Looks Toward Growth in Rural Chinese Networks as Key for Q3
Chinese e-commerce giant JD.com, Inc. (NASDAQ:JD) reported second quarter results on Tuesday, August 13, smashing its own revenue guidance and hitting a net profit on the bottom line. JD’s founder and CEO Richard Liu continues to push revenues for the e-commerce platform despite concerns about the ramifications of the trade war between the U.S. and China, and the Chinese retailer – backed by Walmart and Alphabet – reported Q2 net revenues nearing $22 billion while JD’s shares soared in the days following the report. Equally, if not more importantly, JD.com reported a sharply increased margin corresponding with company management raising adjusted net income guidance to between $1.13 billion and $1.35 billion for the full year – an impressive swing into the black after full-year losses for the past three years. For the days and months to come, Liu aims to ramp up logistics and fulfillment operations while the retailer invests in strengthening operations in local markets.
JD.com reported sales boosts from its anniversary promotional event this June, as well as recent partnerships with fashion and luxury houses – 20 of which have joined the platform since April. JD also credited its impressive second quarter reports to a number of other improvements in the platform: the addition of new features to its membership incentive program JD PLUS, product additions to the “Consumer to Manufacturer” initiatives, enhanced environmental projects in its sustainability programs, increased efficiency in fulfillment and logistics operations with advancement in cold-chain services and global partnerships, and more merchants in its marketplace than ever. As JD’s reach continues to grow around the world, its cutting-edge retail infrastructure leads the industry in enabling consumers to buy whatever they want, whenever and wherever they want it – all the while continuing to add perks in services and partnerships in an unrivaled nationwide fulfillment network that provides standard same- and next-day deliveries, covering a Chinese population of more than one billion – a level of service and speed unmatched globally.
“Highlighted by our successful June 18 anniversary sales event, JD’s strong performance in the second quarter further demonstrated the resilience of our superior business model in a highly competitive industry,” said Liu in a statement. “JD’s commitment to bringing users the best overall shopping experience continues to win over consumer mindshare. We will remain focused on leveraging technology and innovation to enhance our offerings, increase efficiency, and drive shareholder value for the long term.”
After releasing the second quarter report, JD.com saw its shares jump nearly 13 percent in New York trading to $29.69 overnight. The $21.9 billion revenue reported was one billion dollars over analysts’ forecasts and the company posted a surprise profit. The improving profitability picture helped propel JD’s shares higher in U.S. trade, adding about $5 billion to its market capitalization. “Profits in the long run will continue to grow,” Liu said on an earnings call the next day as shares of his company soared over 46 percent year to date.
“JD.com delivered robust growth in the second quarter across our key metrics of revenue, profitability, cash flow, and customer base,” said JD CFO Sidney Huang in the official second quarter statement. “Our economies of scale and innovative technologies are driving operating efficiency and further strengthening our business model. Looking ahead, we will continue to invest in user experience and our talented workforce to further grow the business and create value for all of our stakeholders.”
Key Factors in Q2 Growth
JD.com reported a wide variety of “business highlights” in the second quarter, spanning partnerships, new services, and advancement in logistics operations and community initiatives. Leading the Q2 report was, as Liu pointed out, a widely successful anniversary sales event. The mid-year consumer event – a massive draw for the Chinese population each year – set a new sales record, recording $17.6 billion in transaction volume for the first 18 days of the sale, increasing transaction volume well over 50 percent compared to the 6.18 event in 2018. As recognition of the 6.18 event grows in the market, the anniversary drives new users to JD.com while the platform helps participating brands build name recognition and loyalty. The 2019 event saw a strong gain in categories dominated by women – fashion, luxury products, and maternal products – as the number of female first-time customers on JD during the 2019 anniversary event was nearly double over 2018. In addition to the surge of female shoppers, JD reported a number of other astounding metrics: 80 percent of orders bought from JD on 6.18 were delivered on the same or next day, and the $17.6 billion transactional volume reported included over 700 million items and 7,664 tons of fresh food – a metric that nearly quadrupled from 2018.
Online business got a boost from 20 new fashion and luxury house partnerships on the platform, including French apparel labels Sandro and Maje, British leather goods company Mulberry, and Italian high-end footwear brand Giuseppe Zanotti. The anniversary sales event also saw the addition of a partnership with three of Prada’s brands – Prada, Miu Miu, and Car Shoe – opening dedicated stores on the site.
