Fast-fashion platform Shein reported a 67% drop in second-quarter adjusted net profit to $228 million in its first financial results as a public company, according to its financial results released on September 28.
Profit Plunge Driven by Rising Fulfillment Costs and Middle East Conflict
Shein’s bottom line took a hit as conflict in the Middle East drove up jet fuel and freight costs for the platform, which relies on air shipments to deliver low-cost apparel to customers globally. Fulfillment costs jumped 18.1%, a surge that Jefferies analysts described as concerning because it occurred before additional European regulatory fees took effect.
European Sales Slide Ahead of EU Regulatory Fee Implementation
European sales dropped sharply during the quarter ending June 30. Revenue in Europe fell 13.9% to $3.77 billion, while US sales declined 6% to $2.5 billion. Shein hiked prices and cut online advertising in Europe to prepare for new 3-euro fees imposed by the European Union on low-value e-commerce parcels starting July 1. Jefferies analysts estimated that Shein’s earnings landed more than 10% below the low end of expectations set out in its initial public offering prospectus. Since debuting in Hong Kong on September 1 at an offer price of HK$48.56 per share, Shein’s stock price has fallen 27.3%.
Did you know? The EU’s low-value parcel fees apply per product category. If a shopper purchases five different types of items in a single order, the total added fees can reach 15 euros, with an additional 2-euro handling fee scheduled to take effect on November 1.
Expansion in Poland and Shift Toward Higher-Priced Brands
To combat margin compression and clear regulatory hurdles, Shein is altering its logistics footprint and product strategy. CEO and Chair Yangtian Xu stated that increasing inventory levels in Europe is a primary corporate priority. The company established a massive logistics hub in Wroclaw, Poland, featuring 740,000 square metres of warehouse space in December, and leased an additional 66,000 square metres through industrial real estate firm CTP this year. Xu also announced plans to expand into higher-priced clothing lines and grow its family of brands through acquisitions. “As the product mix shifts towards brands at higher price points, the platform’s overall average selling price will rise accordingly,” Xu stated.
Factors behind profit decline and European sales challenges
Why did Shein’s profit drop in the second quarter?
Adjusted net profit fell 67% to $228 million due to rising freight and jet fuel expenses driven by conflict in the Middle East, alongside an 18.1% jump in fulfillment costs.
How are European regulations affecting Shein’s sales?
European sales fell 13.9% to $3.77 billion in the second quarter as Shein raised prices and cut digital advertising ahead of new EU fees on low-value e-commerce parcels.
What is Shein’s strategy for increasing profitability?
CEO Yangtian Xu announced plans to shift toward higher-priced apparel categories, expand the company’s brand portfolio through acquisitions, and scale up local warehouse inventory in Europe.
Worth a look