Invest2 publishers2 min readPublished
Shein's profit margin shrinks to 2.1% from 6.2% in its first post-IPO results
Shein's quarterly profit fell 67% in its first results since listing, and its shares dropped as much as 14% in Hong Kong on Tuesday. At about $17 billion, against $26 billion at its September 1 debut, the price now depends on whether the thinner margin is temporary.
The Investor · Invest desk
What happened
- Jefferies estimated that earnings for the quarter to June 30 came in more than 10% below the low end of the range implied by Shein's own prospectus.
- European sales dropped sharply after Shein raised prices and cut online advertising ahead of a 3-euro EU fee on low-value parcels that began July 1.
- Chief executive Yangtian Xu said a key priority is putting more inventory in Europe, and the company plans to push into higher-priced clothes to lift profitability.
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Why it matters
- cost Investors who bought at the September 1 listing have absorbed about $9 billion of lost market value, a 35% markdown in four weeks.
- constraint With duty-free access gone in the US and a per-parcel fee in the EU, the low-price air-parcel model now pays a charge in both markets, and Shein itself says Europe's could cost more.
- decision Stocking Europe and selling pricier clothes puts cash into inventory before shoppers order and moves Shein away from the $5 dresses and permanent discounts it is known for.
A margin that goes from 6.2% to 2.1% has lost about 66% of itself, or 4.1 percentage points [2]. Profit fell 67% [1]. If both figures describe the same adjusted measure, sales were flat to slightly down on a year earlier [3], and dividing $228 million by 2.1% puts the quarter's revenue at roughly $10.9 billion [4]. Breakneck growth carried Shein's rise and underpinned its plan to list [13]. "Shein is still growing orders and diversifying across markets, but the scale of the margin compression and the weakness in Europe raise questions over how quickly it can return to a combination of stronger growth and improving margins," said Jianggan Li, chief executive of the Singapore consultancy Momentum Works [11].
By Tuesday's midday break the stock was down 10.9% at HK$31.44 [4]. Annualise the June quarter, crudely, and $228 million becomes about $912 million a year, so $17 billion is about 19 times adjusted earnings [5]. At the listing value the same sum gave about 28 times [6].
Suppose the jet fuel and freight costs that Reuters tied to the Middle East conflict [5] ease for a retailer that ships its clothes by air [6], and the margin returns to 6.2% on the same sales. Quarterly adjusted profit would then be about $673 million [7], and $17 billion would be roughly six times that rate annualised [9]. Suppose instead that Europe holds the margin near 2%. Then 19 times is a full price for sales that did not grow [3].
The European case has not been tested yet. The EU's 3-euro charge began on July 1, the day after the quarter closed, so the June numbers carry Shein's own price rises and advertising cuts [7] and none of the fee itself [8]. The September quarter is the first to include it [8].
I lean toward the European case. Fuel costs can fall, and a calmer Middle East would not remove a charge the EU set. Having cut its online advertising in Europe [7], Shein is not paying for demand there while it builds stock on the continent [8]. The counter-thesis is strong: if most of the 4.1 points came from freight, most of the margin comes back and the stock is cheap at six times recovered earnings [9]. Reuters' account does not split the margin fall between fuel and Europe. A September-quarter margin back near 6.2% with the fee in force would prove this view wrong.
What to watch
- Jet fuel and air-freight prices tied to the Middle East conflict, the cost Reuters linked to Shein's June-quarter margin squeeze.
- Whether Shein restores online advertising in Europe once more of its inventory sits on the continent.