Hepsiburada - 2Q22 loss is narrower on the quarter, risks tilted to the upside

Hepsiburada has reported June quarter financial statements and provided a trading update. The financial statements follow IAS29 inflation accounting standards for the first time this quarter. The highlight of the quarter is the sequential improvement in loss readings. Indeed, the reported loss is narrower both at EBITDA and net income level on the quarter. The quarterly decline in loss is due to a combination of reasons including gross contribution margin and the improvement in various OPEX lines. Below are the highlights.

Customer traffic and order flow trending up. Business volumes are strong despite headwinds. The number of orders posted a 7.2% growth on the year with active customers reaching 11.7 million growing 18.2% over the same period. At 14.1 million, the SKU count added 107% year on year. The merchant base is reported at 88.7 thousand growing 45.4% over the same period last year.

Consumer trends and changing product mix with inflation. The spike in inflation towards 70-80% range has pushed consumers into substitution buying affordable products temporarily holding back discretionary categories. This has resulted in more defensive FMCG lines outperforming the discretionary items in Hepsiburada’s product mix.

Adopting inflation accounting and the margins. Pricing under inflation accounting in its first year may, temporarily, overstate cost of sales and understate revenues masking the true state of profit margins on year-on-year comparisons. This is because cost repricing may lag revenue repricing earlier on.

The key take-away: June P&L reads better on the quarter. June quarter income statement reports sequential improvement at most lines. The 2Q trends, both operating and macro, are showing recovery boosting confidence for outlook in the lead up to the holiday season.

Raising GMV outlook. GMV growth for the quarter exceeded guidance; and the management has raised the full year outlook following the earnings release and during the call.

A note on gross contribution. Inflation accounting shows year-on-year deterioration in profit margins, especially at the gross level. However, the quarterly trends are showing a turnaround. Indeed, at an inflation adjusted 5.0%, June quarter gross contribution posts 130bp improvement sequentially.

Marked improvement in major OPEX lines. Major OPEX lines have also shown improvement both on year-on-year comparisons and sequentially. Shipping and handling margin reads 2.9% down from 4.3% in 2Q21 and 3.6% in 1Q22. Similarly, advertising cost margin comes in at 3.6% versus 4.9% in 2Q21 and 3.9% in 1Q22.

EBITDA loss has narrowed. The loss at EBITDA level has narrowed sequentially to TL593.8M for the June quarter versus TL836.4M for the March quarter. The year-on-year “deterioration” in EBITDA margin of circa 230bp is largely due to gross contribution shortfall.

And a narrower net loss. The net loss has also narrowed sequentially to TL554.1M for the June quarter versus TL939.7M for the March quarter.

Free cash flow turns positive. Free cash flow turned positive during the quarter: +TL185M in 2Q22 versus -1.8B booked in 1Q22, both figures are inflation adjusted. The reversal is due to positive reading in operating cash flow, which has posted +TL397M in June quarter versus -TL1,676M in March.

To be profitable sooner than the street expects. The quarterly readings are encouraging. Hepsiburada could become profitable sooner than the street gives it credit for.