Ladies and gentlemen, good day, everyone, and welcome to Vipshop Holdings Limited Second Quarter 2021 Earnings Conference Call. At this time, I would like to turn the call to Ms. Jessie Fan, Vipshop's Head of Investor Relations. Please proceed, ma'am.

Thank you, operator. Hello, everyone, and thank you for joining Vipshop's second quarter 2021 earnings conference call. With us today are Eric Shen, our Co-Founder, Chairman and CEO; and David Cui, our CFO. Before management begins their prepared remarks, I would like to remind you that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in our Safe Harbor statements, in our earnings release and public filings with the Securities and Exchange Commission, which also applies to this call to the extent any forward-looking statements may be made. Please note that certain financial measures used on this call such as non-GAAP operating income, non-GAAP net income, and non-GAAP net income per ADS are not presented in accordance with U.S. GAAP. Please refer to our earnings release for details relating to the reconciliation of our non-GAAP measures to GAAP measures. With that, I would now like to turn the call over to Mr. Eric Shen.

Good morning and good evening, everyone. Welcome and thank you for joining our second quarter 2021 earnings conference call. In the second quarter, we kept up our solid business momentum with core operating metrics continuing to trend healthily. Our user base maintained its strong growth driving a continued increase in total GMV. During the quarter, our total number of active users grew by 32% year-over-year to 51.1 million and our total GMV increased by 25% year-on-year to RMB48.1 billion. Our most valuable user group showed especially strong growth momentum with cumulative Super VIP membership increasing by nearly 50% year-on-year, contributing about a third of the total GMV in the second quarter of 2021. These encouraging developments were the result of our relentless efforts to calibrate our strategic focus and increase operational synergies. In the second quarter, we continued to robustly execute our merchandising strategy. Our buyer teams successfully collaborated with an increasing number of suppliers and brand partners. As a result, we have not only been able to attract an increasing amount of unique branded merchandise to be sold on our platform, but have been able to do so at Vipshop’s favorable discount price. In addition to our traditional deeply discounted inventory covering an extensive range of brands, we now also carry a considerable proportion of Made for Vipshop products. These are products especially customized for Vipshop by our branded partners. We are committed to increasing the breadth and depth of our merchandising portfolio to offer users a differentiated selection of high-quality merchandise while creating a dynamic price advantage for our discount sales. In the second quarter, we successfully instituted refinements at the operational level. User experience is one of our clear priorities. To this end, we implemented several initiatives, including better matching of merchandising selection to target users and improving overall incentives for our most valued users. On top of this, we also leveraged effective marketing to attract more younger shoppers to our platform. Looking forward to the second half of 2021, we remain committed to executing our merchandising strategy. We are dedicated to creating value for our new and existing customers while also increasing the value we add for our core branded partners. We believe this will solidify our leading position in China's discount retail markets. At this point, let me hand over the call to our CFO, David Cui, who will go over our operational and financial results.

