Gome Electrical swings back to profit during the first half

Struggling retailer Gome Electrical Appliances Holding Ltd swung back to profit in the first half of the year, amid a restructuring plan by the brick-and-mortar retailer to expand its e-commerce business. The Chinese retailer, which is backed by private equity firm Bain Capital, said in an unaudited earnings flash on Wednesday that it posted a 322 million yuan ($52.25 million) profit in the January-June period, as costs went down and its margin widened.

The company said that a fierce price war waged by online retailers, including 360buy.com, cost it 607 million yuan in the first half. Last year was the first time that Gome lost money, after it went public nine years ago.

The turnaround comes after Gome shut low- performance stores, cut costs and started a plan to go digital. Gome plans to build up its e-commerce business and create synergies with its brick- and- mortar stores. Last year, owner Huang Guangyu, bought a 40 percent stake in each of Gome’s two e-commerce sites, Coo8. com and Gome.com.cn, in a bid to support the company’s e-commerce business.

Gome’s shares rose 2.6 percent in Hong Kong on Wednesday to 79 HK cents (10 US cents) a share, after a 3-million-share purchase during morning trading. On an annual basis, the shares are flat.

Gome’s e-commerce business is yet to turn a profit, even though its profit margin has been improving. Chief Financial Officer Fang Wei said that online sales accounted for 5 to 6 percent of Gome’s 27 billion yuan sales revenue in the first half. At a gross profit margin of about 6 percent, the e-commerce business lost a total of 120 million yuan in the period. Fang said that the profit margin has to rise to 8 to 9 percent for the business to start making money.

“Our priority for e- commerce at the moment is profitability, not quantity. We are actively cutting costs and raising money. Hopefully, we can see the service make money in at least one month this year,” said Fang in a news conference in Hong Kong on Tuesday.

Gome started selling fast-moving consumer goods on Wednesday, including food and beverages, cosmetics, and mother and baby products. The move indicates that Gome has entered into a full-blown competition with e-commerce services such Taobao and Yihaodian.

President Wang Junzhou said that Gome intends to beat its competitors through price wars.

“Gome has rich experience in price competition,” said Wang.

Gome’s advantage lies in its strong logistics and supply chain management, an ability that it accumulated through years as a brick-and-mortar retailer, Wang added.

The company’s biggest source of profit in the first half came from “differentiated products”, or goods that are sold exclusively by Gome. Differentiated products, which usually have higher margins due to the absence of competition, accounted for 22 percent of Gome’s sales revenue in the first half. CFO Fang said that Gome intends to raise the proportion of those products to up to 35 percent through 2016.

Same- store sales — one of the most important indicators in the retail industry — rose 15.1 percent year-on-year, while the company’s consolidated gross profit margin was 18.3 percent, slightly higher than its full-year target of 18 percent. Fang said that he is confident that the company will exceed the target this year.

The company closed 35 stores in the first half, taking the total to 1,073. Fang expects the company to keep that number stable through the end of the year.