Earnings Call Transcript - VIPS Q4 2022

Jessie Zheng, Head of Investor Relations

Thank you, operator. Hello everyone, and thank you for joining Vipshop's fourth quarter and full year 2022 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 US Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlining our safe harbor statements in our earnings release and public filing with the Securities and Exchange Commission, which also applies to this quarter 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.

Eric Shen, Co-Founder, Chairman and CEO

Good morning and good evening, everyone. Welcome and thank you for joining our fourth quarter and full year 2022 earnings conference call. In the first quarter, we once again demonstrated strong earnings power against a challenging backdrop. The top line recovery was impacted by the short-term disruption in economic activities from the surge of COVID-19 infections. Apparel-related GMV fared better than expected, slightly down year-over-year, as we actively adjusted our merchandising selection to satisfy seasonal demand. Customer trends continued to recover year-over-year. The desire to spend remained healthy, with customer visits clearly picking up, and the active super VIP customers increased by 13%, accounting for 42% of our online spending. Overall, we accomplished quality development in 2022, delivering net income of RMB6.8 billion while navigating through an extremely challenging year. Our business fundamentals have been strengthened after we made serious enhancements to merchandising and technology. On merchandising, we now have an upgraded portfolio of blended product offerings that reinforce the value proposition of our platform with hundreds of brands at the core of our business. New trends in high-end products and a greater selection of integrations are bringing a new look to our platform. For the full year of 2022, co-brands have positively contributed to Vipshop, greatly boosting total GMV. Apparel-related GMV outperformed non-apparel categories. Our customized product lines have developed into more selective collections that enjoyed higher conversions than general merchandise. Operationally, we are more efficient in deploying resources to best support brand partners, launching innovative channels to build sales momentum, and increasing customer engagement in a cost-effective way. That's how we managed to grow the base of quality customers with 6.7 million SVIP members repeatedly shopping with us last year. Technology has become increasingly instrumental in every aspect of our business. For example, our fully upgraded merchant platform enabled brand partners to engage in a more measurable way, including offering customer incentives. Our strong execution in 2022 gives us confidence as we look ahead to post-pandemic opportunities. We are set to take advantage of our plentiful inventory. Our professional buyer team continues to be a significant advantage as they work more effectively with brand partners. Though uncertainties still remain following China's reopening, we have seen some recovery in spending on apparel and other discretionary items since the beginning of this year. There are opportunities for us to attract new customers and capture more customer spending. We believe we are now in a healthier position than before to achieve growth and profitability while continuing to deliver value to our shareholders. At this point, let me hand over the call to our CFO, David Cui, who will go over our financial results.

