LightInTheBox Holding Co., Ltd. Q2 FY2021 Earnings Call

Good morning everyone, and welcome to the Second Quarter of 2021 earnings conference call for LightInTheBox Holding, Co, Limited. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Rene Vanguestaine for opening remarks and introductions. Please go ahead, Sir.

Thank you, Rae. Hello, everyone, and welcome to LightInTheBox Second Quarter 2021 earnings conference call. The Company's earnings results were released earlier today and are available on the Company's website through PR Newswire. Today you will hear from LightInTheBox CEO Mr. Jian He who will give an overview of the Company's strategies and recent developments, followed by Ms. Yuan Jun Ye, the Company's Chief Financial Officer, who will go over the financial results. Together with them today is Wenyu Liu the Company's Chief Growth Officer. All will be available for the Q&A after the prepared remarks. Before we proceed, I would like to remind you of our safe harbor statement. Please note that the discussion today may contain certain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. To understand the factors that could cause results to materially differ from those in the forward-looking statements, please refer to our Form 20-F filed with the Securities and Exchange Commission on April 21, 2021. We do not assume any obligation to update any forward-looking statements, except as required under applicable law. At this point, I'd like to turn the call over to Mr. He. Mr. He, please go ahead.

Thank you, Rene. Thank you, everyone for joining us today. Following the start of the first quarter, we continued to achieve stable year-over-year growth in the second quarter. Total revenue reached 122.2 million, up 7.3% from the same period of 2020. Our gross profit margin in Q2 was 46.8%, higher than 43.5% in that same period of 2020. Adjusted EBITDA grew by 59% year-over-year. Total revenues from the first half of this year grew to 324.2 million, representing a 41.6% increase from the first half of 2020. From a macro perspective, as of estimation rates around the world include people engaging in more outdoor and social activities with family and friends, as well as offline shopping at retail stores and malls, is a positive phenomenon and we are pleased to see this happen. In the long run, we believe that online and offline shopping can complement each other for a better shopping experience. Overall, our sales in Q2 continued to sustain a healthy growth momentum. Product sales increased by 11% year-over-year, and apparel sales increased by 149%, which contributed 62% of the total product sales in Q2 compared with 28% in Q2 last year. For the first half of the year, apparel sales grew by 56% from the same period of last year. The strong performance is attributable to our selected portfolio and continuous efforts in enhancing our customer's shopping experience. On the other hand, we believe that investing in R&D is a critical element to maintaining a solid position against the increasing competition. Our R&D expense increased by 52% year-over-year to 5.1 million in Q2, as we continued to strengthen our R&D capabilities. The pandemic has accelerated the shift towards online shopping but has also attracted more competition in the e-commerce space from new and established players. Currently, we are still facing economic uncertainties partly due to the resurgence of Coronavirus in several countries. We will continue, as we have in past quarters, to implement strategies to enhance our platform, making it more responsive and user-friendly, so that our customers can enjoy the comprehensive convenience of online shopping even more on our websites and mobile app. I will now turn the call over to Yuan Jun to go through the financial results.

