Earnings Call Transcript - VIPS Q1 2023

Operator, Operator

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

Jessie Zheng, Head of Investor Relations

Thank you, operator. Hello, everyone and thank you for joining Vipshop’s first quarter 2023 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 in 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 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, Co-Founder, Chairman and CEO

Good morning and good evening, everyone. Welcome and thank you for joining our first quarter 2023 earnings conference call. We were off to a strong start in 2023. Our steadfast leadership, combined with our long-term merchandising strategy and relentless focus on agility, execution, and business fundamentals, has allowed us to navigate through micro challenges, stay even closer to brand partners and customers, and capture the opportunities in the post-pandemic consumption recovery. During the first quarter, we saw good momentum in apparel-related categories, which booked a double-digit GMV growth year-over-year. Our abundance of branded merchandise has great value and aligns with customer appetite for holiday and seasonal shopping along with a rebound in social activities. Customer trends remained strong. The number of active customers regained growth year-over-year and the average spending also grew nicely on more frequent purchases. Paid membership growth has proven to be even stronger. We ended the first quarter with a 15% growth in Super VIP members who represented about 42% of our online spending. Profitability was exceptionally strong as we continue to double-down on execution for efficiency with a number of measures in place, but our efforts are more on building the strategic and long-term capabilities related to merchandise expansion, customer engagement, and service excellence that truly differentiates us. On merchandising, we focus on living a sense of fresh needs as customers are attracted to all things new and trending. In addition to industry-leading co-brands, we are continuing to expand into more high-quality affordable and premium brands that offer great value and we are becoming more holistic about differentiating our merchandise offerings. We are also optimizing the apparel product portfolio within the Made for VIP line. We will develop general guidelines for brand partners to customize high-quality products that can fill in the gap in certain categories and price ranges on our platform. Furthermore, we will invest in our merchandising talent because we understand they are at the heart of our business model. Through well-designed internal certified programs, we intend to enable them with the skills and expertise to take our merchandising capabilities to a new level. Customer engagement, especially with our high-value cohort, is driven by a comprehensive set of upgrades. Our goal is to make Vipshop an enjoyable shopping destination, not just about sales or searches. We are digging into customer insights to provide more inspiration, relevant content, and personalized offerings to our customers. We are creating innovative channels of promotion around customer lifestyles, product lifecycles, and trending categories. We expect these initiatives to increase repeat orders and cross-category purchases. Service has been another source of differentiation. We will demonstrate our best-in-class service involving three reasons for exchange as well as efficient and reliable logistics; there is a lot more we can do in terms of enhanced customer mind share and price advantage. Quality assurance, product authenticity, as well as tailored service through our loyalty program will continue to drive change and capture opportunities in this environment as consumers manage household budgets more carefully. We reinforce our value-for-money perceptions across our quality branded merchandise to keep Vipshop top of mind with customers. With this, we are positioned to grow the base of high-value customers and paid members and also grew engagement levels across customer cohorts. We believe we are in better shape to achieve quality and consistent growth in both top and bottom lines for the long-term. Lastly, as stated in our earnings release, our CFO, David Cui, will step down from his current position for personal reasons. On behalf of the Board of Directors and the management team, I would like to thank David for his contributions and tireless work over the past 3 years and wish him all the best in his endeavors. Mark Wang will succeed David as our new CFO starting tomorrow. I would also like to warmly welcome Mark. His extensive experience in finance and accounting will make him a great addition to our team. At this point, let me hand over the call to David Cui to go over our financial results.

