Gome Retail profit warning reflects pain before gain

A Gome Retail profit warning issued Friday demonstrates the Herculean task the Chinese retailer has ahead of it to restructure into a New Retail generation company.

The company has warned shareholders to expect a RMB 400 million and RMB 500 million (US$58 million – $64 million) loss for the nine months when accounts are complete.

It said due to the implementation of the strategic transformation plan, sales revenue of the group is expected to decrease by about 11 per cent, while operating expenses increased slightly year on year and finance costs remained high.

Gome Retail is integrating its online and offline business and promoting a new ‘Social + Business + Sharing’ shared retail model. As part of that strategy, the company is combining its electrical appliances, home decoration, household systems and supermarkets to create sizable “experiential stores” in tier 1 and 2 cities. The group is also optimising its platform to include the Xiaomei Net Cafe, VR Cinemas and Gome esports.

On Friday, Gome Retail chairman Zhang Da Zhong told shareholders that based on the preliminary review of the latest management accounts, the total gross merchandise volume (GMV) of the group for both online and offline operations is expected to grow by about 5 per cent compared with the same period last year. Shared retail GMV and the GMV from the marketplace of the e-commerce business are expected to grow by more than 100 per cent and 25 per cent, respectively.

“The group will continue to speed up its expansion on the services regime and expand into the third- to sixth-tier cities, with a view to shaping up its new competitive advantage,” he said. That strategy was revealed earlier this year under the title ‘New Market, New Technology, New Business’.

While Gome Retail is headed for a loss due to restructuring and expansion costs, the business delivered solid operating results. Consolidated gross profit margin of the group was maintained at a relatively high level in the third quarter, while the third quarter operating expenses also decreased compared with the second quarter.

“Therefore, the profit attributable to owners of the parent is expected to achieve break-even for the third quarter.”

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