A Fresh Reset For Jumia Technologies

Summary

• Jumia's Q3 results showed mixed performance with positive growth in active customers and GMV but increased cash usage and EBITDA loss due to strategic investments.

• Warehouse consolidation and increased marketing spend temporarily raised costs but are expected to drive efficiency and growth in 2025.

• Expansion beyond major cities in Nigeria is promising, with upcountry orders growing 22%, highlighting Jumia's resilience in tough economic conditions.

• Despite current stock declines, Jumia's strong cash position and strategic groundwork set up 2025 as a critical "prove it" year, maintaining a strong buy rating.

When I wrote about the "primal panic" in shares of Jumia Technologies (NYSE:JMIA), I noted that the company would need to re-earn the confidence of investors in the wake of its secondary share offering. While the offering put the company in a good position to pursue strategic objectives, investors reacted negatively to the large dilutive effect of the offering. This angst-filled backdrop greeted Jumia's Q3 earnings report where investors learned how the company has used some of the money from the secondary along with new strategic and operating developments. While the overall strategic narrative remains the same, elements of the execution speak to a kind of fresh reset for Jumia.

Once again, I sat down with CEO Francis Dufay to talk about the latest results.

Business Overview

Dufay began with an overview of the results for Q3. He acknowledged that the company delivered "mixed results." The 5% year-over-year growth in physical orders is unsatisfactory, and he expects "a lot more from this company now." Indeed, these expectations helped to drive this year's large run-up and what, I thought, was validation of my long-run thesis on Jumia. At this juncture, or very soon, the return on the company's important investments should show up in strong, top-line growth.

However, the promising news is that the company reached a milestone with positive year-over-year growth in active customers for the first time in two years. (An active customer returns to make another purchase within three months of their last purchase). While admitting 1% growth is "not spectacular", Dufay is encouraged by finally "crossing that line" from negative to positive growth. Moreover, GMV (Gross Merchandise Volume) grew at 29% year-over-year in constant currency terms (seven countries drove the growth). Dufay also noted that these numbers denote consistent growth, but "we want more than that." The chart below from the earnings presentation shows a rapidly improving trend. For Q4 2024, the company needs to show a successful Black Friday event this month (more on that below).

Financials

Dufay explained that cash usage went back up due to a one-time cash settlement for taxes in some countries and a build-up of inventory in preparation for Q4, which includes the Black Friday shopping event. In the past, Jumia was unable to build up such preparatory inventories. This year, the secondary provided the necessary capital to do so. Dufay acknowledged that the cash use "doesn't look great when you look at the liquidity position," however he added it is the "…right decision for the business because we need to grow and in Africa securing inventory is a big deal." Dufay further explained that in the past, the company's constrained liquidity position forced the company to wait until the beginning of the quarter and then clear inventory by the end of the quarter.

As long-time Jumia investors know, supply availability is a key strategic imperative for Jumia. Thus, it is encouraging to learn that the secondary enabled improved inventory management.

Dufay also acknowledged that EBITDA and the P&L present a mixed picture. He explained that EBITDA loss increased year-over-year given the absence of last year's non-recurring tax provision benefits (recognized under G&A expense). Without it, EBITDA would have shown improvement. He also said "the gross margin is marginally improving, which is fine with me." Gross profit margin increased slightly from 22.2% a year ago to 22.9% in Q3 2024.

The consolidation of warehouses the company announced last month also created extra costs but will enable future efficiencies. Dufay explained that "the warehouse moves, [they're] actually a very big deal. Disrupts a lot of the operations, increases costs, but for 2025 it means that we have the right centers to take a lot more volumes with much better efficiency than the setup we had before." As a result, Dufay is confident "about our growth levers…and we believe that we've done very hard fundamental work this quarter that will pay off in 2025, although it doesn't show in the numbers…"

Overall, Jumia's costs have stabilized. This stabilization is the foundation of improving profitability. I will be looking for this cost base to even improve from ongoing optimizations. The page below from the earnings presentation shows the breadth of stabilization in the cost base: from sales and advertising expense, and technology and content expense. General and Administrative ("G&A") expense is a bit on the high side.

Fulfillment Costs

The warehouse consolidation temporarily increased fulfillment costs. Dufay further explained that "the operational costs or fulfillment costs per order are flat in US dollars…we need to be decreasing that quarter after quarter and year after year, but it's fully explained because this quarter we invested money and time in moving to new warehouses." In Q3, Jumia finished the warehouse work in Nigeria and completed Ghana, Ivory Coast, and Egypt, four of Jumia's biggest countries. This amount of work "created a bit of waste and inefficiency, impacted our vendors and customers. So it did increase our operational costs, so that's why those ratios are not improving this quarter. But it's the right thing to do for 2025 to be ready for efficiency and growth."

In particular, by recently opening a new state-of-the-art, 6,000 square meter warehouse in Tema, Ghana, Jumia announced "by optimizing its supply chain operations, Jumia aims to reduce delivery times, expand product availability, and solidify its position as the preferred online shopping destination in the country." The announcement goes on to say that the warehouse will provide "a wider selection of products, faster delivery times, and even greater convenience to customers." Jumia clearly expects robust growth in Ghana and in other markets where warehouse improvements are occurring. These warehouses are key signals of confidence in Jumia's markets. I will be looking for direct payoff in a successful Q4, holiday season.

Jumia's operations got more complex during the consolidation. Dufay explained that "for example, we had to operate two or three locations at the same time because two were being discontinued and one was the new one. So it means you have teams in all three locations. You need shuttles between those locations to balance your inventory. You need security…it's just a lot more complex and a lot more expensive for a given period of time."