David Cui, CFO

Thanks, Eric, and hello everyone. As Eric mentioned, today is my last time joining the earnings conference call as the company’s CFO. It has been a great honor to be part of a company that is steadfast in what it does. The past 3 years were full of challenges and uncertainties. But together with our dedicated management team and colleagues, we weathered through hard times and emerged stronger with a solid business foundation and financial position to achieve our long-term growth strategy. I would like to express my gratitude to the Board, Eric, and the investment community for your trust and support along the way. Turning to the earnings results, we are pleased to deliver a strong quarter that exceeded our expectations. We achieved good sales numbers as our teams responded to the fast-changing consumer needs and aggressively secured inventory for the opportunities ahead, positioning us well going into the year. Margins remained on an expansion track with increased sales contributions from higher-margin apparel-related categories and well-rounded measures of cost optimization; gross profit recorded double-digit growth and gross margin continues to expand meaningfully year-over-year. We continue to be disciplined in expenses and remained committed to our high-quality growth strategy. As a result, we saw decent expense leverage. Non-GAAP net income increased by 46% year-over-year, and net margin reached a new record high at 7.5%. Moreover, we continue to return value to our shareholders proactively. During the quarter, we fully utilized the remaining amount of our $1 billion share repurchase program, and today, we announced an increase in the existing share buyback program from $500 million to $1 billion. Now, moving to our detailed quarterly financial highlights. Before I get started, I would like to clarify that our 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 first quarter of 2023 increased by 9.1% year-over-year to RMB27.5 billion from RMB25.2 billion in the prior year period, primarily attributable to the growth in active customers and spending driven by the recovery in discretionary categories. Gross profit increased by 17.9% year-over-year to RMB5.9 billion from RMB5.0 billion in the prior year period. Gross margin increased to 21.4% from 19.8% in the prior year period. Total operating expenses increased by 4.2% year-over-year to RMB4.1 billion from RMB3.9 billion in the prior year period. As a percentage of total net revenue, total operating expenses decreased to 14.7% from 15.4% in the prior year period. Fulfillment expenses increased by 5.2% year-over-year to RMB1.8 billion from RMB1.7 billion in the prior year period. As a percentage of total net revenue, fulfillment expenses decreased to 6.5% from 6.7% in the prior year period. Marketing expenses increased by 10.2% year-over-year to RMB836.9 million from RMB759.3 million in the prior year period. As a percentage of total net revenues, marketing expenses remained flat at 3.0% compared to the prior year period. Technology and content expenses increased by 0.6% year-over-year to RMB392.8 million from RMB390.4 million in the prior year period. As a percentage of total net revenue, technology, and content expenses decreased to 1.4% from 1.5% in the prior year period. General and administrative expenses decreased by 0.7% year-over-year to RMB1.0 billion from RMB1.1 billion in the prior year period. As a percentage of total net revenues, general and administrative expenses decreased to 3.8% from 4.2% in the prior year period. Income from operations increased by 54.8% year-over-year to RMB2.0 billion from RMB1.3 billion in the prior year period. Operating margin increased to 7.2% from 5.1% in the prior year period. Non-GAAP income from operations increased by 50.6% year-over-year to RMB2.3 billion from RMB1.5 billion in the prior year period. Non-GAAP operating income margin increased to 8.3% from 6.0% in the prior year period. Net income attributable to Vipshop’s shareholders increased by 69.6% year-over-year to RMB1.9 billion from RMB1.1 billion in the prior year period. Net margin attributable to Vipshop’s shareholders increased to 6.8% from 4.3% in the prior year period. Net income attributable to Vipshop’s shareholders per diluted ADS increased to RMB3.16 from RMB1.61 in the prior year period. Non-GAAP net income attributable to Vipshop’s shareholders increased by 45.8% year-over-year to RMB2.1 billion from RMB1.4 billion in the prior year period. Non-GAAP net margin attributable to Vipshop’s shareholders increased to 7.5% from 5.6% in the prior year period. Non-GAAP net income attributable to Vipshop’s shareholders per diluted ADS increased to RMB3.52 from RMB2.09 in the prior year period. As of March 31, 2023, the company had cash and cash equivalents and restricted cash of RMB18.9 billion, and short-term investments of RMB1.5 billion. Looking forward to the second quarter of 2023, we expect our total net revenues to be between RMB27.0 billion and RMB28.2 billion, representing a year-over-year increase of approximately 10% to 15%. Please note that this forecast reflects our current and preliminary view of the market and operational conditions, which is subject to change. Now, I would like to introduce Mark, our new CFO, who is also present at the call. I would like him to say hello to everyone.

Mark Wang, CFO

Good morning and good evening, everyone. I appreciate the chance to join the first quarter earnings release and connect with all of you. With over 15 years in financial management, I previously collaborated with the CFO of a group and served as the Vice President of Finance at Xiaomi Group. It's an honor to take on the role of CFO at Vipshop. I'd like to express my gratitude to David for his hard work over the years, and I look forward to partnering with management to help drive the future success of our business. Thank you.

David Cui, CFO

Okay. With that, I would now like to open the call to Q&A.

Operator, Operator

First question comes from Thomas Chong with Jefferies. Your line is open.

Thomas Chong, Analyst

Hi, good evening. Thank you to management for taking my questions and congratulations on strong results. My first question is about the consumption recovery, specifically the consumer sentiment management has observed in recent months. How should we view the monthly GMV trend recently and our expectations for the upcoming quarters? My second question is regarding our marketing campaign. Can management provide insights on the industry's preparations for this event and our strategies for this year?

Eric Shen, Co-Founder, Chairman and CEO

Okay. In terms of the general consumption trend in the past several months, we see a very strong recovery after the spring festival when people are returning to normal life and work after 3 years of pandemic effects. We observe a notable recovery in apparel-related categories as people go out more often to meet friends, combined with a strong rebound in social activities. The momentum in April and May was really good and continues into the quarter-to-date. It appears that there is a lot of pent-up demand as people are going out for travel, having parties, or meeting friends. Regarding the June 18 promotion, it is a very important promotional event in the e-commerce sector. This year, it starts early and will have an extended length up to 1 month of promotion. Everyone is putting in great effort to prepare for the promotional campaign, and we are doing nothing less than before. We still focus on apparel-related categories and we are branded discount retail while ensuring a strong flow of our branded merchandise and discounts. We will be ready for the campaign as well.

