Dangdang Goes Bang

Rick Aristotle Munarriz, The Motley Fool
Updated

Today isn't a good day for E-Commerce China Dangdang (NYS: DANG) investors.

Shares of the Chinese e-tailer opened 9% lower -- trading nearly 20% lower at one point -- after posting disappointing quarterly results.

The good news is that net revenue soared by a better than expected 53% to $122.3 million. Dangdang also continues to make progress in establishing itself as more than just a Web-based bookseller with hundreds of thousands of stocked titles. General merchandise sales have grown from 14.7% of net revenue to a thicker 24.2% slice over the past year.

The move away from books is a mixed blessing, as Amazon.com (NAS: AMZN) found out a decade ago. On the one hand, it does increase the value of a typical order. You see this by spotting that total orders only grew by 33% to 9.2 million during the period relative to the 53% top-line pop. We can also divide net revenue by total orders to see that the average order has gone from less than $12 to more than $13 over the past year.

The downside to stocking larger items is that they require more warehousing space and sport thinner gross margins. These are daggers to Dangdang's bottom line. Gross margins have shrunk from 19.8% to 14.3% over the past year, as opening new warehouses and trying to stand out by offering same-day delivery in some cities are jacking up fulfillment costs. Cost of revenue and fulfillment expenses alone swallowed down 99% of Dangdang's net revenue.

Ouch!

The end result is that Dangdang's loss widened despite the solid growth in this seemingly scalable model. The fast-growing online retailer's deficit of $0.06 is three times larger than analysts were expecting.

One analyst during this morning's call applauded the company for its emphasis on growth over current profitability, though today's market actions suggest that investors don't see it that way.

Dangdang now joins social networking site Renren (NYS: RENN) , content integrator Phoenix New Media (NYS: FENG) , and car info hub Bitauto (NYS: BITA) as initially buoyant Chinese dot-com IPOs over the past year that have fallen back into the single digits.

If there's any silver lining here it's that Amazon has been through this before, and lived to laugh at the bears. It was Amazon that was derisively mocked for its crummy gross margins and wrecking fulfillment as a profit center with its subsidized shipping promotions.

Things obviously worked out well for Amazon. It would be a mistake to argue that Dangdang -- described by many as the Amazon.com of China -- will diligently follow in those footsteps. However, at least it can rightfully be suggested that the transition has panned out perfectly in one prolific case.

The next few years will be both exciting and challenging for Dangdang, and as a bonus today's investors can get in for less than last December's IPO buyers.

To keep track of China's newest batch of IPOs, make sure to add them to our free My Watchlist service, which offers up-to-date news and analysis on all your favorite companies!

At the time thisarticle was published Motley Fool newsletter services have recommended buying shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin online stocks for a long time. He does not own shares in any of the companies in this story. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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