A 'Latin American eBay,' MercadoLibre Outfits To Grow


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Latin American e-commerce sensation MercadoLibre isn't just riding the crest of the region's growing wave of online buying, but also helping to drive it.

The company has worked to improve the user experience and make it easier for consumers to transition to online commerce. It has upgraded the user interface, expanded product categories and added shipping options.

Through steps such as these,MercadoLibre ( MELI ) has sparked a surge in sales and profit amid a rising user base, increasing the number of transactions and merchandise volume.

Dubbed theeBay ( EBAY ) of Latin America, MercadoLibre operates a marketplace website that lets businesses and individuals list items and conduct transactions in a fixed-price-sale or auction-based format.

It offers its platform to a market of over 584 million people in Latin America that includes Argentina, Venezuela, Mexico, Colombia, Ecuador and Panama, as well as Brazil, its biggest revenue generator. The company also runs e-commerce platforms in the Dominican Republic, Panama and Portugal.

MercadoLibre offers the online payment system MercadoPago too, which operates much like eBay's PayPal system.

Another feature is the MercadoShops solution, where users can set up, manage and promote their own online Web stores.

MercadoLibre reigns as the e-commerce leader in each Latin American country where it operates, based on the number of page views and unique visitors it gets. And the company works hard at building that position.

"Rather than sitting back and benefiting from the shift of retail to online, they continue to innovate and roll out different enhancements and functionalities," said Chad Bartley, an analyst at Pacific Crest Securities.

More Plentiful Money

The shift to digital buying Bartley refers to is occurring in Brazil and other Latin American countries amid "secular growth in income," he says. So people have more discretionary income to spend on shopping overall.

Still, Bartley says, e-commerce is only about 3% of total retailing done in Latin America. So there's plenty of room for that penetration rate to grow -- and MercadoLibre has been and should continue to be a prime beneficiary of that growth, thanks to ongoing internal initiatives.

"This year and going forward, it has several initiatives that, in the aggregate, can move the needle intermediate- to longer-term," he said.

Among those Bartley lists is expansion into new product categories. He says, historically, the company has concentrated on the consumer electronics products category. Recently, it's diversified away from that to focus on others, such as apparel and home goods.

The effort yielded "above-average" growth rates in the second quarter in categories such as apparel, home, garden and toys, said MercadoLibre Chief Financial Officer Pedro Arnt on the company's second-quarter conference call.

Another initiative, launched in 2013, is the MercadoLibre Envios shipping solution. Through it the company offers product sellers cost-efficient integration with logistics companies and shipping carriers. Those sellers opting into the program are able to offer a "uniform and seamlessly" integrated shipping experience for their buyers, according to Arnt.

These types of initiatives have helped propel 15 straight quarters of double-digit sales growth, and double-digit or better profit gains in all but one of those quarters.

"Quarter after quarter they are delivering steady performance in terms of driving transaction volume," said Morningstar analyst Dan Su. "They spend a lot of effort and resources improving the user experience every step of the way, from how they log in through to finishing the transaction."

They have shown "solid execution in getting new customers in the door and making sure they enjoy the experience and keep coming back," she added.

That "execution" came into play in the second quarter. Earnings rose 18% to 67 cents a share. Sales climbed 26% to $112.2 million.

During the quarter, 4.5 million new users registered on the site, expanding the base of registered users 23% from a year earlier.

"New users in the quarter were the highest ever and sold items accelerated vs. the prior quarter in all our key countries -- primarily in Brazil -- outpacing user growth, a sign of increased user engagement," Arnt said.

Items sold grew 27%, reaching 20.1 million. Overall gross merchandise volume was $1.7 billion, up 33% from a year earlier. Total payment volume was up 40% in U.S. dollars to $578 million.

Several initiatives contributed to the quarter's growth, Arnt says. Among them was a TV marketing campaign launched during the quarter that centers on MercadoLibre's brand, its mobile capabilities and the benefits of buying online vs. offline.

Other efforts during the quarter include a series of search optimizations aimed at improving the relevance of search results users get, and added features that improved deal and product discovery.

MercadoLibre also extended user-interface improvements to its mobile initiatives.

Arnt says the company's mobile efforts "continue to exceed expectations for such an early stage and show no signs of slowing down."

Mobile is an area of focus for the company as smartphone and broadband penetration increase in the region, Bartley says.

Mobile On The Move

Mobile accounts for a "low double-digit percentage" of the company's new users and a high single-digit percentage of its general merchandise volume, Bartley wrote in a report. He notes that's "impressive" considering its mobile site and app have been available for only a year.

Analysts polled by Thomson Reuters expect MercadoLibre to stay on the fast track. They see full-year 2013 earnings rising 20% to $2.77 a share. They expect a 25% rise in 2014 and a 30% increase in 2015.

"The company is well-positioned to tap into the tail wind in e-commerce in Latin America," Su said. The Latin American market is a very attractive market growing at a pretty nice pace, she says.

"I think the tail winds can continue going forward in that space," she added.

Bartley said in his report that MercadoLibre "should continue to benefit from increased e-commerce adoption and grow faster than the market due to" various initiatives such as product category expansion.

He expects MercadoLibre to see "at least" 30% revenue and earnings growth over the next several years and notes that Latin American e-commerce is forecast to grow in the low 20% range in 2013.

"Being the largest player in this space, MercadoLibre is well positioned to capture much of the incremental growth going forward," Su said.

As to rivals,Amazon.com ( AMZN ) has entered Brazil with Amazon Web Services and a digital Kindle store, Bartley notes. And MercadoLibre expects Amazon to enter the marketplace business at some point, but it believes it "can compete against Amazon effectively."

In terms of competition outside the MercadoLibre marketplace, the firm is most focused on eBay, he says. Ebay owns about an 18% stake in MercadoLibre.

"Management believes eBay has an advantage in technology, but MercadoLibre is innovating to close the gap," Bartley said.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas
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