Former Retail Star Gome Hobbled by Declining Revenue, Heavy Debt

Key Takeaways:

• Gome’s revenues are falling sharply despite gains for its online business, as tumbling sales at its brick-and-mortar stores lead to layoffs and closures
• The company is staring at a potential debt crisis as it owes 22.9 billion yuan in bank loans despite having only 2.41 billion yuan in its coffers

By Ken Lo

Chinese poems like to lament how fleeting beauty is. In real life, great business minds often meet with the same fate, flourishing for a period only to quickly fade into oblivion.

Former retailing magnate Huang Guangyu is a poster child for that type of rise and fall. Once China’s richest man, the founder of appliance retailing giant Gome Retail Holdings Ltd. (0493.HK) found himself behind bars in 2010, convicted of economic crimes. He was released in 2020 and hoped to lead his struggling company back to glory. But such glory days look like a distant memory, as reflected by the company’s latest profit warning issued at the end of last week.

It wasn’t always that way. Expectations were running high on Huang’s return that he could lead his company back to riches with an aggressive push into e-commerce using a new app called FUN. But the app wasn’t so fun after all, failing to gain traction in a market already crowded with similar platforms.

As its situation continued to deteriorate, the company has been wracked by senior executive defections, mass layoffs, and difficulty paying its remaining employees. None of those are helping Gome’s finances, both in terms of revenue and also in its large volume of bank loan debt.

The company’s latest profit warning forecast its revenue for the first three quarters of the year would plummet by 55% to 60%, and it would register a net decline in revenue for the whole year. It cited near non-stop disruptions from China’s strict measures to contain the highly contagious Omicron Covid variant since the start of 2022, which have created one of the most difficult environments in years for traditional consumer-facing retailers.

Adding to its woes, the company said the plunging revenue has caused it to become delinquent on some of its loans, and its holdings of around 55 million shares in Zhongguancun (000931.SZ), worth about 350 million ($48.5 million) yuan at current prices, have been frozen. It is currently in talks with its lenders to find solutions. Gome’s Hong Kong-listed shares fell 7.1% the next trading day after releasing the dire outlook, finishing at a historic low of HK$0.118.

In light of the dire circumstances, the company said it would focus on cutting costs and increasing efficiency, which includes shutting down inefficient stores and restructuring its business operations.

It was already engaged in such measures even before the warning, reducing its China store count from 4,195 at the end of last year to 3,895 at the end of June. It has cut its employee headcount even more, from 35,032 at the middle of last year to 25,701 at the end of June.

Left in the e-commerce dust

While the pandemic is taking its toll on the company, that’s only half the story. The other half is the company’s failure in e-commerce. Lockdowns in many cities this year boosted online shopping in general, to the benefit of many e-commerce platforms that could seize on the trend.

Pinduoduo PDD, the e-commerce platform focusing on smaller Chinese cities, is a case in point. Its revenue rose 22% to 55.23 billion yuan in the first half of the year, propelling the company to a 11.5 billion yuan net profit from a loss a year earlier. Gome’s movement in the opposite direction suggests it is burdened by its legacy brick-and-mortar retail operation, unable to adapt to changing preferences of online shoppers.

Gome tried to show it was up to the e-commerce challenge with the FUN app, which used a “home and life” strategy to win over customers, modeled on the example of short-video giant Douyin, China’s version of TikTok. But the results have been dismal so far. According to data from third-party research company Analysys, 18 months after going online the platform had only had 72.86 million active monthly users at the end of June, much lower than the 800 million and 350 million for e-commerce leaders Alibaba BABA and JD.comJD, respectively.

Despite logging 30% growth in gross merchandise volume (GMV) last year, FUN only raked in 146.9 billion yuan, a far cry from its initial target of 1 trillion yuan.

As its prospects sputter, Gome has become a revolving door for not only low-level employees, but also senior executives. Late last month the company confirmed that the CEO of its appliance business Wang Wei, a 20-year company veteran, and the CEO of its investment firm He Yangqing, had left after less than a year on the job. The leadership of Gome Electric, the unit led by Wang, has now changed hands three times in the last 14 months.

22.9 billion yuan in debt 

As its prospects founder, Gome is having to deal with a debt load that is growing as a proportion of its shrinking revenue pie. In the five and a half years from 2017 to this June, the company posted cumulative losses of around 22.3 billion yuan, including nearly 7.4 billion yuan during the year and a half since Huang returned in late 2020.

By the end of June, the company’s current liabilities totaled 50.07 billion yuan, including up to 22.9 billion yuan in bank loans that must be paid off within a year, according to Gome’s interim financial statement. But it only had 2.41 billion yuan in cash and cash equivalents at that time, meaning it will need to find other ways to make those payments. Accordingly, the company could soon face a debt crisis.

As its market cap shrivels even faster than its revenue, the company’s price-to-sales (P/S) ratio has reached an extremely low level of just 0.11 times, even less than the 0.2 times for similarly suffering former rival Suning.com(002024.SZ), and a far higher 1.63 times for Alibaba and 0.41 times for JD.com. Such a low valuation reflects the market’s disdain for the former retailing superstar, whose days of beauty must seem like little more than a distant faded memory.