Earnings Call Transcript - VIPS Q3 2023

Operator, Operator

Ladies and gentlemen, good day, everyone, and welcome to Vipshop Holdings Limited's Third Quarter 2023 Earnings Conference Call. At this time, I would like to turn the call over to Ms. Jessie Zheng, Vipshop's Head of Investor Relations. Please proceed.

Jessie Zheng, Head of Investor Relations

Thank you, Operator. Hello, everyone, and thank you for joining Vipshop's third quarter 2023 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 statements 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 matters 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.

Eric Shen, CEO

Good morning, and good evening, everyone. Welcome and thank you for joining our third quarter 2023 earnings conference call. We continued to see decent momentum throughout the third quarter, with sales and profit growth ahead of expectations. While we accelerate our efforts on strategic priority to capture customer mind share, among the drivers, the apparel category continued to outperform with over 16% growth in GMV year-over-year. High-value customers increasingly relied on us as they looked for great deals. Active Super VIP members grew 17% from a year ago and accounted for 45% of our online spending in the third quarter. We continue to execute well and drive changes for the long term. We made it clear that we'd like to be the first go-to online shopping destination for apparel. To that end, we are pushing forward with a strategic improvement related to merchandise expansion, best value for money, and wallet-free service for our customers. Our merchandise team is more skilled at developing rich and diverse mixes of branded products. Up-to-date we have added several hundred trendy and high-end brands this year. And we have a complete system to help new brands grow their business faster by providing the right mix of resource support including traffic allocation, customer analytics, and channel promotion. Also, as a buyer-based platform that highlights carefully selected products, we will launch content like 'buyers must have', which is tailored for apparel category and customer behaviors on Vipshop to interest different types of users. On 'made for Vipshop', our team has done a better job of identifying product opportunities together with brand partners. We now have an enlarged supply of customized offerings with SKUs available for sale trending up every month. The customized offerings still perform better in categories like clothing, shoes, and bags. This has motivated brand partners to deepen their collaboration on customized products with us. While we are growing our merchandise selection, we are committed to providing our customers with affordability. We are focused on seeking out the best deals for our customers to ensure they get value with great everyday prices, and also through unique and customized products, and we provide additional saving opportunities through our popular loyalty programs. Lastly, we are improving customer shopping experiences that include an overall set of enhanced capabilities from the wallet-free quality guarantee, enriched product detail page, and integrated customer service together with brand partners to improve fulfillment efficiency through seamless process management. For example, as part of our enhanced quality assurance program, we recently reached a strategic collaboration with the China Inspection and Certification Group to upgrade our quality control system. With all of these competencies at the core of our business, we are in better shape to deepen engagement with our customers. Our Super VIP members recognize our big strengths more than others because of the trust, value, and ease they've enjoyed at every interaction. Super VIP members have had consecutive quarters of double-digit growth. Overall, retention and renewal rates are trending higher average spending is also ticking up. As we look ahead, we are confident that our business will stand firm in the face of a still challenging environment. We are encouraged to see a deepening level of trust we are establishing with our brand partners and customers, and we are uniquely positioned to secure consistent product supply that is aligned with customer performance for value spending. We are confident about being a longstanding player with stable, sustainable growth prospects. At this point, let me hand over the call to our CFO, Mark Wang, to go over our financial results.

