Key Takeaways
- Shein's shares fell 14% to a record low after reporting a 67% drop in quarterly profit.
- Investors worry about margin pressure and slowing growth, despite continued order growth.
- European sales dropped due to price hikes and reduced advertising amid new EU fees.
Shares of fast-fashion retailer Shein experienced a significant decline, plummeting 14% to a record low on Tuesday. This sharp drop followed the release of the company's first post-IPO financial results, which revealed a 67% decrease in quarterly profit.
Analysts and investors have been closely monitoring Shein's performance, particularly as the company transitions from its rapid growth phase to a more mature market presence. The steep decline in profits has raised concerns about the company's ability to maintain its margins and sustain growth.
According to Jianggan Li, CEO of Singapore-based consultancy Momentum Works, '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.'
Jefferies analysts estimated that earnings for the quarter ended June 30 were more than 10% below the range implied by Shein's prospectus. As a result, the company's market value dropped from approximately $26 billion at the time of its Hong Kong IPO on September 1 to about $17 billion by midday on Tuesday.
The decline in profit was attributed to a squeezed margin of just 2.1%, down from 6.2% last year, due to increased costs for jet fuel and freight. These expenses were driven by conflicts in the Middle East, which affected the retailer's ability to send cheap clothes by air to customers worldwide.
Sales in Europe took a hit as Shein increased prices and reduced online advertising in anticipation of €3 fees imposed by the European Union on low-value e-commerce parcels starting July 1. This move, aimed at mitigating the impact of the new fees, led to a sharp drop in European sales.
In response to these challenges, Shein CEO and Chair Yangtian Xu stated that the company's key priority is to increase inventory in Europe. Additionally, Shein plans to expand into higher-priced clothing items to boost its profitability. The company has previously noted that it was forced to raise prices in the US last year due to the end of de minimis duty-free access for low-value e-commerce parcels under the Trump administration.
Despite these challenges, Shein continues to see growth in orders and is diversifying its market presence. However, the recent profit slide and the concerns over margin pressure and slowing growth have left investors and analysts questioning the company's future trajectory.
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.
Jianggan Li, CEO of Momentum Works
