BZUN - Baozun: Spotlight On Q4 Earnings And Brand Management Business

Summary

• Baozun is expected to have experienced both an improvement in profitability and a more substantial revenue decline in Q4 2022.
• There are both pros and cons associated with BZUN's expansion of the company's brand management business.
• I continue to assign a Hold rating to Baozun; I have a mixed view of BZUN's upcoming results announcement and the outlook for its brand management operations.

Elevator Pitch

I have a Hold investment rating for Baozun Inc.'s ( BZUN ) (9991:HK) shares. My earlier update for BZUN written on November 9, 2022 analyzed Baozun's shareholder capital return and its proposed takeover of Gap Greater China.

I focus my attention on Baozun's Q4 2022 earnings preview and the company's brand management business with the current article. Considering expectations that Baozun's fourth quarter performance was mixed and that BZUN's brand management business has both downside risks and upside potential, I have decided to keep my Hold rating on the stock.

Preview Of BZUN's Q4 2022 Financial Results

Baozun has yet to officially announce the date of the company's Q4 2022 earnings release, but BZUN stock is expected to disclose its most recent quarterly financial performance in the second week of March .

Q4 2022 is expected to have been a mixed quarter for BZUN.

The sell-side analysts see Baozun's topline decreasing from RMB3,173 million for the final quarter of 2021 to RMB2,723 million in the fourth quarter of the previous year as per S&P Capital IQ data. This implies that the market expects BZUN's YoY revenue decline to worsen from -5% in Q4 2021 and -8% in Q3 2022 to -14% for Q4 2022.

Analysts have become increasingly bearish on Baozun's expected Q4 2022 topline performance, considering that the market's consensus full-year FY 2022 revenue estimate has been cut by -5% since late November 2022 based on consensus data taken from S&P Capital IQ .

The current consensus fourth quarter revenue projection for BZUN seems reasonable, as the company's topline should have been affected by both market-specific and company-specific issues in the recent quarter.

Tight pandemic restrictions (as part of China's COVID-zero policy) in the October-November 2022 period and a spike in COVID-19 cases in December 2022 (as the country pivoted away from its COVID-zero approach) should have had a negative impact on BZUN's business operations.

Separately, Baozun's actions taken to tweak the company's revenue mix would also hurt the company's topline in the most recent quarter. BZUN noted at its prior Q3 2022 earnings briefing on November 29, 2022 that "we continued our efforts to optimize low-quality distribution revenue" and "product sales."

On the flip side, the sell-side holds the view that BZUN could turn around from a non-GAAP adjusted net loss of -RMB13 million for Q3 2022 to register a positive normalized net profit of RMB168 million as per consensus forecasts. Assuming the analysts are correct, Baozun's bottom line would have jumped by +122% on a YoY basis in the fourth quarter of 2022.

As I mentioned above, Baozun is working hard to optimize its revenue mix. While this might hurt BZUN's topline growth, such actions are positive for the company's gross profitability. Baozun targets to generate a higher proportion of its topline from services (rather than product sales), and this will naturally boost its gross profit margin.

Furthermore, BZUN's operating expenses are likely to have declined in a meaningful way for the last quarter of 2022. At its third quarter results call in late November, Baozun revealed that it has been realizing "higher efficiencies by centralizing our operating capabilities, rationalizing incentives and consolidating office footprint."

In summary, Baozun will most probably have witnessed both topline contraction and earnings recovery in the last quarter of the previous year.

Brand Management Business

At the end of January 2023, BZUN disclosed that the recently acquired "Gap Greater China will become part of the Baozun group, under the business line of Baozun Brand Management" beginning in February. I have touched on this M&A deal in my November 9, 2022 write-up.

In light of recent developments, it is worth spending time discussing about Baozun's brand management business.

At its Q3 2022 earnings call, BZUN referred to its brand management operations as "a new line of business" which "naturally flows from our core e-commerce service and technology offering" and "differentiates us from traditional (e-commerce) service providers."

Baozun hasn't revealed the revenue and profit contribution from the brand management business, but the company is likely to disclose the performance of this new business as a separate segment when it announces its Q4 2022 results next month.

Based on what is known at this point in time, Baozun's brand management business is headed by Sandrine Zerbib. Sandrine Zerbib started a branding agency known as Full Jet in 2013, which was subsequently taken over by BZUN in 2021 . She was also previously the person in charge of leading Adidas' business operations in China for more than a decade .

Services Offered By Full Jet

Prior to acquiring Gap Greater China, Baozun's brand management business already has equity interests in a number of brands, as highlighted below.

A List Of Brands That Baozun Brand Management Has Invested In

I have a neutral view of Baozun's brand management business.

With respect to downside risks, there are potential conflicts of interests, and operating physical offline retail stores might not be the company's core competencies. By owning retailers and brands in full or part, BZUN might possibly come into direct competition with its core e-commerce services business' clients and partners. Also, as Baozun invests in more brands to expand its brand management business going forward, the company will have to devote more effort to managing offline retail operations, which is not necessarily part of BZUN's strengths. As a reference, BZUN disclosed at its November 9, 2022 investor call (audio recording and transcript not publicly available) that Gap Greater China (which BZUN acquired) has about 140 outlets in its store network.

With regard to upside potential, the brand management business could act as a new growth engine for BZUN. Baozun specifically highlighted in its Q3 2022 investor presentation that its new brand management business will allow the company to "expand upstream" and become "a technology-driven omnichannel commerce player." Even prior to the sharp increase in COVID-19 cases in China for 2022, BZUN's revenue growth has been slowing significantly. Specifically, the topline expansion (in RMB terms) for Baozun has moderated from +35.0% in FY 2019 to +21.6% and +6.2% for FY 2020 and FY 2021, respectively. BZUN needs to reignite revenue growth, and that could be driven by future investments made by its brand management business. Baozun had earlier revealed at the company's November 9, 2022 investor call that the company was currently in discussions with a number of brands for potential investment opportunities.

Concluding Thoughts

A preview of Baozun's upcoming quarterly financial results and an analysis of its brand management business prospects haven't changed my Neutral view of the stock as a potential investment. In that respect, I still rate Baozun's shares as a Hold.

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