Secoo’s Contraction Slows as It Cleans Up Financial House

Online luxury goods seller was one of the biggest corporate victims of China’s Covid restrictions over the last three years

Key Takeaways:

  • Secoo’s revenue fell 24% in the first half of 2022, moderating from a 50% drop in 2021
  • Company is trying to clean up its finances, including a bond restructuring and inventory write-offs, to position itself for a return to growth as China lifts its Covid restrictions

By Doug Young

Our first review for the New Year features a look at the latest earnings report from online luxury goods seller Secoo Holding Ltd. (SECO.US), which hopes that 2023 will be better than 2022. Then again, the same could be said for just about any Chinese company, following a miserable year, as nearly everyone suffered under the weight of the country’s tough Covid restrictions.

But Secoo suffered more than most. Luxury spending has taken one of the biggest hits on China’s retail landscape over the last three years as Chinese remained housebound during lengthy lockdowns and other restrictions. And as many consumers reined in their spending, items like luxury bags and expensive clothing were probably among the first things they ditched.

Interestingly, Secoo’s latest earnings for the first half of 2022 contain no mention of a bankruptcy that the company reportedly filed for last August, according to Chinese media reports at the time. The company reportedly first filed for bankruptcy in January last year, but later withdrew that application. Since a bankruptcy filing is obviously a major development that should be disclosed by any public company, the lack of discussion on the topic in its latest results perhaps indicates that it was able to work out its issues without resorting to bankruptcy court protection.

The latest results, which we’ll detail shortly, show a company that’s trying hard to restructure its finances in preparation for better times ahead as China finally emerges from its Covid isolation of the last three years.

“Against the backdrop of macro turbulence throughout 2022, we maintained our focus on optimizing operations and continued to drive value for our high-end customers, paving the way for our sustainable, long-term growth,” said Chairman Li Rixue in the latest announcement.

In our view, one of the most encouraging things about this entire report is simply the fact that Li feels confident enough to talk about “sustainable long-term growth.” But investors didn’t seem to feel the same way. Secoo’s shares tumbled 12.7% after the results came last Friday on the last trading day of the year, taking the company’s market value down to just $15 million.

Things were far different when Secoo made its market debut in 2017, raising $170 million in a deal that valued China’s self-proclaimed first “luxury e-commerce shop” at $900 million. How the times have changed since then.

China was once the star of an annual global luxury goods report from Bain, as millions of Chinese snapped up billions of dollars worth of handbags, luxury watches and other such goods both at home and abroad. Fast forward to the report’s 2022 edition, when Bain noted that while China remains crucial to the market over the long-term, the country “continues to confront a challenging phase due to Covid lockdowns and is still performing below 2021 figures.”

That said, Bain noted that China’s luxury market is expected to recover in 2023, which looks quite likely following Beijing’s sudden lifting of the country’s many Covid restrictions starting in early December.

Shrinking company

With all that background in mind, we’ll take a deeper dive into Secoo’s latest performance, including the steps it’s taking to get its financial house back in order and position itself to perhaps return to growth after three years of revenue contraction.

The company’s revenue fell 24% year-on-year to 1.16 billion yuan ($168 million) in the first half of 2022 from 1.53 billion yuan a year earlier. While that doesn’t look too good, it’s actually a big improvement from the roughly 50% revenue decline to about 3.1 billion yuan in 2021.

Most of the company’s other metrics show similar-level declines. The gross market value (GMV) of goods sold over Secoo’s platform fell 34% year-on-year to 3.3 billion yuan in the first half of last year, while the company’s active customer base fell 28% to 409,000 over the same period.

Compounding all the Covid-related issues, Secoo also suffered from serious customer-relations issues, as its business tanked, making its situation worse. The number of complaints against the company on the Black Cat consumer rights protection platform shot up from 8,800 at the start of last year to over 17,000 by August. It has also consistently ranked No. 1 on the online public complaints platform Diansubao since 2021 in terms of consumer complaints received.

The company’s financial position looks quite tenuous, though there are signs that perhaps it is turning a corner in that regard. Secoo lost 816.4 million yuan in the first half of last year, swelling from a 40.9 million loss a year earlier. At the same time, its cash tumbled to 91.9 million yuan at the end of June from 407 million yuan a year earlier.

The company appears to be financing its big losses with more bank borrowing and advances from its customers. Its losses are also coming from inventory write-downs. Amid all the gloom, the company managed to refinance $175 million in convertible notes that came due last August, which may have helped to avert a court-led bankruptcy restructuring. It also raised an additional $3 million by selling new shares to two investors that same month. So, at least someone seems to have confidence in the company’s future.

In terms of that future, Secoo noted that its platform began accepting payments last March using China’s two most popular platform operators, Ant Group and Tencent’s WeChat, which should make it more attractive for consumers. It also formed a new partnership last March aiming to seize on the recent popularity for digital art, most notably non-fungible tokens (NFTs).

Founded in 2008, Secoo’s founder once boasted that he was building a company that would “last for more than 109 years,” a reference that, at the time, was meant to best e-commerce giant Alibaba’s (BABA.US; 9988.HK) boast that it would last for 102 year. Such a boast must seem like a distant memory now. But that said, Secoo does look increasingly likely to survive at least another year as China finally emerges from one of its darker periods in recent memory.

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