Thank you, Mr. He, and thank you everyone for joining the call. I will now review our financial results for the second quarter. Please be reminded that all numbers quoted are in U.S. dollars. Total revenue was 122.2 million, up 7.3% year-over-year from 113.9 million. This was mainly driven by strong growth in product sales, which were 119.3 million versus 107.2 million in the same period in 2020. Revenues for our services and others was 2.9 million compared with 6.7 million. Included in product sales, revenues from apparel increased by 149% to 74 million in the second quarter of 2021, compared with 29.7 million in the same quarter of 2020. Gross profit was 57.1 million, compared with 49.6 million during the same period last year. Gross margin was 46.8%, up from 43.5% in the same quarter of 2020, primarily due to our continued efforts to optimize the supply chain economy. Total operating expenses were 60.6 million compared with 41.4 million during the same quarter of 2020. The increase was mainly due to higher selling and marketing expenses. Fulfillment expenses were 7.6 million compared with 7.4 million in the same quarter of 2020. As a percentage of total revenues, fulfillment expenses were 6.2% compared with 6.5% in the same quarter of 2020 and 6.5% in the first quarter of 2021. Selling and marketing expenses were 43.5 million, compared with 26.5 million in the same quarter of 2020. As a percentage of total revenue, selling and marketing expenses were 35.6% compared with 23.3% in the same quarter of 2020 and 31.8% in the first quarter of 2021. The increase was due to high expenses for online advertising from leading ad providers. G&A expenses were 9.5 million, compared with 7.5 million in the same quarter of 2020. As a percentage of total revenue, G&A expenses were 7.8% compared with 6.6% in the same quarter of 2020 and 7.5% in the first quarter of 2021. Included in the G&A expenses, R&D expenses were 5.1 million compared with 3.3 million in the same quarter of 2020 and 4.9 million in the first quarter of 2021. Other income net in the second quarter of 2021 was 17.2 million compared with 0.3 million in the same quarter of 2020. Included in other income net, in the second quarter of 2021, 17.1 million was derived from changes in fair value on our equity investment. The gain in fair value change on our equity investment after respective income tax of 4.2 million was 12.9 million. Net income was 9.5 million compared with 8.5 million in the same quarter of 2020. Net income per ADS was $0.8 compared with $0.8 in the same quarter of 2020. Adjusted EBITDA, which represents income from operations before share-based compensation, interest income, interest expense, income tax expense, depreciation, and amortization expenses, was 14.5 million in the second quarter of 2021 compared with 9.1 million in the same quarter of 2020. As of June 30, 2021, we have cash and cash equivalents, restricted cash of 58.2 million compared with 65.5 million as of December 31, 2020. Our revenue growth and net income in the past quarters have validated our well-established growth strategy. As we continue to maintain business continuity in the upcoming quarters, we expect to face challenges in the highly competitive markets, and we will continue to implement our long-term growth strategy to optimize user experience across our platforms and mobile apps. The commitment of our experienced management team, leading our operations and our R&D and technology innovation has given us the solid foundation we need to stay well-positioned in the industry. However, it is unlikely to determine whether any business fluctuations amidst the current economic dynamics are likely to materially affect our operations. To focus on long-term goals and avoid overly emphasizing short-term objectives, we will not provide revenue guidance for the Third Quarter of 2021. This concludes our prepared remarks. At this point, we are ready to take some questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. The first question comes from the line of Matthew Larson from Martial. Please go ahead.

Okay. Hi, thanks for taking my call. Good evening to you all. Okay. It was nice to see the top-line growth and the bottom line. I guess the bottom line, a lot of it is derived from a derivative revaluation. What does that derive from?

It is the investment gain.

On what? I guess, what's the investment?

Hi, Mr. Matthew Larson. This is an investment in a company that we invested in several years ago whose business was selling cosmetic products.

Okay, so it's a related business. It's retail. And do you maintain that business investment exposure so that could impact, hopefully positively in the future just as it did this quarter?

We are just a shareholder. We do not maintain the business in this investment capacity.

As a shareholder in a retail business, specifically in cosmetics, which is reflected as an asset on your balance sheet, is this in addition to the approximately 50 million you have in cash? Additionally, do you also hold securities in this business? Is that correct?

Okay. This investment gain is based on the company which raised capital and our initial investment gained value according to the new equity raised in this company.

The gain is quite nice, and it's beneficial to have investments in addition to cash since there is plenty of cash on the balance sheet. The investment appears to be performing well. I'm trying to understand the assets on the balance sheet, considering there is no debt. You have cash and this investment in a company. Could you estimate the total value of your investment based on the end of the second quarter?

The total value of this company, I think is not available information that we could disclose. The long-term investments that you are seeing on our balance sheet were valued according to U.S. GAAP with the relative methodology. It is not totally equivalent to the value of these investment companies.

Okay. But it increased by 12 or 13 million, so the overall value of the investment must be higher than that. This helps me better understand the value of your company, in addition to the operational value we can assign to you based on your ability to generate revenue.

Yes. As we are only a managing shareholder, and we are in different markets, the methodology behind is quite different. It's really hard to explain or to compare the value of this investment company.

Okay, very well.

But what you can see is okay, please go ahead.

I was mentioning that if we could understand the value of your past investments, particularly their current value based on GAAP accounting, we could include that in your book value. As an investor representing several others with solid exposure to your company, I see this as a positive. I was unaware of other assets you have that could enhance the overall value of LightInTheBox, in addition to your cash and your operating capabilities. This is definitely a positive aspect for you. Regarding your guidance, as you pointed out, you won't be issuing it due to high competition, and the impacts from COVID are still felt in the PRC as they are elsewhere. Retail is inherently competitive, yet your performance over the past year has been outstanding; you've achieved four consecutive quarters where you doubled your previous year's revenues. Although you didn't achieve that this year due to tough comparisons with last year, you still posted an improvement, which is commendable. However, on an operational level, you experienced a small loss. Notably, SG&A expenses rose significantly from 26.5 to 43.5. This increase seems considerable. Is it primarily due to higher sourcing costs related to shipping and other factors that might decrease in the future, potentially reducing SG&A as a percentage?

Okay. As for G&A expenses, the absolute value will most likely stay low. So if the revenue continues to grow in terms of G&A expenses, the percentage will definitely decrease.

