Ladies and gentlemen, good day, everyone and welcome to Vipshop Holdings Limited Second Quarter 2024 Earnings Conference Call. At this time, I would like to turn the call to Ms. Jessie Zheng, Vipshop's Head of Investor Relations. Please proceed.

Thank you, operator. Hello, everyone and thank you for joining Vipshop's second quarter 2024 earnings conference call. With us today are Eric Shen, our Co-Founder, Chairman and CEO; and Mark Wang, 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 statement in our earnings release and the 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 2024 earnings conference call. In the face of multiple headwinds in the external environment, we had a slower momentum in our business. Our team focused on staying agile to respond quickly to external changes and achieving operational excellence. In the second quarter, sales were under pressure from the high base and cautious customer segment; however, the apparel category held up relatively well. GMV generated from co-brand and SVIP members showed resilience for the full quarter. We see this as an indication of the fundamental strength of our business. Customer traction remained robust, reflecting our cautious approach to marketing spends amid a challenging backdrop. However, active SVIP members increased by 11% from a year ago and accounted for 40% of our online spending. That's encouraging as a core customer cohort with the most resilient spending power continues to recognize the unique value of shopping with us. Given that we are facing ongoing uncertainties in the near term, we focus on long-term thinking that positions us for continued growth in the years ahead, even as the patterns of spending involving the key factors that determine where customers choose to shop have not changed. We are sharpening our focus on enriching our merchandising offerings, and highlighting affordability throughout our assortment will ensure a worry-free experience. Together, these have been the core competencies that have helped us navigate difficult times. Among the business highlights, we are pleased with the steady flow of quality planned inventory, thanks to our merchandising capability from a strong team. Our talents across categories now allow us to adapt more quickly to emerging trends, which is important for driving growth by delivering what customers look for. In the first half, we selected more than 600 well-known brands to our platform, including a mix of mass brands, new trendy brands, and affordable luxury brands in a much richer selection. Our layered approach to brand portfolio is well suited to meet the ever-changing customer needs across income and age cohorts in different regions. We are also encouraged by the steady progress in the Made for VIP line of customized products. In the second quarter, GMV from Made for VIP increased more than 140% from a year ago. Our know-how and expertise have enabled brand partners to customize more differentiated products at great prices, which have been welcomed by many customers. We see a meaningfully higher portion of customers repeatedly purchasing customized products than they do in the general apparel category, and the conversions for Made for VIP have been consistently higher than the average levels seen within the same brand and category. Beyond that, we continue to focus on delivering value by providing the right blend of great pricing and quality to our customers. We consistently optimize the ways we work with brand partners to ensure we can generate more savings for our customers. Recently, we launched some new channels, future time-limited promotions, and everyday low prices designed to help our customers make the most of their budgets while also providing reliable resources for brand partners to present their best views. On the other hand, we are enhancing quality control. We have been working hard this year to help customers select a trusted portfolio of brand products by increasing quality inspections throughout our supply chain. In addition, we are adapting and refining our approach to customer engagement. In the second quarter, for SVIP members, we continued the launch of product sales and special offerings, both online and offline, and we intend to increase the depth of our loyalty program to serve this community. For younger customers, we tailored the layout and design of our homepage, created specialized channels, and made personalized recommendations that better cater to their preferences. In the face of the temporary volatility on the top line, we continue to work on long-term efficiency through process optimization and technology enhancement across business lines, among other initiatives. For example, we continuously upgrade our merchandise platform to further improve our team's productivity when serving brand partners. This has motivated brand partners to invest while generating the best return on investment from technology. AI capabilities are increasingly applied to search recommendations and intelligent shopping assistants to provide customers with explanations and improved conditions. We have a fundamentally solid business model that is also inherently flexible, but we have much more work to do, and we are on it so that we can quickly pivot as customer priorities change. As we move ahead, we believe that as long as we stay close to our customers, continue investing in our merchandising capabilities, and consistently execute on discount retail inventory, we will be positioned for continued growth over the long term. At this point, let me hand over the call to our CFO, Mark Wang, to go over our financial results.