Thomas Chong, Analyst

Thank you.

Operator, Operator

The next question comes from Natalie Wu with Haitong International. Your line is open.

Natalie Wu, Analyst

Hi, good evening. Thanks for taking my question. Just one for the longer-term prospects, just curious, Shen-zong, what kind of expectations do you have post the reopening bonus and low base effect, let’s say, beyond next year? What kind of normalized growth rate are you anticipating? And also just wondering if the high margin of the first quarter could be sustained in the future? Thank you.

Eric Shen, Co-Founder, Chairman and CEO

Okay. In terms of long-term growth targets, at least for this year, we still have very high expectations because we benefit from the current environment, especially in branded discount retail, and we are going to take advantage of the opportunity when consumers manage their household budgets more carefully after the pandemic. Therefore, we are quite optimistic about our growth for the full year. Regarding profitability, we also have high confidence; although we achieved a record high level of non-GAAP profit margin, we may see small fluctuations from quarter to quarter. But remember, we still focus on high-quality growth. We’re not growing just for growth; we are looking for quality, profitable growth. With several measures already in place in terms of efficiency gains, we are confident that we can further expand our margins. Additionally, we remain disciplined regarding our costs and expenses, ensuring that every dollar we spend provides a return.

Natalie Wu, Analyst

Just curious about the post-landing bonus next year and much longer-term, can we still manage a higher than average growth rate compared to other e-commerce players? Thank you.

Eric Shen, Co-Founder, Chairman and CEO

In terms of long-term growth, we cannot fully guarantee what we will achieve in the next couple of years because we see increased competition from our peers in terms of promotions, subsidies, and also a lot of emerging formats like live streaming capturing consumer time. The only thing we can do is focus on our strengths, to be good at what we excel at, and to offer our customers better merchandise offerings, better pricing, and better experiences, hence strengthening our leadership in branded discount retail. We may not grow as rapidly as many people imagine, but we will grow solidly. Therefore, we are optimistic about our long-term growth but we are fully aware that the competitive landscape is evolving, and we are ready for that.

Natalie Wu, Analyst

Understood. Much appreciated.

Operator, Operator

The next question comes from Jialong Shi with Nomura. Your line is open.

Jialong Shi, Analyst

Okay. First of all, thank you very much for management for taking my questions. I have two questions here. My first question is about the Super VIP. I just wonder what is the latest number of quarterly Super VIP members? And what was the GMV in Q1 contributed by Super VIP member? Also, how many of our active customers may be converted into Super VIP members? My second question is about the growth outlook for the second half. Just wonder if management can provide any insights on how much the top line may grow in the second half? Thank you.

David Cui, CFO

I’ll answer the first question. In Q1 2023, we had active Super VIP members at 6.3 million, which represents a 10% increase year-over-year, contributing about 42% of our total revenue. Regarding how many can be converted to Super VIP, we have over 85 million annual active customers who could be considered for conversion. Additionally, we have about 200 million registered customers that we could reach out to. Among our active customers, we have roughly about 15 million high-value customers that contribute a higher ARPU, which could be a target for conversion.

Eric Shen, Co-Founder, Chairman and CEO

Just adding to David’s point in terms of the Super VIP members, we are going to continue expanding the base of our Super VIP members. We will increase their membership privileges to motivate them to spend more, stay longer, and place repeat orders, as well as do more cross-category purchases to increase their frequency of repurchases. This is our priority for customer expansion. In terms of growth for the second half of the year, we have seen very good momentum in customer trends in both Q1 and Q2, laying a solid foundation for growth into the second half. We are confident that we can continue expanding our customer base with reasonable spending, having worked out strategies to increase customers at a rational spending level. In addition, we have numerous initiatives in terms of merchandise expansion, creating clear pricing advantages, and leveraging personalized offerings to increase customer purchase conversions. Our merchandising offerings will be stable between apparel-related categories and non-apparel-related categories, so we have a comprehensive set of initiatives to maintain healthy growth momentum for our business.

Operator, Operator

Our next question comes from Wei Xiong with UBS. Your line is open.

Wei Xiong, Analyst

Thank you, management, for taking my question. My first question is regarding competition in the e-commerce industry. Some of our peers have recently announced plans to be more aggressive in investments regarding user growth and price competitiveness. I wonder what actions we can take to maintain our value proposition in light of this heightened competition? My second question is a follow-up on marketing expenses. With a significant promotion coming up, how should we think about the marketing expense trend in the second quarter as well as the marketing expense ratio for the full year? Thank you.

