Baozun's Investments in Growth Keep Paying Off

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Baozun (NASDAQ: BZUN) reported first-quarter 2019 results on May 29, once again showing its efforts to invest in building a bigger, stronger offering to be the right move. Total net revenue increased 40% and operating income surged 61% on higher operating margin, even with operating expenses climbing 39% in the quarter.

Baozun's results may have come in a little lighter than the big growth it reported to close 2018, but its results continue to be stellar across the board. Let's take a closer look at Baozun's earnings report for the key items investors should know.

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Increased expenses a big reason why revenue and profits surged

(Note: Baozun collects and reports revenue in Chinese yuan, and also provides dollar-adjusted results for some metrics. The results below are based on yuan unless otherwise noted.)

While earlier in its existence Baozun invested more resources in providing end-to-end e-commerce solutions to merchants, including product distribution, more recently management has focused on developing software tools and the technology behind its platform. By investing in the platform and associated tools, the company has been able to win a number of new and large brands and retail partners which don't necessarily need Baozun to fulfill orders.

And that's paying off for the company on the top and bottom lines. In the first quarter, total net revenue was 1.29 billion yuan (about $192 million), up 39.7% from last year. Product sales revenue was up 34.3%, while services revenue was up 45.1% to 669 million yuan, or 52% of revenue. CFO Robin Lu credited "new brand partners" with delivering incremental contribution to the company's results.

Winning those new clients is coming at a cost: Baozun's operating expenses increased 39% to 1.24 billion yuan. The biggest contributors to the increase were sales and marketing expense, which increased 41% to 311 million yuan, and technology and content expense, which increased 75% to 87.9 million yuan.

Despite the big increase in operating expenses, more of Baozun's revenue reached the bottom line. The company reported operating income of 45.8 million yuan, up 61.2%, and operating margin of 3.6%, up from 3.1% year over year. On an adjusted (non-GAAP) basis, operating income was 64.7 million yuan, up 42% from last year, while adjusted operating margin of 5% was the same as last year's first quarter.

The benefits showed even more on the bottom line. Baozun reported that net income surged 128% to 34 million yuan, or $0.09 per American depositary share (what American investors buy on a U.S. stock exchange).

Looking forward

Baozun offered guidance for second-quarter revenue that's relatively similar to what it just reported: total net revenue up between 34% and 38%, with services revenue expected to increase "by over 40%" from last year.

All told, the company's strategy to prioritize its platform, and to attract brands as well as merchants, is really paying off; the company said it was partnered with over 200 brands in eight product categories at the end of the quarter.

It's coming at a cost as operating expenses will continue to climb. But China's middle class remains one of the most attractive markets for global brands to want to tap into, and those investments appear to be paying off with big growth on the top and bottom lines.

With that middle class set to grow even bigger in the years to come, Baozun's role as the connector of global brands and local merchants to Chinese consumers seems likely to grow as well.

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Jason Hall owns shares of Baozun. The Motley Fool owns shares of and recommends Baozun. The Motley Fool has a disclosure policy.