Shares of fast-fashion’s Shein plunge 14% to record low after profit slides 67%

[HONG KONG] Shares of fast-fashion retailer Shein tumbled as much as 14 per cent on Tuesday (Sep 29) after it reported a 67 per cent fall in quarterly profit in its first post-IPO results, fuelling investor concerns over margin pressure and slowing growth.

Investors and analysts have been closely watching for signs that growth is moderating from the breakneck pace that propelled Shein’s rapid rise and underpinned its plans for a stock market listing.

“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, CEO of Singapore-based consultancy Momentum Works.

Jefferies analysts estimated earnings for the quarter ended Jun 30 came in more than 10 per cent below the low end of the range implied by the China-founded and Singapore-headquartered company’s prospectus.

The share plunge left Shein with a market value of about US$17 billion as of the midday break on Tuesday, down from roughly US$26 billion when it went public in Hong Kong on Sep 1. The stock was down 10.9 per cent at HK$31.44.

Adjusted net profit was US$228 million for the second quarter, down 67 per cent from a year ago, and its margin was squeezed to just 2.1 per cent from 6.2 per cent last year as conflict in the Middle East pushed up jet fuel and freight costs for the retailer that sends cheap clothes by air to shoppers around the world.

Sales in Europe dropped sharply too in the quarter to end-June as Shein hiked prices and cut online advertising in anticipation of 3-euro fees the European Union imposed on low-value e-commerce parcels starting from Jul 1.

Shein reported US$11.08 billion in sales for the second quarter, with Europe revenue down 13.9 per cent to US$3.77 billion and US revenue falling 6 per cent to US$2.5 billion. Overall sales were up 0.9 per cent from a year ago as growth in Latin America offset declines in Shein‘s biggest markets.

Since its Sep 1 debut in Hong Kong, Shein‘s shares have dropped 27.3 per cent from the offer price of HK$48.56 apiece, and the continued profit squeeze gave little to encourage investors.

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Shein‘s 18.1 per cent jump in fulfillment costs was well above Jefferies’ expectations and was concerning, they said, given this was already before the European fees kicked in.

In a statement, Shein CEO and Chair Yangtian Xu said a key priority was increasing the amount of inventory in Europe.

Shein has been investing in warehouse space in Poland, opening a logistics hub in Wroclaw with 740,000 sqm of warehouse space in December last year. Industrial real estate firm CTP said it has this year leased an additional 66,000 sqm of warehouse space to Shein in Poland.

Shein plans shift to higher-priced brands

Xu also said Shein plans to push into higher-priced clothes that will boost its profitability, and hinted at the company’s strategy of expanding its family of brands, including through acquisitions.

“As the product mix shifts towards brands at higher price points, the platform’s overall average selling price will rise accordingly,” he said in a statement. “Our vision is to become a richly diversified brand collection that meets consumers’ varied needs across multiple price points and occasions.”

Known for selling US$5 dresses and US$10 jeans and running permanent discounts, Shein was already forced to raise prices in the US last year when the Trump administration ended de minimis - duty-free access for low-value ecommerce parcels - and this year faces the same challenge in Europe.

Shein has said the European fees could have a bigger impact than the end of de minimis in the US. The 3-euro fees apply per product category, adding up to 15 euros if a shopper buys five different types of item in one order.

The EU is also planning an additional 2-euro handling fee on low-value ecommerce parcels, to be implemented from Nov 1, adding to the pressure on Shein‘s business model. REUTERS