The retailer also credited gains in Q2 with additional partnerships to expand its customer reach, adding incentives to shop across platforms. For JD PLUS, partnerships with 19 international hotel brands provided members with more benefits than ever before, including special discounts, room upgrades, and extra loyalty points at over 15,000 hotels worldwide. Started in 2016, JD PLUS is a premium membership program offered by JD – the first program of its kind in China – with a bevy of lifestyle offerings, including bundled memberships with key partners such as Sam’s Club, iQIYI, and Tencent Video.
JD.com’s joint venture Dada-JD Daojia – China’s leading on-demand logistics and omnichannel e-commerce platform – has partnered with over 300 well-known chain retailers and continues to grow its offerings through cooperation with other retail brands. Dada-JD Daojia teamed up with over 30 cosmetics and home retailers to launch a dedicated channel for home and fashion products on its platform. In the second quarter, Dada cooperated with JD Logistics to provide fast intra-city delivery services for merchants and consumers, with most goods delivered within 30 to 60 minutes.
As part of JD’s Consumer to Manufacturer initiative leveraging its capabilities in big data and consumer insights, JD.com continued its famed collaboration with brands and manufacturers to tailor products specifically for its consumers. Leading Chinese appliance manufacturer TLC partnered with JD this April to launch three new customized smart appliances specifically for the Chinese consumer market. Additionally, JD worked on C2M projects with top food and beverage company Nestlé, optimizing product options to support customer needs for a larger variety of flavors.
In April, JD Logistics introduced its new cold chain service, utilizing idle capacity in the industry to offer cold chain transport services, partnering with iconic American food and treats brand Dairy Queen for the global debut of its ice cream tubs. Combined with JD Logistics’ previously launched cold chain services, the new service has formed a one-stop shop F2B2C cold chain delivery system to meet the service demands of manufacturers, merchants, and consumers.
Also during the second quarter, JD strengthened its lead in the industry with expanded fulfillment capabilities, operating approximately 600 warehouses as of June 30 and covering an aggregate gross floor area of over 15 million square meters. Approximately 2.5 million square meters are managed in this space under the JD Logistics Open Warehouse Platform. Leveraging JD Logistics’ sophisticated warehouse systems, the JDL Open Warehouse Platform was launched in late 2017 and consolidates warehouse capacity from partners to offer merchants and retailers convenient and flexible warehouse management solutions.
JD continued in the second quarter to place a focus on enhancing its Environmental, Social, and Governance (ESG) program that oversees sustainability efforts in China and creates outreach on a global scale. On World Book and Copyright Day in April, JD Logistics, JD Foundation, the China Children and Teenagers Foundation, and the Stars Youth Development Center teamed up to launch the “Book Sharing Project,” using JD’s leading logistics network to distribute donated children’s books in rural areas to nearly 250 primary schools, kindergartens, and community libraries. In June, JD, Disney China, and China Charities Aid Foundation for Children launched a used toy donation project, enabling consumers from 10 cities to reserve free pickups on the JD app. JD continued its annual mission this year in the second quarter with World Wide Fund for Nature (WWF) in support of the Earth Hour movement, using its nationwide logistics to allow clothes to be picked up by its customers and distributed to recycling facilities. A new addition this year is JD’s partnerships with Mead Johnson Nutrition and Wyeth Nutrition to collect and recycle empty infant formula cans to be transformed into pencil cases that the company distributed to disadvantaged schoolchildren. “With its comprehensive in-house logistics network and vast consumer base of more than 300 million customers, JD.com is the priority partner in our efforts to promote sustainability in China,” says Lunyan Lu, chief operating officer of WWF China. “Considering JD’s influence as an industry leader, its commitments and actions help to promote sustainable consumption in China and set a good example for practicing social responsibility in all sectors of society.”
A Look Toward Q3
A closer look at the second quarter numbers shows that JD.com is finally benefiting from its investments in technology. In addition to its logistics network, this infrastructure includes an industry precedent in artificial intelligence and drone delivery services, as well as the company’s plans to open one million convenience stores, dubbed “the supermarket of the future,” over the next few years. The second quarter reports indicate that the company’s spending on logistics investments is beginning to pay off, as JD CFO Huang pointed out that fulfillment expenses as a percentage of net revenues decreased to 6.1 percent in the second quarter – the lowest reported since the company went public in 2014. Overall fulfillment costs did rise, but the company also revealed that its logistics business broke even from an operating income perspective. “We are seeing operating leverage,” Huang said, noting robust July sales numbers in the first month since the end of the second quarter.
In an interview with CNBC following the second quarter earnings call on August 13, Huang said that JD’s focus for the future is also geared toward new, local buyers in smaller Chinese cities. “Given perhaps the trade tension, more and more manufacturers will actually turn their attention to (the) domestic market,” said Huang.