Mark Wang, CFO

Thanks, Eric. Good morning, and good evening, everyone. We are delighted to see that the third quarter results exceeded our expectations. Leveraging our elevated customer mind share in our apparel categories and value-for-money offerings, we delivered satisfactory revenue growth despite the slow season in the third quarter. With continued focus on high-quality growth, profitability remains strong. Gross margin increased by 2 percentage points year-over-year to 23.6%, a record high in three years, primarily benefiting from favorable category mix and optimized merchandise portfolio. Non-GAAP operating margin hit an all-time high of 9.1% as we stayed disciplined when managing every expense item. Non-GAAP net margin attributable to Vipshop's shareholders maintained a high level of 8.1%. Meanwhile, we value shareholder interest from a long-term perspective. As of the end of the third quarter, we have returned a total of approximately US$2 billion to our shareholders since April 2021. We remain committed to executing our share repurchase program. Going forward, we are positive about the long-term growth outlook supported by the underlying strength of our unique business model. We believe our enhanced efforts from merchandising to supply chain will help us capture the opportunities presented by consumers' increasing needs for value-for-money offerings. 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 the percentage changes are year-over-year changes unless otherwise noted. Total net revenues for the third quarter of 2023 increased by 5.3% year-over-year to RMB22.8 billion from RMB21.6 billion in the prior year period, primarily attributable to the growth in active customers and spending driven by recovery in the consumption of discretionary categories. Gross profit increased by 14.9% year-over-year to RMB5.4 billion from RMB4.7 billion in the prior year period. Gross margin increased to 23.6% from 21.7% in the prior year period. Total operating expenses increased by 9.6% year-over-year to RMB4.0 billion from RMB3.7 billion in the prior year period. As a percentage of total net revenues, total operating expenses was 17.6% as compared with 16.9% in the prior year period. Fulfillment expenses increased by 9.5% year-over-year to RMB1.6 billion, the same as in the prior year period. As a percentage of total net revenues, fulfillment expenses were 7.8% as compared with 7.5% in the prior year period. Marketing expenses increased by 17.0% year-over-year to RMB669.6 million from RMB572.4 million in the prior year period. As a percentage of total net revenues, marketing expenses were 2.9% as compared with 2.6% in the prior year period. Technology and content expenses increased by 10.3% year-over-year to RMB435.3 million from RMB394.8 million in the prior year period. As a percentage of total net revenues, technology and content expenses were 1.9%, compared with 1.8% in the prior year period. General and administrative expenses increased by 5.5% year-over-year to RMB1.13 billion from RMB1.07 billion in the prior year period. As a percentage of total net revenues, general and administrative expenses were 5.0%, remaining flat compared with the prior year period. Income from operations increased by 34.8% year-over-year to RMB1.5 billion from RMB1.1 billion in the prior year period. Operating margin increased to 6.7% from 5.3% in the prior year period. Non-GAAP income from operations increased by 33.0% year-over-year to RMB2.1 billion from RMB1.6 billion in the prior year period. Non-GAAP operating margin increased to 9.1% from 7.2% in the prior year period. Net income attributable to Vipshop's shareholders was RMB1.2 billion compared with RMB1.7 billion in the prior year period. Net margin attributable to Vipshop's shareholders was 5.3% compared with 7.8% in the prior year period. Net income attributable to Vipshop's shareholders per diluted ADS was RMB2.91 compared with RMB2.70 in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders increased by 15.5% year-over-year to RMB1.8 billion from RMB1.6 billion in the prior year period. Non-GAAP net margin attributable to Vipshop's shareholders increased to 8.1% from 7.4% in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS increased to RMB3.33 from RMB2.56 in the prior year period. As of September 30, 2023, we had cash and cash equivalents and restricted cash of RMB19.6 billion and short-term investments of RMB451.9 million. Looking forward to the fourth quarter of 2023, we expect our total net revenue to be between RMB31.8 billion and RMB33.3 billion, representing a year-over-year increase of approximately 0% 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.

Operator, Operator

Thank you. We will now take our first question. Please stand by. The first question is from the line of Thomas Chong from Jefferies. Please go ahead.

Thomas Chong, Analyst

Hi, good evening. Thank you to the management for addressing my questions. I have two inquiries. The first relates to the recent GMV trend we've observed in October and early November, as well as our insights on Double 11. My second inquiry concerns the outlook for 2024. Could management share their thoughts on how we should approach next year's outlook and the competitive landscape?

Eric Shen, CEO

Jessie Zheng, Head of Investor Relations

Okay. On the first question of the latest GMV performance in recent months, actually, I think entering into Q4, overall performance was a bit muted especially for apparel categories because of the abnormal weather conditions in October, and the seasonal shift for autumn and winter clothing seemed to come in later than expected. But apparel categories have been picking up very nicely in recent weeks, especially during Double 11. The overall GMV growth during our Double 11 has actually reached double-digit growth, outperforming the industry average quite meaningfully. So we still have some expectations for the rest of the quarter, but it still depends especially on the weather conditions. If winter kicks in colder than expected, we should have much better performance. For the year ahead, 2024, our overall strategy continues to focus on achieving stable and healthy growth. A lot of the developments through the last couple of years have reached a healthy level, especially for margins. Whether it is gross margin or net profit margin, all are on the healthy track. We are looking for better growth, especially on the customer front. We are trying different ways to boost our customer growth for the long term. And of course, certainty remains especially as to the consumption environment and a lot of other factors, et cetera. But we remain focused on the current strategy and believe that we will continue to be a very stable and healthy player in the industry for the year ahead.

