Vipshop Holdings Ltd Q4 FY2021 Earnings Call

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

Thank you, operator. Hello, everyone, and thank you for joining Vipshop's fourth quarter and full-year 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 reconciliations 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 to everyone. Welcome and thank you for joining our fourth quarter and full-year 2021 earnings conference call. We are delighted with our solid business performance in 2021. Despite a slow fourth quarter impacted by the challenging external environment. For the full-year, total active customers increased by 12% year-over-year to RMB93.9 million GMV rose by 16% to RMB191.5 million. Notably, super VIP active customers grew by 50% to RMB6 million and that contributed 36% of online net GMV. Driven by steady growth in both customer base and average revenue per customer. Our total revenue for the year increased by 15% year-over-year to RMB117.1 billion. Non-GAAP net income for the year exceeded RMB6 billion and net margin remained about 5%. Our solid operational and financial performance was led by continuous business upgrades based on our strategic position as a discount platform for branded products at exceptional value. To further enhance our competitiveness. During the second half of 2021, we focused more on core brands and high-value customers to further strengthen our value proposition with them. Among many things, we rely on upgrading value channels on our platform to better empower brand partners and enhance the shopping experience for customers. We are encouraged by the business synergy generated from these initiatives. For example, multiple brands recorded their highest single day GMV in recent years during the super brand day and today's top brand sales events. Many more brands came to us providing our customers with more unique and price competitive products. We are pleased to see that the contribution from core brands for the past year significantly improved from a year ago with their GMV growing faster than the overall GMV on our platform. As they deepen their relationship with our brand partners, we were able to better cooperate with the core brands who made for Vipshop's products. In addition to addressing the needs of younger customers, we also consistently added new and trendy brands to our platform. As we brought in more quality brands and products, we were better positioned to leverage integrated operations to improve customer stickiness and ARPU. In particular, Super VIP members outperformed in almost all operational metrics. They have a very high retention rate, with their annual ARPU around 8x that of non-SVIP customers. We expect this paid membership program to cover more high-value customers on our platform. Looking into 2022 and beyond, we will firmly execute our merchandising strategy to secure an increasing share of quality products from carefully selected brand partners. To achieve this, we will keep allocating more resources to accelerate growth in core brands, differentiate our offerings further, promote made-for-VIP products, and introduce more popular and high-end brands. In addition, we will continue to optimize our operations. We will improve the effectiveness of customer acquisition through personalized recommendations, enrich the shopping experience, and effectively target marketing for new and existing customers. We expect these efforts to collect the three drivers of quality and sustainable growth of our customer base and revenue for the long term while consistently delivering healthy profits. At this point, let me hand over the call to our CFO, David Cui, who will go over our financial results.