As most of the tech-savvy smartphone users in China’s big cities already shop online, JD.com is setting its sights on big investments in the years ahead to push the boundaries of China’s e-commerce capabilities while strengthening its in-house logistics network. “This is a phenomenon actually already happening for quite some time, slowly, that there are excess capacities for those manufacturing facilities… there are a lot of very low-priced products at good quality they used to produce (as) branded products for global brands,” said Huang. “So we think it’s a good opportunity for us to reach down to those quality manufacturers, so we can provide those products at a really good value to our consumers.”
Liu also stated this objective in the earnings call, declaring JD’s interest in increasing its investment to the growth of small Chinese cities. “In the future, we’ll continue to enhance our user experiences and also gain more potential customers from third- to six-tier cities. We’ll continue to invest in our technologies and improve our management to reduce costs and improve profitability.” And with a growing logistics network, JD.com has the resources to make this growth happen, making a pledge to invest $253.1 million this year in a move to boost its presence in smaller cities and villages across the country.
These announcements come as growing purchasing power in smaller cities and rural China is turning heads. With Beijing’s efforts to push economic development inland, combined with generous government subsidies on the purchase of a slew of home appliances, residents in areas once viewed as economic dead zones have transformed into the new driving force of the country’s consumption upgrade. In the first half of 2019, per capita consumption expenditures in rural China surged 6.4 percent from a year ago, outpacing the national average of 5.2 percent, according to the National Bureau of Statistics of China. The figure was also higher than the 4.1 percent growth of urban dwellers – head turning numbers that prove JD’s foresight in investing time and money in growing logistics operations in these areas.
Last week, JD confirmed the appointment of a new head of investments, Jason Hu, strengthening its investment arm in creating new national and overseas deals. Investments in Vipshop Holdings Limited – an apparel platform in which JD invested $863 million, now valued at around $6.5 billion – and Chinese luxury e-commerce platform Seecoo are the company’s major at-home investments. An investment to get a minority stake in London-based retailer Farfetch – a luxury e-commerce site valued at around $3.1 billion – is JD.com’s latest high-profile deal overseas. Together with its biggest investor, Tencent, JD just announced the purchase of Bitauto – a marketing platform on which Chinese car companies can buy data about prospects and their buying behaviors. JD.com owned just over 25 percent of the company, while Tencent held a 7.81 percent stake when the statement to take the company private was made.
Looking ahead, management expects third quarter revenue to land near $18.1 billion, representing a year-over-year growth rate around 20–24 percent in local currencies. Huang also expects adjusted full-year earnings to of about $1.26 billion, reflecting both continued macroeconomic uncertainty and generally expanding net margins.
Second Quarter 2019 by the Numbers
Net revenues for Q2 2019 hit $21.9 billion – a 22.9 percent increase from the second quarter of 2018, while net service revenues reached $2.4 billion, an increase of 42 percent.
Cost of revenues increased by 21.2 percent to $18.7 billion, credited to the growth of the company’s online direct sales business and the logistics services provided to third parties.
Fulfillment expenses – which primarily include procurement, warehousing, delivery, customer service, and payment processing expenses – increased by 11.4 percent to $1.3 billion in the second quarter of 2019. Fulfillment expenses as a percentage of net revenues decreased to 6.1 percent in the second quarter of 2019, compared to 6.7 percent in the same period last year, mainly due to economies of scale from enhanced logistics capacity utilization and staff productivity.
Marketing expenses increased by 6.8 percent to $0.8 billion.
Technology and content expenses increased by 34 percent to $0.5 billion in the second quarter of 2019 as a result of the company’s continued investment in top R&D talent and technology infrastructure.
General and administrative expenses increased by five percent to $0.2 billion.
Income from operations for the second quarter of 2019 was $330.2 million, and non-GAAP income was $468.7 million, with a non-GAAP operating margin of 2.1 percent.
Net income attributable to ordinary shareholdersfor Q2 2019 was $90.1 million, and non-GAAP net income attributable to ordinary shareholders increased by 644 percent to $518.4 million.
Diluted net income per ADS for the second quarter of 2019 was $0.05, and non-GAAP diluted net income per ADS was $0.33.
Operating cash flow for the 12 months that ended on June 30, 2019, increased to $4.6 billion.
Free cash flow, which excludes the impact from JD Baitiao receivables included in the operating cash flow, for the 12 months that ended on June 30, 2019, increased to $1.1 billion.
Annual active customer accounts increased to 321.3 million in the 12 months that ended on June 30, 2019, from $310.5 million in the 12 months that ended on March 31, 2019.