Thomas Chong, Analyst

We are focused on achieving better growth, particularly in terms of customer acquisition. We are exploring various strategies to enhance our long-term customer growth. While there are uncertainties regarding the consumption environment and other factors, we are committed to our current strategy and believe we will continue to be a stable and healthy player in the industry in the coming year.

Operator, Operator

Thank you. We will now take our next question. Please stand by. The question is from the line of Ronald Keung from Goldman Sachs. Please go ahead.

Ronald Keung, Analyst

Thank you, Eric, Mark, and Jessie. I have two questions. First, we've observed that gross margin has reached a new high. As far as apparel is concerned, this quarter seems significant regarding mix, which should have positively impacted gross margins due to the apparel mix. How should we view the potential for gross margin improvement as we move into 2024? What factors do we see that can drive further gross margin increases from this elevated level? Secondly, I'd like to discuss our buyback activity over the quarter. Management has reaffirmed the ongoing buyback plan, but the total amount spent this quarter appears quite limited compared to the second quarter. Can you clarify whether our buyback decisions are influenced by share price, our available cash, whether it's onshore or offshore, or if this was just an atypical quarter with plans for a more balanced buyback approach going forward? Let me translate myself.

Eric Shen, CEO

My second question is regarding our buyback over the quarter. Management, you just reiterated the ongoing buyback plan, but the total amount spent during the quarter is significantly lower compared to the second quarter. I would like to understand if our buyback is influenced by the share price, our cash situation whether onshore or offshore, or if this is simply an unusual quarter, and we intend to maintain a balanced buyback schedule throughout each quarter. Let me clarify my question.

Jessie Zheng, Head of Investor Relations

Okay. On the first question about GP margin expansion, the GP margin expansion in Q3 was actually primarily driven by the higher margin in turn and higher contribution year-over-year. Our saving initiatives, especially on customer incentives, have been well put in place. The take rate of how much we take from brand partners has not changed significantly. Instead of increasing the take rate from brand partners, we actually offered a lot of incentives for brand partners to grow their business together with us, so they can save a lot of money. The GP margin has reached a relatively high level, so we think there is not much room for it to improve further in Q4 or for the year ahead, as we won't increase the take rates for brand partners or issue customer coupons as well. We believe we have found a better and healthier way to grow our business as well as our customers. But on the other hand, in terms of NP margin, we think we still have some room for further expansion, especially for Q4; it's typically a peak season for us in terms of margins, especially NP margin. We should see a higher NP margin in Q4. And for 2024, we still have some economies of scale and some operating leverage, especially on the marketing expense front. We will continue to be prudent and invest only when and where we feel there is a need and the returns are satisfactory. Therefore, we think NP margin still has some room for expansion, but not as meaningful as we have seen for 2023 versus 2022.

Mark Wang, CFO

Okay. Hi Ronald, this is Mark, and thanks for your great question regarding the share buyback. I will answer your question. First, we have been steadily executing our buyback programs. As of the third quarter, we have utilized around US$448 million of our current US$1 billion share repurchase program. That is to say, starting from the second quarter of 2021; we have returned a total of about US$2 billion to our shareholders as of the third quarter of 2023. The remaining US$551 million buyback is being executed. Secondly, we are committed to executing the buyback as it is a way to show confidence in our long-term growth prospects. We also think about providing relatively stable returns for shareholders and investors. Lastly, we have been doing this from time to time with some flexibility, considering some risk factors, including share price volatility, regarding the share buyback programs. Thank you.

Ronald Keung, Analyst

Okay. Thank you very much.

Operator, Operator

Thank you. We'll now take our next question. Please stand by. The next question is from the line of Alicia Yap from Citigroup. Please go ahead.

Alicia Yap, Analyst

Hi, good evening, management. Thanks for taking my questions. Very quickly I wanted to ask as we enter 2024 with demand for apparel and the discretionary spend likely to experience the normalizing growth. So what are VIP strategies or plans to enhance your growth outlook or user purchasing frequency? What could be the normalized growth percentage for next year? And does management think the consumption sentiment will be improving from this year's level? Thank you.

Jessie Zheng, Head of Investor Relations

Hi, good evening, management. Thanks for taking my questions. Very quickly, I wanted to ask as we enter 2024 with demand for apparel and discretionary spending likely to experience normalized growth. What are the strategies or plans to enhance your growth outlook or user purchasing frequency? What could be the normalized growth percentage for next year? And does management think the consumption sentiment will improve from this year's level? Thank you.

