Personal Finance

Vipshop Stock Doesn't Earn Its Way Out of Its Slump

Vipshop's homepage, with a model showing off fashions and accessories

Vipshop Holdings (NYSE: VIPS) knows how to spot a bargain, but it remains to be seen if its investors have a similar knack. Shares of the Chinese online discounter of brand-name apparel initially slipped after the company posted second-quarter results on Wednesday afternoon.

Revenue climbed 30% to $2.58 billion, a tidy haul for most flash-sales specialists, and at the high end of the 26% to 30% growth it was targeting for the quarter three months earlier . Vipshop's top-line spurt was the result of a 23% uptick in orders -- it fulfilled 84.8 million orders during the three months ending in June -- enhanced by a 6% increase in average order size.

The double-digit revenue growth unfortunately didn't leave the rest of the income statement unscathed: Vipshop's adjusted earnings rose a more modest 8% to hit $0.17 a share. Analysts were expecting a profit of $0.19 a share, making this the first time in more than a year that Vipshop fell short of Wall Street's earnings estimates.

Vipshop's homepage, with a model showing off fashions and accessories

Image source: Vipshop Holdings.

Shopping for clues

Vipshop Holdings stock moved 5% lower in after-hours trading on Wednesday, ahead of the deep discounter's conference call with analysts on Thursday morning. The after-hours hit sent the stock into negative territory year to date. Unless the shares bounce back during the latter half of 2017, this will be the third year in a row that Vipshop stock closes lower, a sharp contrast for the former market darling: It had seen its stock more than double in each of the three years before that.

The bottom-line miss is rare for Vipshop, and a lot of moving parts are playing a role in the e-tailer's contracting profit margins. Gross margin declined, in part because of what Vipshop is calling promotional activities for market-share gain. However, that could also be a euphemism for cutthroat pricing in a competitive climate, something that weighed on Deutsche Bank analyst Alan Hellawell's decision to downgrade the stock this summer after observing industrywide discounting in June.

Operating margin also took a hit as fulfillment costs outpaced revenue growth. Vipshop has been building out its infrastructure, building new warehouses and expanding its proprietary last-mile network, which now accounts for 95% of all deliveries. It remains to be seen if these moves will temporarily suppress earnings growth, or if this is the new normal in a more competitive marketplace.

The market was nervous heading into Wednesday's report, closing lower in six of the seven previous trading days.

Vipshop still has a lot of things going for it. It had 28.1 million active customers during the quarter, 22% more than it was servicing a year earlier. Its balance sheet remains flush with cash. Vipshop is also eyeing 24% to 28% in top-line guidance that it's initiating for the new quarter.

The outlook implies decelerating growth, but we've seen Vipshop land at the top or exceed the top of its revenue range in the past several quarters. While the stock may be in a funk, as long as Vipshop keeps growing its fashion-hungry audience profitably, it's tempting to view this as a buying opportunity.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

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

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

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