Thanks, Eric. Hello everyone. 2021 was a year of challenges and uncertainty. Despite this, we achieved solid performance thanks to our continuous efforts in executing the merchandising strategy and refining operations. Our total revenue for 2021 increased by 15% year-over-year, driven by steady growth in both customer base and average revenue per customer. Although the fourth quarter came under some pressure, net margin attributable to Vipshop's shareholders for the year remained resilient with sequential improvement in the fourth quarter due to disciplined operations, evidenced by a more prudent marketing strategy through integrated customer acquisition. Going forward, we remain committed to delivering steady profitability with quality top-line growth and creating long-term value for our shareholders. Now moving to our detailed quarterly financial highlights. Before I get started, I would like to clarify that all financial numbers presented below are in RMB and all percentage changes are year-over-year changes unless otherwise noted. Total net revenue for the fourth quarter of 2021 was RMB34.1 billion as compared with RMB35.8 billion in the prior year period, primarily attributable to softer consumer demand for discretionary categories impacted by the micro economy and COVID-19 pandemic. Gross profit was RMB6.7 billion as compared with RMB7.8 billion in the prior year period. Gross margin was 19.7% as compared with 21.9% in the prior year period. Total operating expenses decreased to RMB5.0 billion from RMB5.4 billion in the prior year period. As a percentage of total net revenue, total operating expenses decreased to 14.6% from 15.2% in the prior year period. Fulfillment expenses were RMB2.2 billion, which largely stayed flat as compared with the corresponding period in 2020. As a percentage of total net revenue, fulfillment expenses were 6.4% as compared with 6.1% in the prior year period. Marketing expenses decreased to RMB1.1 billion from RMB1.7 billion in the prior year period. As a percentage of the total net revenue, marketing expenses decreased to 3.4% from 4.8% in the prior year period, primarily attributable to a more prudent marketing strategy. Technology and content expenses increased to RMB443 million from RMB272.4 million in the prior year period. As a percentage of total net revenue, technology and content expenses were 1.3% as compared with 0.8% in the prior year period. General and administrative expenses were RMB1.2 billion as compared with RMB1.3 billion in the prior year period. As a percentage of total net revenue, general and administrative expenses were 3.5%, which stayed flat as compared with the corresponding period in 2020. Income from operations was RMB1.8 billion as compared with RMB2.6 billion in the prior year period. Operating margin was 5.4% as compared with 7.2% in the prior year period. Non-GAAP income from operations was RMB2.1 billion as compared with RMB2.8 billion in the prior year period. Non-GAAP operating income margin was 6.1% as compared with 7.9% in the prior year period. Net income attributable to Vipshop's shareholders was RMB1.4 billion as compared with RMB2.4 billion in the prior year period. Net margin attributable to Vipshop's shareholders was 4.1% as compared with 6.8% in the prior year period. Net income attributable to Vipshop's shareholders per diluted ADS was RMB2.07 as compared with RMB3.51 in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders was RMB1.8 billion as compared with RMB2.6 billion in the prior year period. Non-GAAP net margin attributable to Vipshop's shareholders was 5.3% as compared with 7.2% in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS was RMB2.64 as compared with RMB3.70 in the prior year period. As of December 31, 2021, the company had cash and cash equivalents and restricted cash of RMB17.2 billion and short-term investments of RMB5.4 billion. Now, I will briefly walk through the highlights of our full-year results. Total net revenue for the full year of 2021 increased by 14.9% year-over-year to RMB117.1 billion from RMB101.9 billion in the prior year, primarily driven by growth in the number of total active customers. Gross margin increased by 8.6% year-over-year to RMB23.1 billion from RMB21.3 billion in the prior year. Gross margin was 19.7% as compared with 20.9% in the prior year. Income from operations for the full year of 2021 was RMB5.6 billion as compared with RMB5.9 billion in the prior year. Operating margin was 4.8% as compared with 5.8% in the prior year. Non-GAAP income from operations was RMB6.6 billion as compared with RMB6.8 billion in the prior year. Non-GAAP operating income margin was 5.6% as compared with 6.7% in the prior year. Net income attributable to Vipshop's shareholders was RMB4.7 billion as compared with RMB5.9 billion in the prior year. Net margin attributable to Vipshop's shareholders was 4.0% as compared with 5.8% in the prior year. Net income attributable to Vipshop's shareholders per diluted ADS was RMB6.75 as compared with RMB8.56 in the prior year. Non-GAAP net income attributable to Vipshop's shareholders was RMB6.0 billion as compared with RMB6.3 billion in the prior year. Non-GAAP net margin attributable to Vipshop's shareholders was 5.1% as compared with 6.2% in the prior year. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS was RMB8.67 as compared with RMB9.08 in the prior year. Looking forward to the first quarter of 2022, we expect our total net revenue to be between RMB27.0 billion and RMB28.4 billion representing a year-over-year decrease rate of approximately 5% to 0%. Please know that this forecast reflects our current and preliminary view of the market and operational conditions, which is subject to change. With that, I would now like to open the call to Q&A.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from Thomas Chong of Jefferies. Please ask your question.

Hi, good evening. Thanks management for taking my questions. My first question is relating to the consumer sentiment that we're seeing right now. Can we comment about how it is different in Q4 and so far right now in Q1 because when I look at the guidance, it seems that is a negative 5% to 7% which is similar to the guidance in Q4. So just want to see if any changes in terms of our thoughts on macro headwinds. And secondly, I also want to get a sense about how we should think about the recovery momentum in Q2 and coming quarters. And then finally, that is more relating to competition, management comments about the live streaming online shopping competition in China and how it affects our business, any thoughts on how whether we can separate out or quantify the impact on competition and macro headwinds in 2022? Thank you.

In response to the first question regarding consumer sentiment, we have observed that it has weakened significantly in the fourth quarter due to warmer weather and sporadic COVID-19 cases. However, in the first quarter, there has been a slight improvement as temperatures have dropped. Nonetheless, we continue to be influenced by occasional COVID-19 cases. These factors impact our business performance, especially since we are primarily focused on the apparel category. Concerning the recovery momentum in the upcoming quarter, it's difficult to make predictions at this point due to various uncertainties, particularly with ongoing COVID-19 cases. It's too early to determine if consumer trends are improving or when spending may rebound. Overall, we anticipate relatively stable growth for 2022, without expecting significant fluctuations in our business performance. Regarding competition, we have not observed much change lately and believe the situation is relatively stable. Live streaming platforms have likely maximized their e-commerce potential, and we don’t see competition worsening. We remain confident that with the right merchandise, customers will continue to choose us. As for the effects of macro conditions and competition, it's challenging to quantify since the future of macro conditions is unpredictable. Nevertheless, we are confident that we are already experiencing an impact from the competitive landscape.