Eric Shen, CEO

Thanks for taking my questions. Very quickly I wanted to ask as we enter 2024 with demand for apparel and discretionary spending likely to experience normal growth. What are VIP strategies or plans to enhance your growth outlook or increase user purchasing frequency? What could be the normalized growth percentage for next year? And does management believe that consumer sentiment will improve from this year's levels? Thank you. Jessie Zheng, Head of Investor Relations.

Jessie Zheng, Head of Investor Relations

On the 2024 growth outlook, we are confident that we can achieve stable and sustainable growth for the long term. We are still a very small player in China's e-commerce industry with a limited number of active customers. So we still have a lot of potential to grow our customer base. We are very confident about that. On the one hand, we continue to attract new customers and improve the retention of existing customers, especially growing our SVIP members. In addition to marketing spend, we think our merchandising portfolio is a more important factor to help us grow faster. We continue to expand our merchandising portfolio, including unique offerings made for Vipshop, customized offerings, and buyout offerings. We will continue to leverage a combination of these product offerings to add value to our customers. Speaking of our customer base, we still have less than 100 million annual active customers. As long as we can continue to upgrade our platform and focus on apparel categories to be a better, unique, and standout player in the vertical discount retail segment, and as we continue to enhance our customer experience and services, we will grow our customer base from the current level very meaningfully.

Operator, Operator

Thank you. We'll now take our next question from Jialong Shi at Nomura. Please go ahead.

Jialong Shi, Analyst

Thanks for taking my question. I will first ask my questions in Chinese and translate them myself. So I just asked three questions to the management. The first question is a follow-up on the buyback. I'm wondering if we should expect the company's VIPs to continue to support the buyback program when the current $500 million buyback authorization is fully utilized. I also wonder if management can provide some rough ideas on the size of buyback the company may consider on an annual basis. The second question is a follow-up on management's earlier remarks on gross margin. I wonder if VIPs will be able to maintain the current gross margin of 23% to 24% stable going forward. The third question is about the number of Super VIP members. I want to know the growth of Super VIP members this quarter and the revenue contribution from Super VIP members in Q3. Thank you.

Eric Shen, CEO

Thank you.

Jessie Zheng, Head of Investor Relations

Okay. First on the buyback, we still have $500 million left in our existing buyback program and we will continue to execute that. The Board is very supportive of the current buyback plan, and the factors from the past indicate that as we are close to fully utilizing the current buyback program, we will ask the Board for the approval of the next buyback program. The Board and management have reached a consensus on the buyback, especially given that the share price is still deeply undervalued. We will continue to approve new buybacks as soon as we finish the current program, or even during the process. Regarding how we execute the buyback program, it's very detailed. Just remember that we will execute the buyback program from time to time and on a continuous basis. On the GP margin, we have reached a three-year high of over 23%. There is not so much room for us to further expand our GP margin because we are not going to increase the take rates for brand partners. Instead, we will incentivize them to grow their businesses faster with us. Therefore, there is not much potential for gross margin improvement. But for next year, the gross margin will maintain a similar level compared to 2023, especially in quarters with good gross margins. I have also mentioned that on the NP margin, we still have a good chance of expanding that due to economies of scale and operating leverage. We are very confident about that. Regarding SVIP, we currently have 6.7 million active SVIP customers, accounting for 45% of our online spending, and they have maintained double-digit growth for several quarters so far. All the operating metrics for SVIP members are outperforming, including ARPU, frequency, etc. We will continue to focus our efforts on maintaining the SVIP customer base and elevating their loyalty and trust in our platform so that they can spend much more in the long term.

Mark Wang, CFO

Okay. This is Mark. Jialong, I would like to provide some supplementary comments regarding your question about the share buyback. We would like to create and return value to our shareholders, and we have confidence in our long-term growth prospects. Therefore, we will execute the share buyback program from time to time. We do not have an accurate target volume or amount for the share buyback every quarter. However, I think one thing is that we have a US$1 billion share buyback program that has lasted for two years. I think that gives you an idea regarding your question. That's all.

Jialong Shi, Analyst

Thank you.

Operator, Operator

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

Jessie Zheng, Head of Investor Relations

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

Operator, Operator

Thank you. That does conclude the conference for today. Thank you for participating, and you may now disconnect.