David Cui, CFO

Thanks Eric and hello everyone. In the fourth quarter, we did our best to keep the business on track despite the spike of COVID-19 infections in China. We are pleased that our revenues continue to recover. Another quarter of strong profitability demonstrated the resilience and strength of our business. Gross margin increased by two percentage points to 21.7% from a year ago and actually improved across all categories, thanks to enhanced merchandising strategies, strengthened cost control, and dedicated management of business processes. Our operating margin achieved an all-time high as we consistently focused on operational discipline. As a result, we had the most profitable quarter in two years with non-GAAP net income up by 24% to RMB2.2 billion and net margin at 7%. This helped us finish the full year of 2022 at a record level of profitability. Last year, we generated more than RMB7.8 billion in free cash flow and repurchased a total of USD952 million of our ADS under our buyback programs. We are committed to delivering value to our shareholders by steadily executing these programs. As we entered the post-pandemic era following China's reopening, we are moving quickly, yet rationally, to seize opportunities for growth while allocating resources where we will provide the best returns over time. At the same time, we maintain our focus on everyday operations to generate synergies and efficiency gains. We are positive about regaining growth momentum while sustaining healthy profitability. Now moving to our detailed quarterly financial highlights, before I continue, I would like to clarify that all financial numbers presented below are in Renminbi and all percentage changes are year-over-year changes unless otherwise noted. Total net revenues for the fourth quarter of 2022 were RMB31.8 billion as compared with RMB34.1 billion in the prior year period, primarily due to short-term disruptions in economic activities from the surge of COVID-19 infections nationwide. Gross profit increased by 2.8% year-over-year to RMB6.9 billion from RMB6.7 billion in the prior year period. Gross margin increased to 21.7% from 19.7% in the prior year period. Total operating expenses decreased by 6.5% year-over-year to RMB4.6 billion from RMB5.0 billion in the prior year period. As a percentage of total net revenue, total operating expenses remained flat at 14.6% compared to the prior year period. Fulfillment expenses were RMB2.2 billion, largely staying flat compared to the prior year period. As a percentage of total net revenues, fulfillment expenses were 6.8%, compared to 6.4% in the prior year. Marketing expenses decreased by 17.6% year-over-year to RMB944.1 million from RMB1.1 billion in the prior year period. As a percentage of total net revenues, marketing expenses decreased to 3.0% from 3.4% in the prior year period, primarily due to a more prudent marketing strategy. Technology and content expenses decreased by 7.8% year-over-year to RMB408.5 million from RMB443.0 million in the prior year period. As a percentage of total net revenues, technology and content expenses remained flat at 1.3% compared to the prior year period. General and administrative expenses decreased by 5.2% year-over-year to RMB1.1 billion compared with RMB1.2 billion in the prior year period. As a percentage of total net revenue, general and administrative expenses were 3.6%, compared with 3.5% in the prior year period. Income from operations increased by 37.1% year-over-year to RMB2.5 billion compared with RMB1.8 billion in the prior year period. Operating margin increased to 7.9% from 5.4% in the prior year period. Non-GAAP income from operations increased by 33.6% year-over-year to RMB2.8 billion from RMB2.1 billion in the prior year. Non-GAAP operating income margin increased to 8.7% from 6.1% in the prior year period. Net income attributable to Vipshop's shareholders increased by 57.9% year-over-year to RMB2.2 billion from RMB1.4 billion in the prior year period. Net margin attributable to Vipshop's shareholders increased to 7.0% from 4.1% in the prior year period. Net income attributable to Vipshop's shareholders per diluted ADS increased to RMB3.66 from RMB2.07 in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders increased by 23.9% year-over-year to RMB2.2 billion from RMB1.8 billion in the prior year period. Non-GAAP net margin attributable to Vipshop's shareholders increased to 7.0% from 5.3% in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS increased to RMB3.65 from RMB2.64 in the prior year period. As of December 31, 2022, we had cash and cash equivalents and restricted cash of RMB23.1 billion and short-term investments of RMB1.6 billion. Now, I would like to briefly walk through the highlights of our full year results. Total net revenues for the full year of 2022 were RMB103.2 billion compared with RMB117.1 billion in the prior year. Gross profit was RMB21.6 billion compared with RMB23.1 billion in the prior year. Gross margin increased to 21.0% from 19.7% in the prior year. Income from operations increased by 11.0% year-over-year to RMB6.2 billion from RMB5.6 billion in the prior year. Operating margin increased to 6.0% from 4.8% in the prior year. Non-GAAP income from operations increased by 12.1% year-over-year to RMB7.4 billion from RMB6.6 billion in the prior year. Non-GAAP operating income margin increased to 7.2% from 5.6% in the prior year. Net income attributable to Vipshop's shareholders increased by 34.6% year-over-year to RMB6.3 billion from RMB4.7 billion in the prior year. Net margin attributable to Vipshop's shareholders increased to 6.1% from 4.0% in the prior year. Net income attributable to Vipshop's shareholders per diluted ADS increased to RMB9.83 from RMB6.75 in the prior year. Non-GAAP net income attributable to Vipshop's shareholders increased by 13.7% year-over-year to RMB6.8 billion from RMB6.0 billion in the prior year. Non-GAAP net margin attributable to Vipshop's shareholders increased to 6.6% from 5.1% in the prior year. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS increased to RMB10.67 from RMB8.67 in the prior year. Looking forward to the first quarter of 2023, we expect our total net revenues to be between RMB25.2 billion and RMB26.5 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 is subject to change.

Vicky Wei, Analyst

Thanks, management for taking my question. This is Vicki Wei on behalf of Alicia Yap, and I have two questions. First, how does management view the current competition landscape? Will the recent increase in marketing campaigns by e-commerce competitors affect Vipshop, leading to a need for promotional discounts? My second question is about the company's plans for this year regarding new user acquisition and how that will affect margin channels for 2023. Thank you.

Eric Shen, Co-Founder, Chairman and CEO

First, to answer your question on competition, there is some buzz in the e-commerce industry, especially in the shelf model e-commerce. Some peers have launched aggressive marketing campaigns. However, Vipshop remains highly focused on apparel, not standardized items. Apparel does not only depend on pricing, but also on many other factors like styles and sizes, making it a more sophisticated segment. Additionally, even in standardized items, we are securing unique product supply from our top brands with unique offerings rather than focusing on sheer volume. We are not getting involved in a pricing war and are trying to grow our business healthily. Our key point for Vipshop is to reinforce our unique value proposition in discount retail, and as a result, customers will develop a favorable perception of Vipshop and keep us top of mind. Regarding our second question on new user growth strategy, this year our goal is to achieve quality customer growth. We will definitely take this opportunity during the post-pandemic era to proactively acquire new customers while continuing to evaluate the ROI from different channels to ensure we are acquiring high-quality customers. Overall, we may increase our absolute spending on customer acquisition, but the percentage of revenue spent on marketing expenses should remain healthy compared to last year. This strategy will remain consistent.

