Due to aggressive spending in marketing in first half year of 2018, we see more than 900 basis points increase in SG&A% and caused its operating margin down to near -9% in 2018.

Stock price

This stock currently has a stock price/sales ratio of 0.42 ($26). We think that its stock is being relatively undervalued considering that, while it had a significant loss and shrinking margin in 2018 due to aggressive spending in marketing, it seems that the strategy may be working. We look for potential increase in sales without further marketing spending.