China-based LightInTheBox Holding Co., Ltd. (LITB) is a global direct-to-consumer online retailer focusing on budget-friendly apparel and fashion accessories along with a growing assortment of general merchandise, home goods, and gadget type of electronics. The company is finding success in utilizing social media for marketing which is generating strong sales growth and firming earnings. Indeed, the stock is up over 160% year to date, benefiting from broader trends in e-commerce since the emergence of the COVID-19 pandemic. We like LITB which is proving to be a market leader in its retail niche, building on strong relationships with local suppliers and a global logistics network. The company is profitable with overall solid fundamentals and we see more upside for the stock with continued momentum.
LITB Financials Recap
LightInTheBox last reported its Q2 earnings back on August 19th. It was a blowout quarter by most metrics with revenues climbing 96% year over year to $114 million. Net income of $8.5 million, or EPS of $0.08 per share, reversed a loss of $7.3 million in Q2 of 2019. The company ended the quarter with $55 million in cash and equivalents, highlighting a rock-solid balance sheet with no financial debt.
(Source: Company IR)
Over the trailing twelve months, revenues have reached $300 million, while net income has also climbed steadily. The company has now generated a profit in each of the last four quarters going back to Q3 of 2019. Operationally, LITB has seen an increase of both new customers and existing customers placing more orders.
For reference, the majority of the business is generated in the Asia region which remains the growth driver, although the European market at 35% of total sales and North America at 15% in 2019 have seen stronger trends this year. Growth in general merchandise has balanced softer trends in the apparel segment in recent years. Products are marketed through various platforms like Google search (GOOGL)(GOOG), and Facebook (FB) which drive traffic to the portfolio of company-owned branded sites in various markets and languages including ‘lightinthebox.com’ and ‘www.EZbuy.com’.
(screenshot of LightInTheBox e-commerce site)
The story here has been firming margins over the past year. The gross margin reached 43.5% in Q2, up 160 basis point from the period in 2019. The trend was explained by a combination of top-line growth along with improved terms from suppliers limiting the cost of goods sold. Separately, within operating expenses, a lower fulfillment cost over the first 6-months of the year representing 7.5% of total revenues, down from 9.3% over the period last year has been a positive development. The company has also been able to control general and administrative costs which declined to 8.9% as a percentage of revenues compared to 25% in the first half of 2019. Overall, the company is benefiting from its expanding scale.
The efficiency trends here are indicative of progress towards the company’s growth strategies announced last year. According to management, the company has improved its technology to optimize its supply chain. Secondly, the product mix is now more focused on higher-margin categories in an effort to improve the total order value. Finally, from the earnings conference call, CEO Jian He took an optimistic tone on the recent performance which sets up a positive long-term outlook for growth.
Our solid performance this quarter shows that our rapid response to the adverse working conditions caused by the coronavirus has been a success and is an encouraging sign to revamp of the strategies we laid out last year is in fact getting strong results as we focus on driving long-term sustainable value for shareholders. Our ability to drive greater operating leverage, expand our user base and to generate more order flow from existing users is the product of our team’s tremendous commitment, focus and hard work. And I am very proud of their work so far in 2020. As we look ahead to more progress in the third quarter, I am confident that we are well-positioned to scale the business further, improve profitability, to drive top line growth in years to come.
Analysis and Forward-Looking Commentary
During the Q2 earnings conference call, management guided for Q3 revenues between $95 and $110 million, representing a year over year growth rate between 59% and 83%.
For the third quarter of 2020, based on current information available and business seasonality, the company expects net revenues to be between $95 million and $110 million, representing a growth rate between 59% and 83% compared with the third quarter of 2019.
Given the relatively low-profile of LightInTheBox, consensus estimates are unavailable. Nevertheless, considering the results from the first two quarters of 2020, we expect the earnings trends to continue. Assuming a conservative flat profit margin of 5% for the next two quarters compared to 7.5% achieved in Q2, a back of the envelope calculation suggests LightInTheBox is on track to reach full-year 2020 EPS of at least $0.20 as a conservative estimate.
By this measure, the stock is currently trading at forward P/E multiple of 13.4x. Keep in mind this is in the context of a company that nearly doubled revenue in the last quarter with an unleveled balance sheet. We believe the stock is cheap and has room to climb significantly higher as the growth story is confirmed over the next couple of quarterly results.
Recognizing each company has a different business model, we highlight that LITB trades at a significant discount to much larger online retail players like JD.com (JD) and Alibaba Group Holding (BABA). Notably, LITB growth momentum is significantly stronger and benefits as a more global player while JD and BABA are more concentrated in the Asian region. LITB is the value pick in this group with significant growth potential.
LightInTheBox is a relatively straightforward e-commerce player that isn’t trying to be too many things. We like the simplicity of the business that serves an important market segment for apparel basics, gadgets, and novelty items that often take a back seat on larger e-commerce sites. While LITB is not necessarily attempting to compete or replace the larger players, the strength and competitive advantage of LITB are its supplier relationships allowing for exclusive product listings with a global reach through a well-developed logistics operation. The results in the last quarter show that the business model is working.
The Big Picture
While shares are up significantly year to date, the stock is still down about 15% from a high of $3.27 reached in early August. We think that level represents an obvious first target to the upside from here ahead of the Q3 earnings to be released in December. We are bullish on shares and think another strong report can confirm the sustainability of the recent momentum to command a higher premium. We rate shares of LITB as a buy with a price target of $4.00 per share over the next year.
In terms of risks beyond a complete deterioration to the global macro outlook, a setback would be weaker than expected Q3 report which would force a pullback of sentiment towards the stock. Even as fundamentals are strong overall, keep in mind LITB remains a high-risk stock given its current market cap of $340 million and exposure to cyclical trends. Monitoring points for investors include trends in the gross margin and any insight by management on growth opportunities into new markets.
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Disclosure: I am/we are long LITB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.