CEO Insights: Jumia Technologies' Strategy For Efficient Growth Continues To Deliver (Seeking Alpha)

Summary

• Jumia Technologies AG's stock has experienced volatility but its prospects remain unchanged. In this interview, CEO Francis Dufay describes strong operational improvements and revenue growth.

• Jumia maintains sufficient funding and a healthy balance sheet and sees positive economic trends in its key markets.

• JumiaPay continues to expand and increase adoption rates, while pickup stations and cost reduction efforts contribute to efficiency gains.

• I continue to rate the stock a strong buy as the company promises to continue delivering improvements over time.

Introduction

Jumia Technologies AG (NYSE:JMIA) has experienced quite the roller coaster since I last interviewed CEO Francis Dufay about the company’s earnings. Over this short time, the stock nearly doubled, gave up all those gains and then some, and then rallied again into the latest earnings report. After an initial 17.9% post-earnings boost, JMIA is stretching toward its previous post-earnings high.

Through it all, JMIA’s prospects never changed. In my last piece, I described how the company delivered “proof positive” of its strategic evolution. The Q1 earnings report followed through on a consistent message of operational improvements and efficiencies, market expansion beyond capital cities, increasing adoption of digital payments in the form of JumiaPay, and revenue growth from an increasingly sticky customer base. (Quarterly active customers fell slightly by 5% while total orders increased 2%, Jumia’s first year-over-year growth over the past 5 quarters). The stock’s volatility resonates with some of the macroeconomic uncertainties in Jumia’s African markets, but the volatility is misaligned with the company’s steady execution. The volatility belies the ultimate potential of a company that can become a major part of the economies of several African nations in years to come.

When I sat down with Dufay this time around, I had questions about the key drivers of some impressive growth numbers. Year-over-year revenue growth of 19%, 57% in constant currency terms, well-exceeded Q4’s 2% year-over-year contraction, a 28% growth in constant currency terms. Gross margins also experienced significant growth of 25%, 67% in constant currency terms. This resulted in gross margins increasing from 14.4% of GMV (gross merchandise value) to 17.2%. These numbers compared favorably to Q4’s 15.9% share of GMV going to gross margin. I also had questions about Jumia’s liquidity position given an unfortunate $5.9M hit from sudden devaluations in Egypt and Nigeria. Yet, the company reiterated guidance, so I had to probe for details on the remaining prospects for future improvements. The conversation was as enlightening as ever, and I was once again left with a conviction about the long-run potential for Jumia.

Liquidity Position and Currency Devaluations

Dufay addressed the company’s liquidity decline, explaining that “the cash position decreased by $19.1 million this quarter, and $5.9 million of that was driven by devaluations, mostly in Nigeria.” Despite this decline, Jumia maintains a majority of its cash in U.S. dollars, with approximately 80% held in USD to hedge against high currency volatility. The company fields numerous questions about its cash policies, so Dufay is keenly aware of the importance of communicating the health of the balance sheet. He insisted the company is sufficiently funded.

Dufay went on to note that the cost of acquiring new customers is as low as can be and lifetime value (LTV) of its customers is increasing. At some point, the gap between CAC (customer acquisition cost) and LTV will accelerate. Dufay explained that this dynamic is a better way of thinking about Jumia’s liquidity position.

Regional Economic Improvement

Despite recent devaluations in Nigeria and Egypt, Dufay noted positive trends: “For the first time in a long time, we’re seeing currency stabilizing in the biggest markets.”

Nigeria’s naira has even appreciated recently and stabilized post-devaluation. Difficult economic measures over the past six months appear to be paying off now for the Nigerian economy. The Nigerian government has also settled debts with foreign companies without the IMF’s assistance.

Kenya’s currency improved 19% against the U.S. dollar after the country secured an IMF loan, representing some important economic reforms. The economy overall is doing “fine” according to Dufay. Tourism remains good. Drought previously threatened the agricultural sector, but recent heavy rains have created flooding.

Dufay elaborated on recent economic developments in Egypt: “it was commonly assumed that the ballpark number that Egypt needed was pretty much $50 billion…so they could finish a few…projects and save the economy.” Egypt received $35B from the United Arab Emirates after a sale of land on the Mediterranean Sea. The IMF granted a loan to Egypt, and the country also secured funds from the EU (European Union) for a migration deal to top off its cash infusion at $50B. Thus, overall, Egypt’s economic situation is looking improved.

All of these regional economic improvements are of course positive developments for Jumia’s future results.

Growth in Corporate Sales

Corporate sales played a significant role in driving marketplace revenues, particularly in Egypt, where the company leverages its import licenses. “It’s giving us a boost in that market in specific categories…mostly like appliances and TVs and a bit of phones,” Dufay said. Jumia uses its import advantage to offer competitive prices to both individual and corporate customers.

Along with this success in corporate sales, Dufay emphasized that Jumia is seeing top-line growth broadly across the business.

Market Channels

Jumia balances between first-party and marketplace channels. “By DNA, we’re marketplace, but the plan is to get the value proposition,” explained Dufay. Country-by-country, market-by-market, Jumia looks for the channel split that creates the most value for customers and presents the best opportunity for the category mix. Jumia follows this dynamic strategy across the business. Dufay affirmed that the company builds categories in different ways and categories across markets.

