Andy Feng/iStock Editorial by way of Getty Pictures
Ever since main on-line grocer Dingdong Cayman Ltd. (NYSE:DDL) reported its first ever non-GAAP revenue within the June quarter, observers have been asking if it could do it once more over the long-term. The query has gained urgency as its high rival Missfresh Ltd. (MF) now fights for its survival after years of burning by way of investor money that left its coffers dry.
Dingdong’s reply to the query is an adamant “sure,” which firm administration made to buyers following launch of its newest quarterly outcomes final Friday by reiterating a earlier pledge to realize non-GAAP breakeven by year-end. Its newest outcomes included large motion in that route with an 86% narrowing of its non-GAAP web loss, a generally used metric that sometimes excludes worker inventory compensation and another prices.
Traders preferred what they heard, with Dingdong’s shares rising 47% within the three buying and selling days after the discharge of its outcomes, together with an almost 20% bounce on the day of the announcement. Nonetheless, the inventory’s newest shut of $4.35 is down considerably from its IPO worth of $23.50 final June, and only a fraction of its $30 peak reached in late 2021.
Whereas the outcomes appear to point out the corporate is certainly inching in the direction of longer-term profitability, we also needs to level out that a lot of that enchancment is being pushed by cost-cutting, which can have partly led to its first-ever income decline in its newest outcomes.
We’ll take a deeper dive into Dingdong’s third-quarter outcomes shortly, and likewise have a look at a few of the main challenges it faces in its quest for long-term profitability. However first, let’s step again and evaluation its path to the current, together with its very-fast supply enterprise mannequin that helped gas its fast rise however was a rising supply of investor concern as a result of its heavy funding necessities.
Dingdong belongs to a bunch of grocery e-commerce firms utilizing a “frontline achievement grid” enterprise mannequin. That depends on networks of a whole bunch of warehouses personally operated by the corporate close to residential areas, permitting it to quickly ship groceries to customers’ properties, normally inside half-hour of an order’s placement.
Corporations utilizing the mannequin say it gives extra dependable and quicker service as a result of their sturdy management over their provide and supply chains. However such management comes at a worth, for the reason that mannequin requires possession of every part from product sourcing networks, to warehouses and supply fleets.
Dingdong has used that mannequin to develop shortly since its founding in 2017, tripling its income from 3.8 billion yuan ($540 million) in 2019 to 11.3 billion yuan in 2020, after which practically doubling that quantity once more final yr to twenty billion yuan. However heavy funding to realize that development additionally brought about its losses to balloon, doubling final yr to a staggering 6.4 billion yuan loss from the three.2 billion yuan loss in 2020.
Delivering earnings quickly?
With that large image background in thoughts, we’ll take our deeper dive into the corporate’s newest quarterly earnings that confirmed the massive enchancment within the firm’s backside line.
In a significant shift to enhance its profitability, Dingdong adopted a self-described “effectivity first” technique in final yr’s third quarter that included a wholesome dose of price controls. Beneath that technique, the corporate has made vital enhancements in its two main price classes – achievement expense and gross sales and advertising expense. Particularly, the 2 ratios as proportion of income dropped by 10 and 5 proportion factors, respectively, through the newest quarter.
The fee cuts helped to gas a major enchancment within the firm’s gross margin, which soared by 11.8 proportion factors to about 30%, versus 18.2% a yr earlier. The margin additionally acquired a lift from Dingdong’s rising deal with extra worthwhile product classes, together with non-public label merchandise, ready meals and self-processed meals, in line with a analysis notice from funding agency Jefferies.
The fee-cutting, deal with higher-end merchandise and ensuing margin enchancment helped Dingdong considerably pare its third quarter non-GAAP loss to 285 million yuan from practically 2 billion yuan a yr earlier.
However the large backside line enchancment got here at a price, as the corporate reported its first-ever decline in its top-line income, which fell 4% to five.9 billion yuan within the newest quarter. It blamed the drop largely on a excessive base for the year-ago interval, which was boosted by “intensive subsidies and concessions granted to our customers”, administration mentioned on the investor name.
Whereas the corporate is aiming to breakeven by yr finish on a non-GAAP foundation, buyers additionally need to know when it can grow to be worthwhile on the extra normal GAAP foundation. Chief technique officer Le Yu refused to present a timeline when requested about that milestone on the investor name, solely saying “there is no such thing as a doubt that Dingdong can obtain profitability.”
Many analysts masking Dingdong imagine it can obtain its non-GAAP breakeven aim on schedule. Daiwa Capital Markets mentioned in a analysis notice, it expects Dingdong’s breakeven aim will come earlier, with its non-GAAP web loss margin already turning constructive as a result of “gross margin enchancment from favorable class combine.” Jefferies analysts had been extra cautious, saying in a notice that Dingdong’s non-GAAP web loss margin shall be -2.7% within the fourth quarter earlier than turning constructive in 2023.
Analysts at Daiwa Capital Markets mentioned they anticipate Dingdong’s web money to stabilize at present ranges, which ought to ease considerations about any potential liquidity disaster. On the finish of September, the corporate had money and money equivalents and restricted money of 1.4 billion yuan, lower than half the three.1 billion yuan it had a yr earlier.
On the finish of the day, whether or not Dingdong will be capable to obtain profitability will rely on what number of of its initiatives bear fruit, together with its steady cost-cutting and the ramp-up of higher-margin merchandise. Regardless of making an attempt a lot of these, the same effort by Missfresh in the end failed and resulted within the firm’s dramatic unraveling.
Even after the current rally for its shares, Dingdong nonetheless trades at a lowly price-to-sales ratio (P/S) of simply 0.24 occasions. That’s nicely beneath Meituan’s (OTCPK:MPNGF) P/S ratio of 4.6 occasions, in addition to JD.com-backed Dada Nexus (DADA), which trades at 0.88 occasions.
Each Meituan and Dada use a extra asset-light enterprise mannequin by merely working on-line platforms connecting offline shops and customers. The variations in P/S ratios means that buyers may want the latter mannequin, which places far much less pressure on an organization’s funds than the frontline achievement grid utilized by Dingdong.
Disclosure: None.
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