Okay. Thanks, Eric and hello, everyone. We delivered another quarter of solid profitability despite ongoing pressure on top line growth. As we remain responsive to the evolving environment to weather external challenges, we managed to optimize our operational efficiency and achieve healthy margins. Specifically, consolidated gross margin increased to 23.6% from 22.2% a year ago, thanks to a higher margin category mix from apparel sales and a series of cost-saving measures. Non-GAAP net margin attributable to Vipshop's shareholders remained at a high level at 8.1%, reflecting our disciplined approach to managing our business. In the midst of macro and competitive dynamics, our goals are to balance growth with profitability and protect the long-term health of our business. While our outlook for the near term has softened, we remain confident in our unique positioning to drive sustainable and profitable growth in the long run. With that, we are committed to returning significant cash to our shareholders. We accelerated our pace of share buybacks with over US$200 million having been utilized during the second quarter. In addition, a new share repurchase program of up to US$1 billion will be in place after we fully utilize the remaining amount under the existing program. As we mentioned on our last earnings call, we plan to commit no less than 75% of our full year non-GAAP net income attributable to Vipshop's shareholders through discretionary share repurchases and dividend distributions. 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 renminbi and all percentage terms year-over-year, unless otherwise noted. Total net revenues for the second quarter of 2024 were RMB26.9 billion, compared with RMB27.9 billion in the prior year period. Gross profit increased by 2.2% year-over-year to RMB6.3 billion from RMB6.2 billion in the prior year period. Gross margin increased to 23.6% from 22.2% in the prior year period. Total operating expenses decreased by 4.2% year-over-year to RMB4.3 billion from RMB4.5 billion in the prior year period. As a percentage of total net revenue, total operating expenses decreased to 16.0% from 16.1% in the prior year period. Fulfillment expenses decreased by 0.8% year-over-year to RMB2.16 billion from RMB2.18 billion in the prior year period. As a percentage of total net revenues, fulfillment expenses were 8.1% compared with 7.8% in the prior year period. Marketing expenses decreased by 17.0% year-over-year to RMB740.7 million from RMB892.5 million in the prior year period. As a percentage of total net revenues, marketing expenses decreased to 2.8% from 3.2% in the prior year period. Technology and content expenses increased by 10.0% year-over-year to RMB487.2 million from RMB443.0 million in the prior year period. As a percentage of total net revenues, technology and content expenses were 1.8% compared with 1.6% in the prior year period. General and administrative expenses decreased by 6.5% year-over-year to RMB900.7 million from RMB963.1 million in the prior year period. As a percentage of total net revenues, general and administrative expenses decreased to 3.4% from 3.5% in the prior year period. Income from operations increased by 16.5% year-over-year to RMB2.2 billion from RMB1.9 billion in the prior year period. Operating margin increased to 8.3% from 6.9% in the prior year period. Non-GAAP income from operations increased by 11.6% year-over-year to RMB2.6 billion from RMB2.3 billion in the prior year period. Non-GAAP operating margin increased to 9.5% from 8.2% in the prior year period. Net income attributable to Vipshop's shareholders was RMB1.9 billion compared with RMB2.1 billion in the prior year period. Net margin attributable to Vipshop's shareholders was 7.2% compared with 7.5% in the prior year period. Net income attributable to Vipshop shareholders per diluted ADS was RMB3.49 compared with RMB3.75 in the prior year period. Non-GAAP net income attributable to Vipshop shareholders was RMB2.2 billion compared with RMB2.4 billion in the prior year period. Non-GAAP net margin attributable to Vipshop shareholders was 8.1% compared with 8.6% in the prior year period. Non-GAAP net income attributable to Vipshop shareholders per diluted ADS was RMB3.91 compared with RMB4.30 in the prior year period. As of June 30, 2024, the company had cash and cash equivalents and restricted cash of RMB21.6 billion and short-term investments of RMB1.9 billion. Looking forward to the third quarter of 2024, we expect our total net revenue to be between RMB20.5 billion and RMB21.6 billion, representing a year-over-year decrease of approximately 10% to 5%. Please note that this forecast reflects our current and preliminary view of the market and operational conditions, which are subject to change. With that, I would now like to open the call to Q&A.