Eric Shen, Co-Founder, Chairman and CEO

In terms of competition, we are focusing on what we excel at. We prioritize apparel-related categories, allocating resources to popular brands and encouraging them to grow faster on our platform than on others. In terms of product selection, our expertise from a professional buyer team enables us to meet consumer demands and maintain strict pricing with brand partners. We plan our product selections to cater to consumer needs, and we also collaborate with core brands to customize high-quality product offerings. We will continue differentiating our merchandise offerings and create more value for our customers. While we understand there will be competition and pricing wars ahead, we will manage that by focusing on building our strategic and long-term capabilities in merchandise to offer unique and competitively priced products to our customers. Regarding marketing spends, there is no need to worry. We are optimistic about our overall marketing spending. As a percentage of total revenue, our marketing spend is currently at 3%. We expect only incremental increases, possibly around 10%, leading to an increase to approximately 3.3%. It's only a manageable increase.

Wei Xiong, Analyst

Thank you. Very clear. Thank you, management.

Operator, Operator

Our next question comes from Andre Chang with JPMorgan. Your line is open.

Andre Chang, Analyst

Let me translate my question into English. Thank you, management for taking my question. I have two questions. The first is to understand more about the growth drivers. What user group, geographic group, and category are driving the revenue growth acceleration this quarter? Secondly, we noticed GMV growth is clearly faster than revenue growth this quarter. Does that indicate the company is making good progress on the marketplace 3P business? If that's the case, what’s the driver and does it contribute to the margin improvement as well? Thank you.

Eric Shen, Co-Founder, Chairman and CEO

In terms of category, apparel categories are performing significantly better, with double-digit GMV growth in Q1 compared to non-apparel categories. We observed a broad-based recovery in subcategories like women’s wear, menswear, sportswear, kids wear, and shoes because people are increasing their outings and mixing and matching their wardrobe. Geographically, recoveries are consistent across different tiers of cities, with Tier 1 cities slightly outperforming, which is understandable as they were hit hardest by the pandemic. Regarding the gap between GMV and revenue growth, it reflects higher contributions from apparel categories, which generally carry a higher return or rejection rate. But keep in mind that a return on mix change is key to achieving excellence in service and customer experience. Over time, this will enhance customer trust and loyalty, translating to better customer revenue growth. Our focus on high-quality merchandise selection, services, and price advantages will remain our priorities in the long term.

Operator, Operator

Please standby for the next question. The next question comes from Ashley Xu with Credit Suisse. Your line is open.

Ashley Xu, Analyst

My question is related to consumer behavior observed on the platform. Are we seeing continuous signs of consumption downgrade? Will we change our strategy in product direction to focus more on lower price range to cater to such demand? Thank you.

Eric Shen, Co-Founder, Chairman and CEO

In terms of consumption trends, we have not observed clear downgrades among our current customers. Our average order size ranges from RMB200 to RMB300, and it appears that after the pandemic, consumers find it worthwhile to spend a bit more on apparel and related categories due to their increased travel needs. We don’t carry much premium merchandise like gold or high-end watches, so we don't have strong insights regarding whether customers are downgrading their consumption. From our observations, customer visits, active customer numbers, and average orders are all trending positively. While discussions are ongoing about the demand for cheaper products, we haven’t clearly seen this trend reflected on our platform, as our customers continue to purchase what they used to buy.

Operator, Operator

Please standby for the next question. The next question comes from Charlene Liu with HSBC. Your line is open.

Charlene Liu, Analyst

The first question I wanted to ask is about cumulative growth. Can we discuss the key drivers behind that growth and specifically which acquisition channels contributed most to that user growth? The second question pertains to dividends; I would like to know the latest on the topic of dividends in light of the new buyback plan announced by management.

Eric Shen, Co-Founder, Chairman and CEO

Regarding customer acquisition, we continue to utilize various channels, including targeted marketing, pre-installations, app store installations, etc. In particular, we strive to enhance our personalization for new customers by providing better product selections to convert them sooner. We also invest in TV drama sponsorships; those 15-second ads have proven effective in increasing our brand exposure to a wider consumer base. Additionally, we leverage social media for marketing to boost our branding for quicker conversions. Overall, we diversify our investments across multiple marketing channels at a manageable cost to ensure efficiency in customer acquisitions. Regarding share repurchase programs, we have proactively returned value to our shareholders over the last couple of years. With our current share price still undervalued, we believe the best way to increase shareholder value is through reinvestment in our own company. We remain committed to creating value for our shareholders and ensuring stable returns through their investments in our company.

Charlene Liu, Analyst

Helpful. Thank you so much.

Operator, Operator

I show no further questions at this time. So, at this time, I will now 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 questions or follow-ups, please don’t hesitate to contact our IR team. We look forward to speaking with you next quarter.

Operator, Operator

This concludes today’s conference call. Thank you for participating. You may now disconnect.