The revenue increased by 7%, which is impressive compared to last year’s 100% growth. Last year, SG&A was $26.5 million, but this quarter it jumped to $43.5 million, significantly impacting the bottom line. Is it expected that SG&A will be more manageable in the future relative to revenue? Can we anticipate it to be a smaller percentage of overall sales?

Yes, we can.

Okay. Just to be clear, you mentioned that these releases are quite basic. The SG&A increased by $17 million from 26.5% to 43.5%, which represents a rise of 60% or 70%. Sales grew by 7%. What caused the surge in SG&A? I understand that in the U.S., there are bottlenecks and shipping costs for containers coming from Asia, particularly China, have significantly increased, which has raised costs for everyone. Is this true for your situation? If the tightness in supply chains eases, would your SG&A become a smaller percentage of your overall sales, potentially leading to greater profitability?

Okay. For the absolute value as you have mentioned, this jump, as compared to last year, there are two reasons. One was because last year we had some subsidies from the government due to COVID-19. But this year, there are no more that kind of subsidy. The other reason was caused by R&D expenses, as mentioned earlier.

Okay. Alright. That makes sense to me. The R&D went up fractionally and it's important that you continue to invest in your platform.

Yes. This number then should remain stable.

This number, what I'm sorry?

This number will remain stable in the future, at least for this year.

Okay.

For this year.

It's good to know that. If you can continue to grow, what I'm getting at is that your company had been stagnant for many years after going public. However, your revenue has recently shown excellent top-line growth. This suggests that more people are shifting their purchases online rather than elsewhere. You provided limited guidance, is that because it's difficult to assess, or is there a slowdown, or another reason for not being able to provide guidance when we are nearing the end of the quarter?

Okay. For this quarter, honestly speaking, there are some uncertainties we are facing right now, as mentioned earlier by our CFO. So it's unlikely we can provide accurate guidance right now.

Okay. And when you have that capability, will you announce it before earnings announcements, or will you be able to provide guidance and pre-announce those types of things?

I think we are not planning to have another release, but we will try to have an early release for Q3 Quarterly Report.

Okay. And then maybe finally, do you expect to be profitable for the year or is that based also on the other investments that change in value?

We can't predict the final profitability for the whole year. What we know now is the first two quarters' results.

I see. Okay. You only know what you've done so far, but you can't predict the rest of the year. And is that your company or is that you find with a lot of online retail companies like yourselves in the PRC? Is that just what most of your competitors are probably not able to do?

Let me provide a few reasons. Firstly, due to the macro environment, vaccination rates are continuing to rise, and people are increasingly participating in outdoor activities. Consequently, the online segment is experiencing some impact. Other companies are seeing a similar trend, which is one factor. The second reason is the influx of many new players into the cross-border e-commerce sector, creating additional challenges through heightened competition. Additionally, we are encountering uncertainties in certain countries due to the effects of COVID-19. Therefore, it becomes quite challenging for us to provide guidance for Q3 and for the entire year.

Okay. But you do expect to be profitable for the entire year.

No. We can't make a prediction.

because you're already at 10 cents?

We can't make this conclusion right now.

You can't make any predictions?

Yes, we can't.

Your company is significantly undervalued compared to many other online merchants. Currently, the value of your company is only about 25% to 33% of sales, which is quite unusual. Typically, companies with your business model trade at two to three times their sales. Moreover, you have a very strong and solid balance sheet, making it comfortable for investors. The key challenge is converting your top-line sales into bottom-line profits since your stock value is so low. So let me ask you this: are the principles of the firm satisfied with your stock price, or are you looking for it to increase? Because it has decreased by 70% to 80% from its peak, despite your revenue growth and clean balance sheet. Are you interested in increasing the stock price through buybacks or other strategies, such as acquisitions?

Okay. First of all, Matthew, I think we do appreciate that you have done a lot of analysis on this company, as far as this market. We do appreciate that. And I do appreciate that you see the value in this company. But for the stock price, we don't have any comments right now. As for whether we want to transact the stock price, I think that's another topic. This is a difficult question, and we will bring this to our board and initiate some discussion. At the same time, I think if you have any further questions, we can keep in touch after the call. You can find our email address on the IR website. We do appreciate all of your questions and suggestions.

Okay. I'll appreciate that. I'll let somebody else jump in here if there are people waiting. Thank you for your time. Good luck.

Thank you so much.

Thank you, I will now hand the call back to Rene Vanguestaine for any closing remarks. Please go ahead.

Thank you, Ray. This concludes our call for today. Thank you for your participation and ongoing support of LightInTheBox. We look forward to providing you with updates on our business in the weeks and months ahead. Have a good day.

Thank you. Bye bye.

Thank you. That concludes your conference for today. Thank you for your participation. You may all disconnect your lines now. Thank you.