Thanks, Eric, and hello, everyone. We are pleased to report a strong set of results for the second quarter of 2021. During the quarter, we delivered solid top line growth with total net revenue reaching RMB29.6 billion, representing a year-over-year increase of 22.8%. We also witnessed sustainable growth momentum in business development, which is evidenced by our number of active customers and total orders growing by 32% and 30% year-over-year, respectively. Non-GAAP net income attributable to Vipshop's shareholders also increased by 11.3% year-over-year to RMB1.5 billion. In the second quarter of 2021, we repurchased approximately US$301 million of our ADS in accordance with the US$500 million share repurchase program we adopted in March earlier this year, showing both our confidence in the robustness of our business model and our dedication to delivering long-term value to our shareholders. Before I get started with detailed quarterly financial highlights, I would like to clarify that all the financial numbers presented below are in RMB and all the percentage changes are referred to year-over-year unless otherwise noted. Total net revenue for the second quarter of 2021 increased by 22.8% year-over-year to RMB29.6 billion from RMB24.1 billion in the same period last year, primarily driven by a large number of active customers. Gross profit for the second quarter of 2021 increased by 20.6% year-over-year to RMB6.0 billion from RMB4.9 billion in the same period last year. Gross margin for the second quarter of 2021 was 20.1% compared with 20.5% for the same period in 2020. Total operating expenses for the second quarter of 2021 were RMB4.8 billion compared to RMB3.8 billion in the second quarter of 2020. As a percentage of total net revenue, total operating expenses for the second quarter of 2021 was 16.4% compared with 15.8% in the second quarter of last year. Fulfillment expenses for the second quarter of 2021 were RMB2.1 billion as compared with RMB1.7 billion in the same period in 2020. As a percentage of total net revenue, fulfillment expenses for the second quarter of 2021 decreased to 6.9% from 7.0% in the second quarter of 2020. Marketing expenses for the second quarter of 2021 were RMB1.4 billion as compared with RMB1.0 billion in the same period of 2020. As a percentage of total net revenue, marketing expenses for the second quarter of 2021 were 4.8% compared to 4.3% in the second quarter of 2020. The increase was primarily due to higher investment in advertising activities related to customer acquisition and retention. Technology and content expenses for the second quarter of 2021 were RMB369.9 million compared to RMB305.4 million in the same quarter in 2020. As a percentage of the total net revenue, technology and content expenses for the second quarter of 2021 decreased to 1.2% from 1.3% in the second quarter of 2020. General and administrative expenses for the second quarter of 2021 were RMB1.0 billion compared to RMB804.6 million in the second quarter of last year. As a percentage of the total net revenue, general and administrative expenses for the second quarter of 2021 were 3.4% as compared with 3.3% in the same period of 2020. Income from operations for the second quarter of 2021 increased by 18.6% year-over-year to RMB1.5 billion from RMB1.2 billion in the second quarter of 2020. Operating margin for the second quarter of 2021 was 5.0% compared with 5.1% in the same period last year. Non-GAAP income from operations before the second quarter of 2021, which excluded share-based compensation expenses and amortization of intangible assets resulting from business acquisitions increased by 16.1% year-over-year to RMB1.7 billion from RMB1.5 billion in the second quarter of 2020. Non-GAAP operating margin for the second quarter of 2021 was 5.9% compared with 6.2% in the second quarter of 2020. Net income attributable to Vipshop’s shareholders for the second quarter of 2021 was RMB1.1 billion compared to RMB1.5 billion in the same period last year. Net margin attributable to Vipshop’s shareholders for the second quarter of 2021 was 3.7% as compared with 6.4% in the prior year period. Net income attributable to Vipshop’s shareholders per diluted ADS for the second quarter of 2021 increased to RMB1.56 from RMB2.24 in the second quarter of the previous year. Non-GAAP net income attributable to Vipshop’s shareholders for the second quarter of 2021 increased by 11.3% year-over-year to RMB1.5 billion from RMB1.3 billion in the second quarter of 2020. Please note that non-GAAP net income attributable to Vipshop’s shareholders excludes a number of items, the details of which can be found in our earnings release. Non-GAAP net margin attributable to Vipshop’s shareholders for the second quarter of 2021 was 5.0% as compared with 5.5% in the same period last year. Non-GAAP net income attributable to Vipshop’s shareholders per diluted ADS for the second quarter of 2021 increased to RMB2.10 from RMB1.92 in the second quarter of 2020. As of June 30, 2021, the company had cash and cash equivalents and restricted cash of RMB16.5 billion and short-term investments of RMB3.6 billion. Looking forward to the third quarter of 2021, we expect our total net revenues to be between RMB24.3 billion and RMB25.5 billion representing a year-over-year growth rate of approximately 5% to 10%. Please note that this forecast reflects our current preliminary views of the market and operational conditions, which are subject to change.

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. We have the first question from Feitong Zhang from CICC. Please go ahead.

Hi, this is Feitong from CICC. Thanks for taking my question. I have two inquiries. First, I'd like to understand the competitive landscape better. We've seen that some short video platforms are performing strongly this year in e-commerce, with certain brands considering these channels for stocking. How should we view the competitive landscape in the stock industry moving forward? Any insights would be appreciated. My second question pertains to the guidance for the third quarter. How should we interpret this guidance? Did we notice any effects from the pandemic in July and August that have been included in our third quarter outlook? Should we anticipate a boost in the fourth quarter if the pandemic is managed effectively?