Thank you.

Thank you. Our next question comes from Alicia Yap from Citigroup. Please ask your question.

Hi, good evening management. Thanks for taking my questions. I have a couple of questions here. The first one is a question related to the inventory status for the Winter Olympics merchandising. So have you been discussing with your brand partners or maybe your merchandising partners regarding the demand and the inventory situation? Do you see any opportunity that Vipshop can get some of these products that are left over and given the timing do you think you will benefit more for the Fall and winter season later in late 2022 or do you think there could be some winter clearance activity that you can leverage later in the March or April promotion period?

In terms of inventory related to the Winter Olympics, we haven't observed a significant increase in this inventory. Both companies have been rapidly expanding their businesses on our platform in recent years. However, they do not offer any specific inventory related to events like the Olympics. We believe they maintain a typical level of inventory for footwear. Therefore, we do not expect to gain from any surplus inventories associated with the Winter Olympics.

Yes, thank you. Can I follow up with one question on user growth strategy? Can you elaborate on what current plans you're thinking in terms of boosting your new user acquisitions later this year? Thank you.

In terms of our user growth strategy, since the fourth quarter of last year, we have been acquiring quality users more efficiently. We aim to avoid indiscriminately spending on all channels to attract low-quality customers. Instead, we are focusing on a balanced and thoughtful approach to integrated customer acquisition. This year, we will continue to put significant efforts into acquiring new customers while also enhancing the retention rates of our current customers, all while keeping our marketing spend for new user acquisitions at a reasonable level.

Okay, thank you, Jessie.

Alicia, I want to add a couple more things. Number one is we've seen an increase in the number of our Super VIP customers year-over-year. That's one of the key indicators that the quality of our customer base is improving. Secondly, we've also seen that our ARPU has stabilized and experienced a slight increase actually starting last quarter. So we've seen that trend.

I see. Thank you, David for the additional color.

Thank you. Please ask your questions in English and Mandarin. Our next question comes from Ronald Keung from Goldman Sachs. Please proceed with your question.

Thank you, Shen and David. Thank you for taking my question. My first question is about gross margins. The fourth quarter usually has higher margins due to a greater apparel mix. Since this year is not the highest margin quarter, I would like to know your thoughts on gross margin trends and their implications for 2022. My second question is regarding our business as it matures. We have a strong net cash position and significant earnings per share. I would like to hear management's views on potential plans for rewarding shareholders, such as paying dividends. Thank you.

In terms of gross margin, while the fourth quarter is relatively lower than the full-year average, this is primarily due to the promotions and subsidies we offered during the quarter. Additionally, because the weather was warmer, it did not encourage consumers to spend more on winter clothing. As a result, the return on our marketing spend was not ideal, but we do not intend to maintain the current gross margin level long-term. We will gradually move our gross margin back to a more normal level in the upcoming quarters. There is no need to be concerned about gross margin going forward.

In terms of cash use, as you know, our board has approved a share buyback plan last year. We have executed part of it last year. Given that we made good profit in the previous year and we still see healthy profitability this year, our board and management are considering alternatives among share buybacks and dividends. This is under review, and we're evaluating options right now.

Thank you, Shen and David.

Thank you. Our next question comes from the line of Natalie Wu from Haitong International. Please ask your question.

Hi, good evening. Thanks for taking my question. I have two here. The first one is following up on Alicia's last question about user acquisition. Can management elaborate more on your latest user acquisition strategy? For last quarter, we noticed that your sales and marketing was quite controlled, especially considering the seasonal pattern. I'm curious if any particular spending channel has changed in performance and whether the sales and marketing budget you're preparing for this year will be more of an absolute number or fixed as a revenue ratio depending on the timing of the improvement of the economy or consumer confidence. Just curious how we should see the change. The second one is related to your Super VIP. Just wondering what's the current percentage of your Super VIP and the related gross profit margin profile contributed by them, because they obviously have a higher pool, which I think is favorable to the gross profit margin. However, they are also enjoying a deeper discount so it would be great if management can share some color on that.

In terms of the latest update on our user acquisition strategy, we have shifted our approach since the fourth quarter by strictly adhering to the LTV model to assess the marketing efficiency of our spending, as well as the time it takes to recover costs for both new and existing customers. Previously, we experienced longer recovery times on our spending for new customers. We have reduced our spending in e-commerce, where we used to distribute many coupons and engage in extensive advertising, which did not prove very effective. We have scaled back our efforts in that area. Generally, we apply this LTV model across all marketing channels, including branding, TV drama sponsorships, and advertisements on video shows. We have observed positive results since the fourth quarter. This year, we will continue to leverage the LTV model to manage our marketing expenditures across various channels. We do not focus on a specific absolute marketing spend figure or a percentage of total net revenues. As long as the LTV model shows that it is a healthy method for customer acquisition, we will proceed accordingly. Therefore, we intend to maintain a balanced and cautious approach to our marketing strategy. Concerning the margin profile for SVIP members, as previously noted, SVIP members represented around 36% of our online net GMV last year. Going forward, we plan to convert more high-value customers into SVIP members. In terms of gross margin, SVIP members have marginally lower gross margins compared to our overall company gross margin and a slightly higher return rate. However, SVIP members typically spend significantly more than non-SVIP members, making this model quite profitable for the company. We anticipate that as more high-value customers become SVIP members, they will likely shop and spend more.

