Dangdang Q3 Earnings Preview: Short-Term Pain, Long-Term Gain

Nov.13.11 | About: E-Commerce China (DANG)

Dangdang (NYSE:DANG) reports its 3Q11 results on November 16th. The Street expects the company to report a net loss of $0.07 per share on $143.3 million in revenue.

In 2Q11, Dangdang generated $122.3 million in total net revenue (+53% y/y). Media revenue was $90.4 million (+34.1% y/y) and general merchandise revenue grew 151% y/y to $29.6 million The company continued to see a shift in its revenue mix as general merchandise represented 24.2% of total net revenue, compared to 14.7% in 2Q10.

For this upcoming quarter, investors can expect Dangdang to experience weak margins due to intense competition, a shift in product mix, and continued investments in fulfillment centers to improve customer shopping experience.

Dangdang faces intense competition from rival Taobao and 360Buy. To generate customer loyalty, the company has been improving customer shopping experience by strengthening its network of fulfillment centers to minimize shipping time.

In 2Q11, Dangdang introduced the “Lightning Plan” which aims to shorten delivery time and expedite exchange and returns. As of October, same-day delivery services have more than doubled to 17 cities and next-day delivery services have expanded to 72 cities across China.

Meanwhile, the commencement of Wuxi fulfillment center in August increased total warehouse capacity to 260,000 square meters, compared to 210,000 square meters at the end of 2Q. By the end of this year, the company plans to add two more fulfillment centers in Jinan and Fuzhou, potentially bringing the total capacity to 360,000 square meters assuming each new fulfillment center has 50,000 square meters of capacity space.

The continued investment in fulfillment expense and product shift toward general merchandise sales, which carries lower margin, are likely to put downward pressure on Dangdang’s overall margin in the near-term. However, the current investments may benefit the company in the long term as margin stabilizes by the middle of next year after it establishes a strong delivery fulfillment network and increases the scale of its general merchandise sales.

Dangdang is well positioned to be a leading ecommerce player in China, but it could take more time before its true value is unlocked.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.