Let me translate the first answer to the first question regarding live streaming models. Many platforms are utilizing live streaming for sales, whether through brand deals or older inventory. These platforms are capturing significant customer attention, but the key factor remains merchandising, which includes pricing advantages and brand strengths that are most important to customers. At Vipshop, we engage less in live streaming. Instead, our main focus is on delivering unique value to customers through brand differentiation and pricing benefits. While short video platforms do draw considerable customer time, their impact on our business is limited. Regarding our guidance for Q3, a few elements are at play. We've noticed that consumer sentiment isn't as robust due to a challenging macro environment, which can be partially attributed to some natural disasters in certain areas and sporadic COVID-19 resurgences. Last year in Q3, we experienced a tough phase with strong recovery from the end of COVID-19, and historically, Q3 is usually a slower season for the apparel industry. However, as we look ahead to Q4, it is typically the busiest season, where apparel ticket sizes increase, and we plan to run promotional events like others in the industry. Therefore, Q4 should perform relatively well, assuming the COVID-19 pandemic is under control by then.

Thanks. Very helpful.

I would like to add on something Eric just mentioned. Number one is that, remember, last Q3, we had a booming business post-COVID-19. So we had a larger base for this year, so that's why we had a softer guidance for Q3 this year. Number two is that we should notice that our active customer base actually grew year-over-year by 32%. So that does provide a foundation for us to grow our future business, and that's also a strong indicator that our business is healthy and should help with our future growth.

Thank you. We have the next question. This is coming from the line of Eddy Wang from Morgan Stanley. Please go ahead.

Hey, I have two questions. First, can you provide the monthly breakdown for the second quarter? We remember that during the first-quarter earnings call in May, you noted that your guidance for the second quarter was a bit conservative, leading us to expect strong growth. However, it seems like your sales in June were weaker than anticipated. Could you elaborate on that? Secondly, could you share insights on apparel demand in July and so far in August? The NBS data shows weakness in retail sales for apparel, and I’m wondering if this will affect your guidance for the third quarter. Thank you.

It looks like you were expecting strong growth, but in June, your sales performance appears to be weaker than anticipated. Could you provide more details on that? Additionally, I'd like to know how the demand for apparel has been in July and so far in August. The NBS data shows weakness in retail sales of apparel, so I'm curious if this will affect your guidance for the third quarter. Thank you.

Okay. In terms of the trend that we have seen in June, as you mentioned, our guidance of 20% to 25%, actually in June, we were already seeing our slower sales due to the longer promotional event for the whole e-commerce sales. In the past, the e-commerce space tended to hold one or two or three-day promotional events. This has become a month-long promotional event, and it's becoming less and less attractive to customers. Back in June, we tried to deliver some coupons to customers to encourage their spending, but it did not turn out very well. So we actually had some control over our marketing spend. Entering into the first half – the first one-and-a-half months of the third quarter, we did see some weakness in the apparel category. It’s not as strong as we had anticipated, but it's also not as bad as we probably had imagined. We think that primarily due to the resurgence of COVID-19 here and there, and we are seeing the trend moving slower than before. But at the same time, we also see branded merchandise actually has very good inventory because offline stores are not a very good media place for sales due to the COVID-19. So actually, they have increased inventory online for us. So we have to see a few a couple of months to see how this trend turns out.

It's not as bad as we had imagined. We think this is primarily due to the resurgence of COVID-19 in some areas, which has caused the trend to move slower than before. However, we also see that branded merchandise has strong inventory because offline stores are not effective for sales right now. As a result, they have increased online inventory for us. We need to observe this trend over the next couple of months to understand how it develops.

Thank you. We have the next question from Ronald Keung from Goldman Sachs. Please go ahead.

Thank you. Thank you, Shen and David, Jessie. So I have two questions, and I'll translate to Mandarin. The first question is on, also in our third quarter revenue guidance of 5% to 10%, just want to know how that user growth and ARPU is kind of put within this, this forecast? Just want to see whether our user growth remains quite strong or remains maintaining that the trends in the second quarter, or would that imply kind of ARPU would decline further on a year-over-year basis, and how do we see that into the fourth quarter as what we talk about as the peak season? And then my second will be on marketing spending that we spent around 37% more in marketing spend in the quarter, you mentioned about some control during June in couponing, but this is still quite an increase. And so, are we expecting more spending as we head into the second half and how as we think of sales and marketing as a percentage of revenue, which is one of the metrics which has been around 4.8% of revenues in the second quarter.

Could you clarify if the fourth quarter is considered the peak season? Additionally, regarding marketing expenses, we saw an increase of about 37% in the quarter. You mentioned some control on couponing in June, but this is still a significant rise. Should we anticipate more spending as we approach the second half of the year, and how do we view sales and marketing as a percentage of revenue, given that it was around 4.8% of revenues in the second quarter?

