E-COMMERCE – Profit-Seeking JD.com in Overhaul Frenzy

Bottom line: A steady stream of layoff and cost-cutting reports around JD.com appear to show it’s trying to sharpen its operations to achieve sustained profits starting in the second half of this year. 

What’s up with e-commerce giant JD.com (Nasdaq: JD)? That seems to be the question of the moment, amid a recent series of nonstop reports of shakeup at China’s perennial No. 2 in the e-commerce world. The company was stuck under a cloud for much of the second half of last year as its founder, Richard Liu, stood accused of rape in the US. That cloud was finally lifted when the prosecutor looking into the matter decided not to file charges.  (English article)

Since then JD.com has been the subject of a nonstop stream of rumors and confirmed reports involving everything from layoffs to corporate overhauls to an imminent divorce between Liu and his wife. The latest reports seem to continue in that vein, including one saying the company plans to lay off about 8 percent of its workforce and another of some major moves in its top ranks. The latter comes after JD confirmed in February it was laying off 10 percent of its senior executives. (English article)

So what exactly is going on with this company? Of course people on the outside like myself can only guess. But my educated guess is that following the removal of the rape cloud, Richard Liu is throwing himself wholeheartedly into the biggest task that has dogged him since the day the company went public in 2014. That task, of course, is finding a formula for sustained profits that has thus far evaded the company, even as arch rival Alibaba (NYSE: BABA) is extremely profitable.

All that said, let’s delve into the latest headlines, starting with a report saying JD.com is preparing to lay off about 12,000 people, equal to about 8 percent of its workforce. (Chinese article) JD has been saying up to now that reports of such mass layoffs are false, though this time the source is the quite respectable US news outlet The Information.

Two other news bits on JD this week also indicate that a major shakeup is going on behind the scenes. One had the company confirming it was cutting the base pay of its delivery drivers in some regions in a move to reduce costs. (English article) The other involved a couple of senior executive movements, possibly departures, at the company’s fashion and grocery units. (Chinese article)

Overhaul Theme

As I’ve said above, all of these moves do seem to have the common theme of a company in the midst of a major overhaul centered on improving operations and cutting costs — steps the company really needs to take. Its last quarterly report showed JD’s revenue grew 22 percent in last year’s fourth quarter, which really isn’t that much to crow about in China’s e-commerce space. (English article) By comparison, the much-larger Alibaba is consistently able to report better revenue growth, including 41 percent during the same quarter.

Then of course there’s the issue of profits that always seems to dog JD.com. The company posted a massive 4.8 billion yuan ($715 million) loss in last year’s fourth quarter, which was more than five times its loss a year earlier. The usual investments in new areas were blamed for its inability to generate a profit, which is supposed to keep investors at bay while the company tries to figure out its own roadmap into the black.

Investors did seem to breathe a big sigh of relief when the US prosecutor decided not to file charges against Liu in December, and have extended that relief rally into the current year. The stock is up nearly 40 percent since January, approaching levels it was at last year before the rape scandal hit. Of course it’s also worth noting China’s broader stock markets have rallied sharply this year, and that many overseas-listed tech companies like JD.com are having their own parallel rally.

Of course the proof will be in the pudding over whether all the recent steps can finally put JD.com onto the right track. I expect we might see some rosy-ish figures when it reports its first-quarter results, mostly likely in May, since this company seems quite capable of shuffling figures to show the occasional profit when it feels like it. But probably the bigger proof would come in the second half of the year, when many will be looking to see if all the behind-the-scenes moves are cutting costs enough to put the company squarely into the black.