Unidentified Analyst, Analyst

Sure. Good evening, David and Jesse, congrats on the solid results. I have two questions. The first one is regarding the overall apparel demand we have observed year-to-date. Have we seen any trends of pent-up demand or any behavior changes, such as consumption upgrades, downgrades, or frequency changes from the supplier side? Is there a clear goal for clearing stocks or launching new products? Any insights would be appreciated. The second question is, in the first quarter, we observed that platform GMV actually grew a little faster than our 1Q revenue. Is this due to some mix change in our marketplace? Do you have specific plans for our three key marketplaces?

Eric Shen, Co-Founder, Chairman and CEO

Joyce, regarding your question about consumption trends post-pandemic, we have indeed seen a faster than expected recovery in spending on apparel and other discretionary items. Many people are feeling more comfortable moving around and traveling, resulting in strong demand for apparel categories. We've also experienced positive growth in customer numbers and conversion rates. On the supply side, there is abundant inventory as many brand partners had a difficult year last year due to offline store lockdowns. Therefore, we see stronger momentum on both the demand and supply sides than anticipated.

David Cui, CFO

Regarding your question about GMV and revenue changes, GMV declined by 4.6%, whereas revenue decreased by 7%. The reason for this disparity is that, towards the year-end post-pandemic, exchanges and returns of items were up, which primarily accounts for the difference.

Unidentified Analyst, Analyst

Thank you, management for taking my questions. I have two questions regarding margins. First, concerning net margin, how much room do we have to further optimize our expenses and costs? Can we expect net margin in 2023 to continue improving year-over-year, and are we becoming more confident in long-term net margin targets? Secondly, regarding gross margin, how should we view trends in the first quarter as well as for 2023? What opportunities do you see for further improving gross margin in the long term?

David Cui, CFO

I will combine the two questions together. Our objective for both net margin and gross margin is to remain stable throughout the year. There could be room to improve net margin due to leverage in our procurement costs. However, our aim for gross margin is to keep it stable.

Thomas Chong, Analyst

Thanks, management for taking my question. Could you please provide some updates on business development, GMV, and consumer sentiment in recent months? How do you perceive the monthly trend, and what is your outlook for the full year 2023?

Eric Shen, Co-Founder, Chairman and CEO

Overall, we are optimistic about the outlook for this year in terms of growth. After the Spring Festival, many people are returning, and we’ve seen stronger-than-expected momentum in spending on apparel and other categories. We expect this momentum to continue into the second quarter. This expectation is partly due to a low base last year, as we faced numerous challenges such as supply chain disruptions, lockdowns, and incidents in Shanghai. Given the challenges we faced in the same period last year, we believe the momentum will carry into the second half, and we are quite optimistic about our growth outlook.

Unidentified Analyst, Analyst

Thanks for taking my question. I have a question regarding the spending power or AOB of existing users. After the pandemic reopening, can we observe any changes in operating metrics? Also, I’m curious about the active paying customers; will the number of active paying customers return to positive growth in the first quarter? If so, what is your target for active paying customers this year?

Eric Shen, Co-Founder, Chairman and CEO

Regarding customer trends, we have seen that customers are more active than before due to the lifting of COVID restrictions. They are more comfortable moving around and shopping. Consequently, we expect positive growth in active customer members in the first quarter, which will continue into the second quarter due to the low base we had last year that saw a 17% decline in customer members because of COVID. Our outlook for customer trends remains positive, and we believe we will achieve quality customer growth throughout the year.

Unidentified Analyst, Analyst

Over the last three years, top-line growth may have been stagnant due to COVID, which resulted in increased margins. I assume that the room for margin improvement is limited moving forward. Given this context, top-line growth is becoming critical. Mr. Shen, could you share some details about your strategy to improve top-line growth in 2023?

Eric Shen, Co-Founder, Chairman and CEO

Regarding the margin side, we believe there's limited room to improve gross margin since we haven't increased prices from suppliers in the past year, and we've been cautious about unnecessary subsidies. Thus, gross margin is expected to remain stable in the future. However, we think there is still room for improvement in net margins through cost structure optimization and efficiency gains. Ultimately, the focus will be on growing our customers and GMV, which will provide the most significant opportunity for margin expansion. Our management will remain dedicated to efficient operations. We will focus on achieving quality growth by increasing repeat orders from existing customers as well as acquiring high-quality new customers, and we aim to expand our super VIP base to boost average order size. We also want to enhance customer engagement through innovative use cases and improved personalization, which present numerous opportunities to build business momentum. We are confident we can achieve quality growth this year.

Jessie Zheng, Head of Investor Relations

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

Operator, Operator

Thank you. This concludes the conference. You may now disconnect. Everyone, have a great day.