Hi, Ronald. I'll take on the second question regarding the marketing expenses. So with respect to marketing expenses, this is probably the area that we have more discretion and the marketing expenses with a little bit, between new user acquisition and existing user retention. So, we have more discretion in terms of how we allocate the spending. And then as you can see in the second quarter, we grew our active customer base by 32%, we would expect that we will continue to grow our customer base and in terms of the strategy, we will be carefully evaluating how to execute in terms of the marketing strategies. And the objective for us is to maintain our marketing expenditure at a stable level, not to – in terms of the percentage of revenue, we expect that number should remain stable. We will try to improve our efficiencies in terms of how we spend that dollar.

Okay, back to your question on trends. As you may have noticed that our ARPU for the second quarter decreased by 7% year-over-year. So for Q3 and Q4, we don't expect similar deceleration, the decline would be much moderated. You know we have spent a lot of time in reactivating our old customers as well as attracting new customers. But recall in the second quarter of last year, we actually stopped spending money on attracting new customers. So when entering into this year, we saw an increasing number of new customers who may need some time to ramp up their spending, which is actually impacting the overall ARPU. But we think the general trend for ARPU going forward will be stabilized. We are confident because we've seen very strong growth in Super VIP memberships which grew about 50% year-over-year in the second quarter, and we found that they have been very loyal and spend much more than an average customer; in fact, Super VIP members spend almost ten times an average customer. So as long as we can grow our Super VIP members, we are confident that the ARPU will improve over time.

Understood, thank you, thank you management.

Thank you. We have the next question. This is coming from the line of Thomas Chong from Jefferies. Please go ahead.

Management, I will ask questions on behalf of Thomas Chong. I have two questions. First, can management provide some insights on the outlook for the second half of the year and 2022, particularly regarding revenues, gross profit margin, and net profit margin? Second, we talked about attracting young users. Do we have any updates on our user acquisition initiatives?

So in response to the first question regarding the outlook for the second half of the year and beyond, we believe that discount sales represent a resilient and long-term business as many consumers are drawn to them. With our customer base continuing to grow, we are quite optimistic about maintaining a stable growth outlook. Regarding net margins, we have repeatedly stated that we intend to balance our revenue growth with profitability. We have enjoyed strong profitability for several quarters, and we plan to maintain a solid level of profitability moving forward. As for the second question about new customer acquisition, we utilize various channels for this purpose. Historically, we have relied on traditional methods like digital advertising to engage younger shoppers, particularly those born after 2000. We have recently observed a notable increase in contributions from these younger shoppers, which rose by 6% year-over-year in the second quarter. Looking ahead, we aim to explore more innovative customer acquisition channels, such as live streaming and short video formats, to attract more younger shoppers to our platforms.

Thank you, shall we move for the next question? The next question comes from the line of Nelson Chang from Citi. Please go ahead.

Hi management. Thanks for taking my questions. So I have two follow up questions. The first question is regarding your guidance and your outlook. So looking beyond the third quarter revenue guidance and your expectation on fourth quarter, do you have any preliminary view on next year or medium term normalization of growth in the discount merchandising industry? And do you expect Vipshop to grow faster than the industry growth in the future? So my second question is also regarding the new user profile. So wondering if management can provide more qualitative colors in terms of user mix from lower-tier cities and their spending behavior from the new acquisition channels like this short video platform?

In terms of the industry outlook compared to Vipshop, you should know that we have a fundamentally strong business. While we may encounter more competition than traditional e-commerce platforms, we are the leading players in discount sales within the apparel tech segment. We remain confident that our expertise in discount sales will surpass that of our competitors in this area. The broader e-commerce industry is continuing to grow at around 20% year-over-year, and we are aiming for consistent growth over the long term. Regarding user behavior across different city tiers, we’ve observed a stable trend in GMV contribution, user acquisition, and ARPU, with little change in behavior among various city tiers.

Let me add on something on this. So, I think we want to differentiate ourselves from other e-commerce platforms in terms that we only focus on apparel related categories and while other e-commerce platforms may carry many more other categories. So, we are confident that we have the leading edge in terms of how we process apparel sales and inventories. So we should outperform in these categories as compared to other e-commerce platforms.

Thank you very much.

Thank you. We have our next question. This is coming from the line of Natalie Wu from Haitong International. Please go ahead.