That's very helpful. Thanks to Shen, David, and Jessie.

Thank you. Our next question comes from Eddy Wang from Morgan Stanley. Please ask your question.

Thank you for taking my question. My first question is about inventory destocking. You mentioned that there is no inventory issue for men's sports apparel, but I want to know if there are any inventories for women's apparel or branded apparel, given the weak sentiment in China since the second half of last year. If so, do we have opportunities for destocking in the upcoming quarters? My second question is about any plans for category expansion beyond apparel. Considering the weak apparel sentiment and the increase in SVIP members on our platform, will we be able to meet their demands in various categories, not just apparel? If we expand, what impact would that have on the overall margin profile? Thank you.

Our sales model primarily is based on consignment. So, the majority of our business is done through consignment, which means the inventory balance on our balance sheet is quite small compared to our total annual GMV. You can also see that the inventory balance is decreasing thanks to our effort to clear some of our inventory. To add some color on this, a significant portion of the inventory balance comes from our shops and offline stores where they carry some human trades. So, this pick-up results in a small real inventory for our online business.

Further to David's point regarding non-footwear apparel, we observed some inventory build-up in the fourth quarter due to weather conditions and COVID-19 cases. This could be beneficial for us. In addition to clearing excess inventories for our brands, we are also working on product offerings with some of those core brands to secure the best supply from our partners. Regarding category expansion, we have previously performed well in apparel-related categories, but this has not sufficiently addressed diverse consumer needs. As a result, we are increasing our efforts to introduce more standardized products to our platform, such as cosmetics, and we have established a dedicated channel for these products to attract more consumers. We anticipate that this will improve our brand portfolio and significantly enhance customer loyalty and repeat orders. The rise in standardized products is expected to have a limited effect on the overall gross margin level. Furthermore, the conversion rate for standardized products is likely higher than for apparel-related categories given the same traffic. This will be a key area of focus for us this year.

Thanks.

Thank you. Our next question comes from Andre Chang from JPMorgan. Please ask your question.

I will ask the first question. In 2021, our capital expenditure is about RMB3.5 billion, with over half allocated to Shan Shan. We also have some payments related to the completion of ongoing warehouse projects and technology upgrades for servers and similar equipment. That's essentially the overview; there are no additional expenditures.

In terms of our expansion for Shan Shan outlets, the Shan Shan business is really doing very well. Although last year, the same-store performance was relatively weaker due to COVID-19, excluding that impact, the same-store performance is actually trending very healthily. We believe that the offline outlets present a large addressable market and will grow rapidly in the next few years. Thus, we are continuing our expansion plan, aiming to add two to three offline outlets each year to capture increasing consumer demand. We think this offline outlets business model is solid, sustainable, and healthy for the long-term.

Thanks.

Thank you. Our next question comes from Ashley Xu from Credit Suisse. Please ask your question.

Thank you to management for answering my questions. My first question is about our strategy shift to focus on core brands. Is there any impact on user stickiness and purchasing frequency? My second question concerns the shipping and handling; we are noticing that the per order expense is increasing both quarter over quarter and beyond. Should we view this new level as a future reference? Is this a structural trend in the industry? Thank you.

Since the second half of last year, particularly in the fourth quarter, we've sharpened our focus on core brands and supported them during uncertain times. We've noticed several positive trends; for instance, customers who participated in our Super Brand Day sales events generally show much higher retention rates compared to those who did not attend. This reinforces our confidence in prioritizing core brands and delivering high-quality merchandise at competitive prices. As long as we maintain the right brand supply for our customers, we expect they will return and increase their spending.

Yes, we have been trying to improve our efficiencies over our fulfillment expenses over the years. The more volume we can achieve, the more efficiencies we can get. As you can see, the number of orders in 2021 has increased compared to 2020. We also aim to find ways to improve our efficiency in warehouses and reduce returns and exchanges, as those always affect efficiency. However, we believe we've optimized efficiency and the potential for improvement may be limited going forward.

That concludes today's question-and-answer session. At this time, I will turn the conference back to Jessie for any closing remarks.

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, this does conclude our conference for today. Thank you for participating. You may all disconnect.