Shein’s market value fell sharply on Tuesday as investors reacted to a steep decline in quarterly earnings, with the fast-fashion retailer’s shares plunging as much as 14% in Hong Kong.
The stock was down 10.9% at HK$31.44 by the midday break, leaving the company valued at about $17 billion. That compares with a market capitalisation of roughly $26 billion when Shein began trading in Hong Kong on September 1.
The sell-off came after Shein reported adjusted net profit of $228 million for the second quarter ended June 30, representing a 67% decline from the same period a year earlier. Its adjusted profit margin narrowed to 2.1%, from 6.2% a year earlier.
The results marked Shein’s first quarterly financial update since its initial public offering and have intensified investor scrutiny of whether the company can maintain the rapid expansion that has driven its rise to become one of the world’s largest online fashion retailers.
Analysts at Jefferies estimated that earnings for the quarter came in more than 10% below the lower end of the range implied by Shein’s prospectus.
Jianggan Li, chief executive of Singapore-based consultancy Momentum Works, said the figures raised questions about the company’s ability to restore both growth and profitability.
"Shein is still growing orders and diversifying across markets, but the scale of the margin compression and the weakness in Europe raise questions over how quickly it can return to a combination of stronger growth and improving margins," Li said.
Europe emerges as a pressure point
One of the biggest challenges highlighted by the results was Shein’s performance in Europe, where sales dropped sharply after the company raised prices and reduced online advertising ahead of new European Union charges on low-value e-commerce parcels.
The EU introduced a €3 fee on such parcels from July 1, adding another cost pressure for a business model built around shipping inexpensive items directly to consumers.
Shein has previously warned that the European measures could have a larger impact on its business than the US decision to end the so-called de minimis exemption for low-value shipments.
The company was already forced to raise prices in the United States last year after the Trump administration ended the duty-free treatment for low-value e-commerce parcels.
For Shein, which has built its global business around low-cost clothing and direct-to-consumer shipping, changes to those trade rules have increased the cost of a model that previously benefited from relatively inexpensive cross-border deliveries.
Higher freight costs squeeze margins
The company’s margins were also hit by higher logistics costs.
Conflict in the Middle East contributed to increased jet-fuel and freight costs, putting additional pressure on Shein’s expenses as it continues to rely heavily on air shipments to deliver inexpensive clothing to customers around the world.
The impact was reflected in the sharp contraction in profitability despite continued order growth.
The weaker margins are particularly significant for Shein because its business model depends on selling fashion items at very low prices while using rapid inventory turnover and large-scale online sales to generate profits.
The company is known for products such as $5 dresses and $10 jeans and for operating with frequent and often permanent discounts.
Shein targets higher-priced fashion
Shein chief executive and chair Yangtian Xu said on Monday that the company’s priorities included increasing the amount of inventory held in Europe.
Xu also said Shein plans to expand its offering of higher-priced clothing, a strategy aimed at improving profitability while broadening the retailer’s product range.
Increasing local inventory could help the company respond more quickly to European demand and reduce some of the logistical challenges associated with shipping individual orders across borders.
The move towards higher-priced products could also help Shein lift its average selling prices and reduce its reliance on the ultra-low-cost segment that has defined the brand.
However, the strategy comes as the company faces a more challenging operating environment in several major markets.
Investors watch growth trajectory
Shein’s extraordinary expansion has been driven by an online model that uses data and consumer demand to rapidly introduce new products, while its low prices have helped it attract shoppers in markets around the world.
That growth has also made the company a major player in the global fashion industry and a target of increasing regulatory scrutiny.
Following its Hong Kong listing, investors are now looking for evidence that Shein can translate its scale into sustainable earnings growth.
Tuesday’s market reaction showed the sensitivity of investors to any deterioration in margins or regional sales.
The fall in the share price also means the company’s market value has declined by roughly $9 billion from the level recorded when it began trading in Hong Kong earlier this month.
For Shein, the immediate challenge is balancing its low-price appeal with rising logistics and regulatory costs, while expanding into markets and product categories that can generate higher margins.
The company’s next results will therefore be closely watched for signs of whether the second-quarter profit decline was a temporary squeeze or evidence of a broader shift in the economics of its fast-growth business model.