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  • +55% Mecox Lane (MCOX) IPO. China -- women's apparel 0 comments
    Oct 25, 2010 12:07 PM | about stocks: MCOX, VRA, XRS, COH, FOH, KATE, GES, CCIH, AMBO, BORN, CCSC
    Mecox Lane Limited (NASDAQ:MCOX) $106mm IPO.  Market cap of $513mm at price range mid-point of $9.  Scheduled for Tuesday, Oct 26

    MCOX Valuation metrics

    SUMMARY
    Strong growing specialty retail brand in China, focused on women’s apparel
    79% of sales online, supplemented with company owned & franchised stores
    June six months revenue hurt by cold weather, see ‘cold weather’ below
    Small IPO attractively priced – IPOdesktop likes this IPO

    Each ADS represents seven ordinary shares
    BUSINESS
    . China’s leading online platform for apparel and accessories as measured by revenues in 2009, according to the Frost & Sullivan report.
    . 79% of June six months revenue from online sales
    .  MCOX’s store network comprises 478 stores in 182 cities across China as of June 30, 2010, including 320 franchised stores and 158 directly operated stores.

    REPEAT CUSTOMERS
    In 2007, 2008, 2009 and the first six months of 2010, 82%, 83%, 84% and 86%, respectively, of orders by value were placed by repeat customers

    WIDE SELECTION TARGING YOUNG URBAN FEMALES
    . Offers a wide selection of products on the M18.com e-commerce website, evidenced by 24,600 SKUs in 2009 and 23,000 SKUs in the first six months of 2010, targeting the large demographic of young urban female shoppers with fast-growing spending power.
    . 1.9 million active customers as of December 31, 2009 and 2.1 million as of June 30, 2010.
    . Online platform offers products under own proprietary brands, such as Euromoda and Rampage, and under selected third-party brands, including established international and Chinese brands such as Adidas, Daphne, Kappa and Li Ning as well as independent and emerging brands featuring unique designs.

    SEOND & THIRD TIER CITIES
    . To enhance MCOX’s brand recognition and to reach target customers in second- and third-tier cities who are less familiar with Internet shopping but present substantial consumption potential
    .  MCOX also offers, through a network of stores, women’s apparel and accessories under proprietary Euromoda and Rampage brands, to which MCOX owns all rights in China.
    70% REVENUE COMPOUND ANNUAL GROWTH RATE IN REVENUE
    . Net revenues grew from $61.4 million in 2007 to $177.7 million in 2009
    . Net income grew from $4.1 million to US$7.2 million over the same period, representing a CAGR of 32.4%.
    . Adjusted net income excluding share-based compensation expenses, a non-GAAP financial measure, grew from $4.4 million to $9.9 million over the same period, representing a CAGR of 49.4%.
    COLE WEATHER AFFECTED JUNE 6 MONTHS RESULTS
    . Net revenues of $108.0 million for the six months ended June 30, 2010, represented 41.6% increase from net revenues of $76.3 million for the six months ended June 30, 2009.
    . Net income of $2.5 million for the first six months of 2010, represented a 37.7% decrease from net income of $4.1 million for the same period in 2009
    Reason for the net income decline
    . Increases in the cost of goods sold and selling, general and marketing expenses outpaced the increase in net revenues
    . Primarily due to unusually prolonged cold weather in the first quarter of 2010 resulting in lower than expected demand for spring apparel.
    . Adjusted net income decreased by 18.6% to $4.2 million from $5.1 million over the same period.

    E-COMMERCE GROWTH IN CHINA
    . According to the CNNIC, in June 2008, China surpassed the United States as the country of the most number of Internet users in the world.
    . There were 384 million Internet users in China as of the end of 2009, of which 90.1% were broadband subscribers, according to CNNIC.
    90% CAGR
    . Total sales revenues of the B2C e-commerce market in China grew from RMB1.3 billion in 2004 to RMB31.8 billion ($4.7 billion) in 2009, representing a CAGR of 89.5%
    . Expected to grow to RMB920.0 billion in 2015, according to iResearch.
    Retail sales of women’s apparel expected to grow at a CAGR of 37%.
    . Retail revenues of women’s apparel and accessories sold through online platform grew at a CAGR of 26.4% from 2004 to 2009
    . CAGR expected to grow at a 37.2% rate from 2009 to 2015, according to the Frost & Sullivan report.
    . However, the Internet use and Internet shopping penetration ratios in China are still low compared to developed countries. With the Internet becoming increasingly popular among Chinese consumers, there are great growth opportunities for B2C e-commerce in China, according to MCOX.

    GROWTH PLAN
    MCOX’s physical store network has also grown substantially since it began selling branded apparel and accessories in stores in 2006.
    . The number of stores increased from 27 as of December 31, 2007 to 402 as of December 31, 2009 and further to 478 as of June 30, 2010, which contributed to the increase in MCOX’s net revenues.
    Expansion
    . MCOX has expanded and plan to continue to expand its store network in second- and third-tier cities by opening franchised stores in order to achieve high growth with minimum capital investment.
    . As of June 30, 2010, had 320 franchised stores and 158 directly operated stores.
    . Plans to open an additional approximately 20 franchised stores and an additional approximately 5 directly operated stores in 2010.
    . The product offerings of our franchised stores and directly operated stores are similar.
    . Sells apparel and accessories products to franchisees at wholesale prices, lower than the prices charged end customers of directly operated stores.
    . Therefore, the franchised stores’ expansion at a faster pace compared to directly operated stores may affect the gross margin.
    Franchise inventory risk issue
    . Under arrangements with a portion of the franchisees, MCOX is not responsible for their inventories but allow for a 10% return rate with respect to unsold merchandise of the current season.
    . Other franchisees selling MCOX products on a consignment basis may return 100% of unsold merchandise.

    COMPETITION
    The B2C e-commerce market in China is fragmented and highly competitive. There is generally no significant barrier to entry.
    . MCOX believes currently there are few large-scale online platforms for apparel and accessories products, particularly women’s apparel and accessories products, in China. Although there are store-based women’s apparel and accessories merchants starting to explore the online sales market, they have not achieved a successful track record in online sales like MCOX.
    . MCOX believes it competes with other B2C or C2C e-commerce operators which offer similar products on the Internet, including Alibaba’s Tao Bao, Amazon China/Joyo and Dang Dang. In contrast to these competitors, MCOX focuses primarily on the apparel and accessories sector.
    . MCOX faces competition from other specialized apparel and accessories B2C e-commerce operators which had relatively low revenues from the online platform compared to us in 2009, according to the Frost & Sullivan report.

    USE OF PROCEEDS
    $75.5mm from sale of 9.4mm ADSs.  Shareholders intend to sell 2.3mm ADSs
    • $15.0 million to enhance e-commerce
    • $29.5 million to build part of a new logistics center and. The first stage of 100,000 square meters will be completed by the end of 2012;
    • $6.5 million for store growth and improvement primarily through MecoxLane Shopping and Rampage Shopping:  Part of this $6.5 million to open an additional five directly operated stores and 20 franchised stores in 2010.
    • Remaining proceeds for working capital and other corporate purposes

    MCOX Valuation metrics






    Disclosure: none
    Stocks: MCOX, VRA, XRS, COH, FOH, KATE, GES, CCIH, AMBO, BORN, CCSC
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