The e-commerce services and brand management company's revenue rose 7.7% in the fourth quarter, as it announced plans to open a net 40 new Gap clothing stores in China this year

Key Takeaways:

• Baozun reported its first net profit in more than three years in last year's fourth quarter, as its brand management and e-commerce services business posted strong growth
• The company had 152 Gap stores across China at the end of last year, and plans to open another 40 net new stores in 2025

But investors weren't buying into any of that. The stock fell 12.7% on Thursday after the latest earnings announcement, throwing a damper on what otherwise looked like a very respectable report. Even after the selloff the stock is still up 15% over the last six months, which seems to show the investment community is becoming more confident in the company.

To better understand why investors are so down on Baozun, we need to trace the company's history. It began as a provider of software services to e-commerce merchants, and was closely tied to Alibaba's (BABA.US; 9988.HK) ecosystem. To this day, Alibaba remains one of its major shareholders. But that business has largely stagnated in recent years.

More recently, the company made headlines in 2023 when it purchased Gap's China operations, launching Baozun's move into brand management. Not long afterwards, it also formed a joint venture with Authentic Brands Group to bring the U.S. brand owner's Hunter brand to Asia.

The company's total revenue rose 7.7% year-on-year in the fourth quarter to 3 billion yuan ($414 million) from 2.78 billion yuan, as it reported a second consecutive year of annual revenue growth for all 2024 after the figure contracted in 2021 and 2022. Fulfillment costs were flat year-on-year, while sales and marketing costs rose 17%.

As those two factors offset each other, the company reported a 100,000 yuan profit for the quarter, marking its first net profit since the second quarter of 2021. Chairman Vincent Qiu indicated the momentum is continuing in 2025, as analysts forecast the company will report an annual profit this year – its first since 2020.

"The year 2025 marks a combination of our strategic transformation and sets the stage for future growth," Qiu said on the company's earnings call. "We have strengthened our senior management team to drive this next phase."

Gap expansion

Next, we'll take a closer look at the company's two main businesses, starting with its newer brand management business that is entering a growth mode after an initial period of retrenchment. The Gap-brand stores still make up the bulk of that business, though Baozun said it recently opened its first Hunter outlets in Shanghai and Malaysia.

Product sales for its brand management business, mostly from Gap stores, rose 17.3% in the fourth quarter year-on-year to 535 million yuan from 456 million yuan a year earlier.

The company said it opened 40 new Gap stores in the second half of last year, including 16 in the fourth quarter, bringing its total to 152 Gap stores across China by the end of 2024. It said it plans to open another 50 Gap stores this year, which, when combined with closure of underperforming outlets, would give it 40 net new stores for the year.

Notably, the company said its Gap stores reported "low single digit same-store sales growth" in the fourth quarter, which looks quite promising in the current economic climate where many retailers are reporting declines. In one other noteworthy development, the company said it is working with franchisees to expand the chain into second-tier cities – a strategy increasingly used by many brands for expansion into China's smaller cities.

"While we opened new stores throughout the year, we also strategically closed underperforming locations to optimize our offline network, making 2024 a year of structural upgrades," said Ken Huang, CFO of Baozun Brand Management, on the earnings call. "Looking ahead, we plan to accelerate our expansion by prioritizing high traffic locations that maximize sales potential."

Huang added that following the recent openings of a Hunter store in Shanghai, the company is looking to expand that brand into other Chinese markets, such as Beijing, Shenzhen and Hangzhou.

On the e-commerce side, the company said its services revenue rose 9.3% year-on-year to 1.89 billion yuan in the fourth quarter from 1.73 billion a year earlier, fueled by double-digit gains for its online store operations and marketing services. But that was partly offset by a 4.3% decline for its e-commerce product sales to 572 million yuan from 598 million yuan a year earlier, as weak consumer sentiment hit that part of the business.

The positive performance by the brand management business, combined with strong results from e-commerce services offset the weakness in e-commerce sales, lifting Baozun's operating income to 73.2 million yuan from 6.4 million yuan a year earlier. And as we've already noted, the company also returned to a profit after more than three years of losses.