NEW YORK (
came out on Monday with its second-quarter earnings which were highly disappointing.
The stock was down at one point over 16%. I was short the stock going into earnings and expect it to weaken over the coming days as analysts come out with their new price targets.
When I wrote about my expectations for the earnings on Monday in
, I pointed out that Dangdang's huge disadvantage competing in the e-commerce space in China against the likes of 360Buy and Tmall (part of Alibaba Group, which is 40% owned by
Even though Dangdang's stock is now down significantly from its post-IPO highs, I feel there is still a huge disconnect between American retail investors' perception (aided by Dangdang's IPO bankers) that this is the "
of China" and the reality of their place in the e-commerce landscape over there.
I expect that disconnect will start to disappear over the coming quarters.
Monday's earnings call was a bit of a shock to analysts and investors in terms of how much the margins had eroded in the quarter. They dropped from 19% to 14%.
Peggy Yuyu, co-founder and co-CEO with her husband, along with the Dangdang CFO, tried their best to spin it. At first, they explained the decline to to product shift. They hinted that they had sold more electronics in the quarter and those carried lower margins. Yet, when asked to be more specific about the mix of one category of sales and another in the quarter, along with margins for each, Dangdang declined comment.
Yet, as the call continued, they explained that competition had been particularly severe in the quarter and that they had to lower prices in order to compete.
At one point, Peggy said: "Our customers expect lower prices and we decided to give them the prices they wanted in order get them to buy and have a good experience and come back to us."
Later, she said: "We like competition. It's kind of like getting on an exercise bike. It makes us work hard but it makes us stronger."
Analysts kept coming back again and again to the question of margins in the Q&A afterwards. They asked if management expected the erosion to continue in the next quarter. They refused to offer any guidance.
Management expects better revenues in the third quarter, significantly higher than in the second quarter. They point to last year's jump up in third-quarter revenue as a seasonal reason why this should happen. However, the guidance was at the low end of analysts' prior expectations -- another reason why the stock came under pressure.
It's interesting to me that management reports historical revenues and earnings in both RMB and US dollars but then offers only top-line revenue guidance in RMB -- leaving it to journalists and analysts to figure it out for themselves.
Management is also spending a lot on building out their infrastructure and logistics for distribution. What they're not doing is spending a lot on marketing. These expenses were down. The company relied more on the group-buying sites. These shaved off 3% from the top-line.
The company's cash levels are dwindling. It still has over $200 million at the end of the quarter but it's far less than the $600 million
has as a result of their secondary offering a few months ago. Dangdang could do a secondary now, but it would take the down another notch.
Over the coming quarters, if I was 360Buy or Tmall, I would continue to turn the screws on folks like Dangdang. Its 2.2% marketshare and its margins should continue to decline.
At the time of publication, Jackson was long Dangdang, Youku and Yahoo!.
Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson