Baozun overhauls Gap stores, goes global with new Hunter deal

The e-commerce company and Authentic Brands Group will form a joint venture to sell Hunter- branded products, best known for their Wellington boots, in Greater China and Southeast Asia

Key Takeaways:

• Baozun announced a new joint venture with Authentic Brands Group, which will own rights to the Hunter brand of outdoor wear products in China and Southeast Asia
• The e-commerce company also announced strong progress for its recently acquired Gap China stores, including plans to start expanding the chain following a major overhaul

By Doug Young

E-commerce company Baozun Inc. (BZUN.US; 9991.HK) is quite the evolving creature these days. Less than a year after announcing its purchase of U.S. retailing giant Gap’s (GPS.US) China stores, the Alibaba-backed (BABA.US; 9988.HK) company has just announced a major new partnership to bring the Hunter outdoor wear brand not only to China, but also to Southeast Asia.

The move represents a major addition to Baozun’s young brand management business, which the company launched with its Gap acquisition announced at the end of last year. At the same time, the inclusion of Southeast Asia rights in the Hunter deal reflects Baozun’s global aspirations as it joins a growing number of Chinese e-commerce companies trying to diversify abroad.

The company also disclosed some early, encouraging results for its overhaul of the Gap chain in China in its latest quarter results released on Monday. But the news wasn’t all so upbeat, as its latest results also showed stagnation for its core e-commerce business that still accounts for the big majority of its revenue, about 85%.

The upbeat news involving the new partnership with U.S.-based Authentic Brands Group, owner of the Hunter brand, as well as the improving performance for Gap stores, won over investors hearts and dollars, at least for the day. Baozun’s shares jumped 12.5% on Monday in New York after the latest announcements, outperforming a smaller rally for U.S.-listed Chinese shares on news about new steps in China to stimulate the nation’s stock market.

But even after the rally, Baozun’s stock is still down 26% so far this year. And most tellingly, it currently trades at an anemic price-to-sales (P/S) ratio of just 0.20. By comparison, domestic rival Weimob (2013.HK) trades at a multiple of 4.5, while global peers Shopify (SHOP.US) and Salesforce (CRM.US) trade at ratios of 11.2 and 6.5, respectively.

The 13 analysts who follow Baozun have given it an average price target of $8.78 for its American depositary shares (ADSs), which is about twice their current level. Still, even if the stock rallies and hits that target, its P/S ratio would still be a rather meager 0.40, making it look quite undervalued if you see good potential in the company’s latest initiatives.

The new Authentic Brands tie-up will see the two companies set up a joint venture that will own the rights to the Hunter brand for Greater China and Southeast Asia, with Baozun holding a 51% stake. A separate licensing agreement will also give Baozun long-term rights to design, make and sell Hunter-branded products, best known for their Wellington-style boots, in Greater China.

The deal looks like it could be just a starting point of a bigger relationship for these two companies, which previously had a relationship in China through Baozun’s original e-commerce services. Authentic Brands owns quite a number of other major brands, including Eddie Bauer, Brooks Brothers, Rockport, Izod and Nautica, just to name a few. So, theoretically, any of those could be added to the new partnership later if things progress smoothly.

International team

Baozun’s acquisition of Hunter rights in Southeast Asia appears to be the cornerstone of a new international division for the company as it seeks to diversify not only in terms of its businesses but also geographically. The addition of an international division means Baozun now has three main businesses: its original e-commerce services; its brand management, which primarily consists of the Gap business; and now its international business.

The company said it has built up a team of about 150 people over the last year-and-a-half that forms the basis of its new international division, with employees based in Singapore, Malaysia, Thailand, South Korea, the Philippines, Hong Kong and Taiwan.

The other upbeat news in Baozun’s latest report was the quick improvement it is seeing at its Gap China stores, which it acquired in a deal that raised eyebrows with its announcement last year. The brand had been struggling in China amid stiff competition from both local and international rivals, and was losing money at the time of the sale.

Following the purchase, Baozun embarked on a major overhaul that included the closure of 86 stores, or about 40% of the chain’s total. It is also trying to take Gap more upscale by offering less discounts, and is introducing a “China for China” strategy of designing and making products locally for Chinese consumers.

As it made those changes, the Gap chain reported 324 million yuan ($45 million) in revenue for the second quarter, down 26% year-on-year. But company officials noted the changes are already producing results, with the chain’s same-store sales up 11% in the second quarter. “Building on the new foundation, we aim to open up to 10 stores, beginning with a flagship destination store in Guangzhou,” said Sandrine Zerbib, president of Baozun Brand Management, on the earnings call.

The upbeat news was partly offset by a quarterly report that was quite somber, reflecting current weak consumer sentiment in China. Baozun managed to post 9.3% revenue growth for the second quarter to 2.3 billion yuan. But revenue was actually down about 5% year-on-year if you exclude contributions from the Gap stores, which weren’t present in the year-ago figure.

The company’s sales from big-ticket items continued to perform the worst as lower new home construction dampened demand for appliances and cost-conscious consumers pulled back on purchases of expensive items like smartphones and computers. The company’s appliance sales fell 24% year-on-year in the quarter, while electronics sales plunged 43%.

The bottom line wasn’t too encouraging, with the company reporting a 20 million yuan net loss. Analysts expect Baozun to return to profitability later this year, and for those profits to grow substantially in 2024 as the performance at Gap stores improves. They may need to make some revisions after studying the new Hunter deal and Gap store updates, which will probably add to the company’s top-line revenue but are also likely to drag on its profits.

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