Hi, good evening management. Thank you for taking my question. I'm asking on behalf of Natalie. My first question is about the company's new initiatives. Can management provide any insights into whether there are any new initiatives or businesses currently being tested? Additionally, could you update us on their recent developments? My second question is focused on user engagement and experience. I believe management mentioned some refinements made in the second quarter aimed at enhancing the user experience on the platform. I would like to know what those specific refinements were and if there are any operational metrics available to help us gauge the improvement in user engagement.

Can you provide an update on the businesses we are currently trialing? Are there any recent developments to share? My second question focuses on user engagement and experience. I believe management mentioned some enhancements in the second quarter aimed at improving the user experience on the platform. Could you elaborate on those specific enhancements and share any operating metrics that might indicate improvements in user engagement?

I'll add something on this. As mentioned earlier, at the end of Q2, our paid Super VIP membership increased by nearly 50%. Super VIP members tend to spend significantly more than the average customer, and they have already accounted for one third of our total GMV. In Q2, we further enhanced our incentives for Super VIP members, including an additional 5% discount on select merchandise. We provided better-targeted products and improved our services for Super VIP members. In May, we also introduced certain lifetime privileges for them. Moving forward, we will continue to offer more popular membership benefits to enhance their shopping experience, which we hope will attract more customers to become Super VIP members.

Okay, back to our first and second question. The first question is on the new business development. Actually, we have been very focused on our core business. We've made it clear that we reinforced our executional merchandising strategy and everything we do is centered on that strategy. We're focused on discount sales and enhancing our buying capabilities. To that end, we are trying to optimize our brand portfolio and target acquisition with brands to enhance our competitiveness. We are consolidating our long-term core competency in the discount retail market. So 99% of management focus is on discount retail and the execution of merchandising strategy. Of course, we are trying a lot of efforts in innovated areas. We've been investing to fulfill our innovation, but that's not our current priority. In terms of enhancing our user experience, it is through some operational refinements. You have to be aware that all consumers are looking for good brands, good merchandise with good prices and good quality that should be matched with good services. So we've been investing heavily in bringing our user experience to the next level, including a hassle-free return or exchange leveraging our relationship to strengthen our express delivery. And on the other hand, we have been increasing our efforts on our front end and back end in terms of customer service with metrics that evaluate customer service standards, like our NPS, improving very significantly. So in the future, we'll continue to invest in our efforts in enhancing our customer service and user experience.

Thank you, Management.

Thank you. We have the next question from the line of Robin Young from Daiwa. Please, go ahead.

Hi, thank you, management, for taking my question. This is Robin asking on behalf of John Choi. I have two questions. Given the strong user growth over the past four quarters, but the year-on-year decline in ARPU, should we anticipate an increase in ARPU in 2022 as new users stabilize and spending from our older users grows? Will this occur in the first half or the second half of next year? Should we also expect to see a reduction in couponing by that time? My second question is regarding regulations. Are we experiencing any positive or negative impacts on our company?

Okay, regarding your first question about ARPU trends, we have noted that ARPU has declined in the second quarter, but this decline will be moderate going forward. It takes time for both new customers and older customers to increase their spending. Historically, we've seen spending from these groups, but recently that hasn’t been the case. However, we have observed a noticeable increase in their spending on a quarter-over-quarter basis, so we’re not overly concerned. As long as we continue to grow our user base, we expect ARPU to improve over time. Additionally, we plan to invest significantly in our SVIP membership program to enhance ARPU moving forward. SVIP members already account for a third of our total net GMV, and converting more customers into SVIP members will help improve ARPU over time. Regarding your question about regulations, we believe that recent developments in internet regulations—such as those concerning cloud services, unfair competition, and data security—especially regarding exclusivity for merchants, will benefit Vipshop to some degree. This means we’ll experience a more open and transparent market with fair competition, providing us with more opportunities to partner with a growing number of brands, which will enhance our selection of branded merchandise on our platform. Overall, we welcome these regulatory changes as they are likely to benefit Vipshop.

Thank you. Due to time constraints, that concludes our Q&A session for today. I would now like to hand the conference back to Jessie for any ending remarks. Please take over.

Thank you for taking the time to join us today. If you have any questions or follow-ups, please don't hesitate to contact me. We look forward to speaking with you next quarter.

Thank you. Ladies and gentlemen, that concludes our conference call for today. Thank you all for your participation. You may disconnect your lines now.