JumiaPay

JumiaPay continues to expand its reach, particularly in Kenya, where nearly 100% of orders are completed using JumiaPay due to the country’s widespread use of mobile money. “In Nigeria, we’re rolling out JumiaPay on delivery as we speak, and we believe that half of our volumes could go cashless with that,” Dufay added. Higher JumiaPay usage on e-commerce is important for increasing prepayment and postpayment in ways that eliminates cash from the supply chain.

JumiaPay transactions soared year-over-year by 52%. As a percentage of orders for physical goods, JumiaPay jumped from 18.8% a year ago to 32.5% in Q1 2024. These adoption rates created a 10% year-over-year increase in total payment volume (TPV), 92% growth on a constant currency basis.

Pickup Stations and Expansion

Pickup stations (PUS) are core part of Jumia’s e-commerce strategy. Adoption of PUS jumped from 43% to 51% of shipped packages. The increase in share of sales outside of the capital cities has helped drive these gains. Dufay noted that “we’ve been actively pushing towards smaller cities where it’s anyway only pickup stations.” Pickup stations are scalable and easier to operate, and Jumia can pass on a large share of the cost savings to customers. Jumia has also been revamping its network by replacing some delivery hubs with PUS.

While a number of retailers in Africa target selling to the “urban elite” and upper classes, Jumia sees massive demand potential from an underserved middle class (broadly defined). Dufay is proud of the work Jumia has done to cultivate a company culture aligned with this effort. (Jumia has undergone significant change management since Dufay’s promotion to the CEO post). The pickup stations are a valuable part of a network reaching out to provide supply to these underserved markets.

Cost Reduction and Efficiency Gains

Dufay emphasized Jumia’s focus on cost reduction while maintaining quality services. He recognizes that many people were skeptical that the company could operate with much lower cost and still grow. Thus, it is particularly gratifying to get to this juncture in the business with still room to go for cost savings and efficiencies. For example, the company’s warehousing strategy promises to transform fulfillment costs. Dufay was also careful to note that while the company has broadly reduced costs, they want their vendors to be able to make money: “we have to be reasonable on monetization.” On the other hand, customers have had to adjust to cuts in packaging costs.

This past quarter adjusted EBITDA loss fell to just $4M, an 83% year-over-year decline and 94% drop in constant currency terms.

Search Engine Optimization (SEO)

Jumia is actively optimizing its search engine optimization (SEO) strategies to enhance the customer journey from search to purchase. Recognizing that SEO “had not been optimized much over the past,” CEO Francis Dufay emphasized that Jumia rebuilt its SEO team with individuals possessing “real seniority and experience” to address this challenge. The team is focusing on core elements such as clean website architecture to ensure it can be easily crawled by search engines. They prioritize improving keyword and text descriptions on product pages while standardizing architecture across markets to eliminate inconsistencies.

Although they have not yet extensively integrated blogs or external links, they enrich internal content to bolster SEO within their platform. Searches like “smartphone delivery in Accra” guide customers to relevant category pages, while more specific queries like “Samsung S24” will lead directly to the product page. By consolidating listings to a single SKU per model across multiple vendors, Jumia aims to streamline searches and help “Google to search it and direct customers.” This ensures the platform offers a seamless and efficient purchasing journey.

It will be interesting to see in coming quarters what kind of conversions Jumia gets from these improved SEO user journeys.

Conclusion and the Trade

Jumia’s turnaround and growth story, under the leadership of Dufay, is marked by critical strategic adjustments. Despite fluctuating market conditions and challenges like currency devaluations, Jumia remains focused on its strategic pillars, including cost efficiency, market expansion, the growth of JumiaPay, and marketing improvements including SEO. Jumia has maintained and executed on a consistent message accompanied by solid and improving results. The company’s emphasis on pickup stations and growth outside capital cities demonstrates a commitment to reaching underserved markets, a key to scalable operations. By staying dynamic, nimble and continuously refining their operational framework, Jumia remains well-prepared to ascend into a major economic player across Africa.

The company’s performance through the strategic shift has delivered the numbers that keeps employees motivated to stay the course and to continue rising up to the challenges present in various African markets. I am similarly encouraged and continue to rate JMIA a “strong buy.”

The technicals for JMIA demonstrate this stock can be hard to buy or to hold, not to mention volatile macroeconomic dynamics in various African markets. The last price pullback took JMIA below the 2023 double-top (see the chart above), a level which I hoped would provide price support. The current rally through that level stopped short of the last highs set in March. Thus, I expect JMIA to bounce around in a wide range until a new major catalyst appears, like the first quarter of positive adjusted EBIDTA. The company's guidance does not quantify the path to profitability (understandable given the economic environment), but the company is certainly moving fast in the right direction given the results I noted above.

JMIA currently trades at 3.3 times sales and a 2.7 EV/sales ratio. Whenever JMIA hits its full business stride, I foresee a market willing to pay at least double that valuation. As a result, I consider the current price worth the risk of entry relative to the long-term potential of both sales growth and multiple expansion. I also like accumulating more stock at a discount on pullbacks to points of presumed support: for example, $5.50 at the 50-day moving average (the red line in the chart above) and $5.00 where a now uptrending 20-day moving average is converging with 2023's double-top.

Read the original article on Seeking Alpha