And now we're going to take our first question, which comes from the line of Thomas Chong from Jefferies.

My first question is about consumer sentiment and macro uncertainty, specifically regarding the monthly GMV trend and our expectations for the full year. My second question concerns the competitive environment. Can management provide insights on how we should approach the apparel and standardized categories? Additionally, what has been the GMV growth for these two categories quarter-to-date, and how is the apparel category contributing at this time?

In terms of your question about the macro environment, we observe that consumption remains rather subdued due to macroeconomic uncertainty. We are unsure if the current consumption momentum can be maintained. As consumers are being cautious, discerning, and selective, there is considerable uncertainty looking ahead. So far this quarter, this trend appears to be continuing, leading to GMV growth that is fairly consistent with what we experienced in Q2, showing little improvement from the previous quarter. Regarding apparel and non-apparel trends, apparel continues to perform better than non-apparel categories this quarter. We have noticed only a slight decrease in GMV for apparel, while non-apparel categories have seen a more significant decline. This situation is primarily due to increased industry competition, as many are focused on price comparisons and offering subsidies, which we have chosen not to pursue, as it could make our standardized items more vulnerable to competition. In the second half of the year, we plan to further stabilize our competitive strategies in the apparel category, particularly as we work to grow our SVIP customers and enhance their purchasing frequency and average ticket size. Conversely, we are implementing various adjustments to standardized items to mitigate losses and restore stability to this business segment. We aim to leverage our SVIP members to boost apparel purchases as well as to encourage greater interest from non-SVIP customers.

And the next question comes from the line of Alicia Yap from Citi.

I have two questions. First, could management provide some operating metrics for the VIP and customized products, specifically the number of SKUs under these customer products and how much they contributed to this quarter's GMV? Additionally, are the ASP and margin higher than those of non-customized products? My second question is regarding the behavior of SVIP members, as they are typically very loyal. Has management noticed any recent changes in their behavior? For instance, are these SVIP members seeking more lower ASP, value-for-money products, or are they purchasing slightly less frequently than before?

In terms of customized products, they are a key part of our unique offerings in the apparel category, where we have over 40% unique selections, including customized options, exclusive access to brand inventory, and heavily discounted items, with some at 70% off retail prices. It’s the combination of high-quality merchandise and great pricing that we provide to our customers. Moving forward, we will keep enhancing our distinct product offerings to avoid direct competition with our peers. Regarding SVIP customer traction, we have a solid base of SVIP customers, whose average spending remains stable. However, we have noticed a slight decrease in their shopping frequency, around 2% to 3% compared to their past habits on our platform. We believe this decline, while concerning, is manageable, and there hasn’t been a major shift in their behavior. There is significant potential for expanding our SVIP customer base in the coming quarters, particularly by leveraging our service capabilities and the trust they have in our platform, as we will concentrate on quality branded offerings rather than cheap imitations. Therefore, we are confident in our ability to grow the number of SVIP customers and their average revenue per user. Lastly, with a higher contribution from SVIP customers, we expect a slight increase in return rates, but it remains very attractive overall. SVIP customers provide a significant return because they spend much more compared to non-SVIP customers.

And the next question comes from the line of Andre Chang from JPMorgan.

My first question is about margin and investments. Given the 5% to 10% year-on-year decline in third-quarter revenue, does that imply the company will continue to be disciplined in its marketing and user acquisition investments? Will the third-quarter margin and second-half margin remain stable considering the normalization observed in the second quarter compared to previous quarters? How should we interpret the margin trend for the third quarter and the second half? My second question concerns the operating cash flow. Despite a strong profit, we noted an operating cash outflow in the second quarter, which is unusual. Can management explain the reason for this?

First, let me comment on investments. We continue to proactively acquire customers and have relaxed our approach to customer acquisition costs to some extent. We are carefully investing in new channels while assessing the effectiveness and efficiency of our customer acquisition efforts from various angles. We haven't identified very effective channels for acquiring customers, so we will maintain discipline in our marketing expenditures for the second half of the year. Regarding gross profit margins, we are confident they will remain stable. Brands are currently facing significant pressure as they compete for additional funding for traffic and returns of goods. Our philosophy when partnering with brands is to ensure a mutually beneficial arrangement. Therefore, we will not increase our take rate for brand partners, as we do not want to impose additional burdens on them. We expect stability in gross profit margins. On the expense side, we anticipate a slight increase in fulfillment costs due to higher return rates. Overall, we believe that in the second half of the year, we will continue with our prudent investments. This means that while margins and net profit in absolute dollar terms will be manageable compared to last year, net profit may not match the performance of the second half of last year, though it should remain relatively comparable.