The trend should resume downward after these costs end. More efficient and centralized warehouses mean lower fulfillment costs going forward. Note that fulfillment expense per order was flat year-over-year on a constant currency basis, a testament to the company's cost discipline even while incurring the extra warehouse costs.

Marketing

The company also decided to spend more on marketing. Consumer incentives increased from $1.9M a year ago to $2.2M in the latest quarter. Despite the absolute increase, the percentage of physical goods benefiting from incentives decreased from 27% to 26% over the same time period. Still, Dufay lamented, "I'm not super happy with the outcome in terms of growth." As a result, "the learning is that we can be even more efficient in terms of marketing, and we have to achieve further savings to achieve in terms of marketing without endangering topline growth."

The extra marketing spend was a little surprising given past discussions focused on driving these costs down. During the earnings conference call, the company projected an increase in sales and advertising expense to invest in customer acquisition. This bet will need to show immediate and growing payoffs in coming quarters, given the need to show customer and order growth.

Customer and order growth is supported by offering the right product availability. Dufay proudly noted the company's ability to put together the right mix of products for sale to cost-conscious customers: "with the same marketing budget, we get more customers than last year finally, and we keep on getting better repurchase rates." This mix must be a key component of the stickiness that will deliver return on investments in customer acquisition.

Expansion

Jumia's expansion beyond the major cities is a point of pride for Dufay: "Our upcountry expansion project is definitely working…our upcountry orders outside of Abuja and Lagos, Nigeria grew 22% just versus last year which in the context of the macroeconomics of Nigeria is pretty good news." Dufay emphasized "we are feeling more confident" thanks to this success.

During the earnings conference call, Dufay noted "over 54% of orders come from outside of major capital cities, and these areas are key growth markets for us. For example, this past quarter in Nigeria, year-over-year gross orders outside of Lagos and Abuja grew by 22% as we extended upcountry. We plan to continue to extend our footprint outside of major urban areas in the coming years…We believe these initiatives are among the most efficient strategies for growth and do not expect them to require significant capital investments."

This growth outside the major capital cities has become a central part of my long-term investment thesis in JMIA and is one of the most encouraging features of the business. Over time, this growth should also promote economic development in communities that have previously been poorly served.

Jumia's performance in Nigeria despite the extremely challenging economic conditions adds to Dufay's confidence. He explained the success as "we've designed a business that is built for rough weather…this business is resilient for the worst macroeconomics." This very resilience explains why I continue to hang in there with JMIA.

Dufay emphasized "I believe a lot in….the business we have in Nigeria… Even if times are tough, there's much more demand we can serve…we can serve it because we've developed the right business model." This business model includes being the "super cheap" supplier of products at the right price level for declining purchasing power. Jumia is getting closer to where the people are and helping them to save money. Again, this access will be an important part of future economic development.

Shuttered Operations

Last month, Jumia announced shutting down operations in Tunisia and South Africa. Dufay explained that the secondary gave them the funds to incur the necessary costs: "it's like an investment in simplification and efficiency because it's one of cost that we would not have been able to incur if we had not done the fundraising."

Dufay provided additional color on the shutdowns in the Q&A portion of the conference call. The business in South Africa was in a highly competitive environment in a non-core retail business, mostly based on fashion. The closure of the South Africa business made sense from a resource allocation perspective. The resource allocation decision in Tunisia was about ending operations with "tough country dynamics" and lower market potential.

Macroeconomic Considerations

After the Federal Reserve cut rates in September, long-term U.S. bond yields steadily rose, and the U.S. dollar rose. Both factors impact emerging markets, including in Africa. However, Dufay indicated that "it is really hard to tell how much worse it can get versus the current situation. We could also assume that pretty big devaluations have been done. Some strong structural adjustment has been done already and that the economy is hard to go lower than this point…" This outlook aligns with Dufay's prior observations that macroeconomic conditions in its African markets had earlier gotten just as bad as they could possible get.

China also looms in the macroeconomic picture. Economic policy in the U.S. could soon feature more severe tariff regimes against China. If so, I expect Chinese supplies may get cheaper as they need to find other markets to sell goods. Such a decline would improve the value proposition for Jumia's goods and provide much needed increase in spending power in a number of African markets.

Conclusion

For a time, this year looked like a liftoff year for Jumia. Instead, it turned into one more year of strategic adjustments, optimization, and balance sheet fortification. All this work sets up for 2025 to be a key "prove it" year.

The current reaction in the stock suggests that investors are also in wait and see mode. JMIA fell 17.0% after the company reported earnings. The stock fell another 4.5% on Friday to close at a nine-month low. These losses several contrasts with the week's tremendous post-election rally in the U.S. JMIA has almost roundtripped the gains from the post-earnings lift-off in February of this year. The stock is now "only" up 8.2% for the year (versus a gain of 312% at the peak in July). Thus, the current price action represents a kind of fresh reset.

I closely monitor the cash balance, cash burn, and the price/sales ratio.

On valuation, JMIA now trades at a rock bottom 2.2 times sales. The stock is also trading at just 1.7 times enterprise value to sales. In other words, the stock is essentially fully derisked, assuming 2025 will come through as a prove-it year.

The net cash used in operating activities was $26.8M in Q3, an 11.7% year-over-year increase. In Q1, the cash flow was a positive $4.5M and negative 8.4M in Q2. The negative $30.7M year-to-date pales in comparison to 2023's negative $73.0M. The company currently has $164.6M in cash on hand. Thus, even in a worse case scenario where the company somehow falls back toward 2023 burn rates, Jumia has a two-year runway. Assuming the worst-case scenario is an outlier possibility, Jumia then has a multi-year runway to prove its growth model and even turn a profit in the future.

Given guidance for the remainder of the year of an increase in both orders and Gross Merchandise Value, I am assuming that the cash burn will return to previous trends. Thus, I maintain a strong buy on the shares.

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