For the second question regarding the operating cash flow, let me answer your question. The net cash from operating activities for the second quarter decreased primarily due to the following reasons. The first one is the revenue decline year-over-year, and the second reason is that this year, the 618 promotion, I mean the shopping festival, started in the middle of May. So, we needed to pay the related costs and expenses to our suppliers in June instead of July. The third reason is the state and administration of taxation advocates the implementation of a fully digitalized health system this year, which means the payment to our suppliers was made a little bit earlier than last year. So, these are the three main reasons for the operating cash flow changes.

And the next question comes from the line of Ronald Keung from Goldman Sachs.

I have two questions. First, there's a noticeable gap between the GMV and revenue. Has the return rate increased? I've observed that while the order volume has decreased, GMV has remained stable. Given these trends, can we conclude that consumers might be purchasing slightly more items to benefit from free delivery, only to return a larger portion of what they bought? Is that reflective of the dynamics we are observing? Second, I've noticed an increase in technology and content costs compared to the subdued revenue. Where exactly are we investing in technology? Is there a possibility to streamline or reduce some of these costs in light of the revenue challenges we are facing?

In response to your question about GMV and the revenue gap, the return rate plays a significant role. While the return rate has recently increased a bit, it has significantly stabilized compared to last year's growth, impacting revenue accordingly. Last year, returns affected revenue by 2%, whereas this year, that figure is at 3%. The return rate has been well managed and is starting to level out on our platform. Regarding the comparison of average order size and total orders, there hasn’t been much change; consumers are still buying their preferred brands, not intentionally opting for cheaper options, but rather making fewer purchases as they become more selective about when and where they shop. We haven't observed significant shifts in consumer behavior, especially among our VIP customers. Concerning our investments in technology and content, we have made substantial investments in large models, including talent and services since last year; we plan to continue this investment as we believe enhancing technology is crucial for long-term value, particularly given our extensive customer base and data. There is considerable room for improvement in this area. We anticipate that our careful investment in technology and content will add value in the long run, and while these costs may constitute a larger portion of total revenue, they remain manageable.

Now we're going to take our last question for today. And the question comes from the line of Jialong Shi from Nomura.

I have two questions. First, we've received some information from our industry checks indicating that major Chinese e-commerce platforms might be relaxing their low-price requirements for certain categories, including apparel. Has VIP noticed any changes in the operating environment, and if competitors are loosening their low-price strategies, what could that mean for VIP's outlook in the second half of the year? My second question is a follow-up: what percentage of sales and gross profit comes from standardized items? Additionally, what is the most recent quarterly number of SVIP customers and their contribution to online GMV?

In response to your first question about our low price strategy, we continue to experience intense competition in the industry. There are numerous promotional subsidies, and we expect this trend to persist. However, at Vipshop, we remain committed to focusing on quality brand merchandise and providing our customers with great products. We are not pursuing business scale but are dedicated to delivering value to our customers and will stick to this approach. In terms of quality, we are concentrating on creating a trusted portfolio of brands. This year, we have eliminated several merchants or brand partners that offered low-quality products. Thus, our focus is now solely on high-quality brands and exceptional products. As for gross profit margin, apparel has a slightly higher margin than non-apparel items. Nonetheless, standardized products tend to have much lower return rates, which positively impacts our bottom line. In the second half of the year, we aim to return standardized items to a growth trajectory, which should also enhance GP margins. Lastly, regarding our SVIP customer base, we reached 7.4 million active Super VIP customers by the end of the second quarter, who represented about 47% of our online spending.

Thank you for taking the time to join us today. If you have any questions, please don't hesitate to contact our IR team. We look forward to speaking with you next quarter.

This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.