Earnings Call Transcript - VIPS Q4 2023

Jessie Zheng, Head of Investor Relations

Thank you, operator. Hello, everyone and thank you for joining Vipshop's fourth quarter and full-year 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 measures used on this call, such as non-GAAP operating income, non-GAAP net income and non-GAAP net income per ADS are not presented in accordance with U.S. GAAP. Please refer to our earnings release for details relating to the reconciliations of our non-GAAP measures to GAAP measures. With that, I would now like to turn the call over to Mr. Eric Shen.

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 2023 earnings conference call. We delivered a strong finish to the year of 2023 with a set of results well ahead of expectations. This has been achieved with the successful execution of our merchandising strategy to see the opportunities in value spending amid strong seasonal demand. In the fourth quarter, apparel categories were once again the bigger driver with a 29% growth in GMV year-over-year. For the full year, apparel categories have been consistently outperforming the industry average, up 24% from a year ago. That helped us close RMB200 billion in total annual sales for the first time in our history. We also gained strong momentum with high-value customers. In the fourth quarter, active Super VIP members increased by 14% from a year ago and accounted for 46% of our online spending. On an annual basis, we had 7.6 million active Super VIP members, who purchased 45% on our platform. Our strategy is simple. It's to be laser-focused on discount retail for brands. We embrace change and focus on retail fundamentals. We are consistently adapting, so that customers can find what they desire, seek great value and enjoy service with us. That's how we try to gain further mind share. When customers feel like shopping for clothing, they come to us first. On merchandising expansion, we did well to enrich and diversify our brand portfolio. Our team brought in over 1,500 new brands last year, covering more trendy and high-end brands. A majority of apparel-related sales came from the several hundred core brands, who took advantage of our various channels, like Super Brand Day, Super Category Day, and Today's Top Brands, which all hit record highs in sales last year. New brands also ramped up sales quickly, leveraging our targeted support from traffic allocations, customer engagement to promotional campaigns. Our merchandising team is more skilled through our internal certification program. They demonstrate the expertise to identify, select and negotiate for quality brand goods at deep discounts across a wider range of categories. They build strong relationships as they work closely with brand partners to address their business needs and challenges. We now have a talent pipeline ready for more opportunities to differentiate our product offering. Our brand partners are happy to deepen their collaboration with us after seeing meaningful sales contributions. Currently, we have over 150 brand partners in this program. They provide a unique supplement to our value offering within trending categories and a certain price range. Giving value is top of mind for most everyone right now. Being able to deliver an affordable experience every day differentiates us in the market. The key is to better leverage our merchandising capability to provide efficient and cost-effective inventory solutions for brand partners. This has been and will continue to be the foundation for us to secure increased supply at competitive pricing, especially in unique and customized products. Lastly, we stay true to being customer-centric. We are making shopping easy for customers, taking a simple, clear and direct way to interact with them. By leveraging the first-party model, we are gaining trust from customers who rely on us to bring them great brands and real value. We continue to enhance product authenticity through upgraded supply chain management from all aspects. This also differentiates us in an environment where everyone is touting lower pricing. We are happy to see customers coming back and spending more because of trust, value, and ease of shopping they experience here. There is still a lot of potential in growing customer wallet share, and the loyalty program has been at the heart of it. Last year, Super VIP members renewed at a high rate, and they spend significantly more with us, with average spending over 8x as much as non-SVIP members. When we look at our business today, we now have a more compelling foundation. We believe our business model is a durable one that allows us to reinforce the value propositions that are most relevant to our brand partners and customers. We will continue to be pragmatic, efficient, and flexible to fuel long-term growth. 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, and hello everyone. We delivered another quarter of solid financial performance, ending 2023 as the most profitable year in our history. We are very pleased with the progress we have made over the past years in upgrading our platform from all aspects. We are acting faster, pushing forward company priorities and building greater synergies. This has been the foundation for us to regain growth momentum while achieving impressive profitability. Benefiting from a number of efficiency improvement initiatives, gross margin improved quarter-over-quarter and on an annual basis reached the highest level since 2017. Operating and net profit margins on a non-GAAP basis hit all-time highs, both quarterly and annually. With such healthy financial conditions, in addition to the existing buyback program, we are pleased to announce the annual cash dividend policy and approximately $250 million in cash dividends for the fiscal year of 2023. This reflects our confidence in future growth and earnings, as well as our long-term commitment to delivering returns to shareholders. Looking ahead, we are clear about strategic initiatives while investing in areas that can better engage with brand partners and customers. We will continue to maintain operating discipline to drive organic and profitable growth. 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 change, unless otherwise noted. Total net revenues for the fourth quarter of 2023 increased by 9.2% year-over-year to RMB34.7 billion from RMB31.8 billion in the prior year period, mainly attributable to the growth in active customers and spending driven by the recovery in the consumption of discretionary categories. Gross profit increased by 93% year-over-year to RMB8.2 billion from RMB6.9 billion in the prior year period. Gross margin increased to 23.7% from 21.7% in the prior year period. Total operating expenses increased by 4.8% year-over-year to RMB4.9 billion from RMB4.6 billion in the prior year period. As a percentage of total net revenues, total operating expenses decreased to 14.0% from 14.6% in the prior year period. Fulfillment expenses increased by 17.0% year-over-year to RMB2.5 billion from RMB2.2 billion in the prior year period. As a percentage of total net revenues, fulfillment expenses were 7.3%, compared with 6.8% in the prior year period. Marketing expenses decreased by 10.7% year-over-year to RMB843.2 million from RMB944.1 million in the prior year period. As a percentage of total net revenues, marketing expenses decreased to 2.4% from 3.0% in the prior year period. Technology and content expenses increased by 21.5% year-over-year to RMB496.4 million from RMB408.5 million in the prior year period. As a percentage of total net revenues, technology and content expenses was 1.4% compared with 1.3% in the prior year period. General and administrative expenses decreased by 11.7% 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 2.9% from 3.6% in the prior year period. Income from operations increased by 46.2% year-over-year to RMB3.7 billion from RMB2.5 billion in the prior year period. Operating margin increased to 10.6% from 7.9% in the prior year period. Non-GAAP income from operations increased by 42.5% year-over-year to RMB4.0 billion from RMB2.8 billion in the prior year period. Non-GAAP operating margins increased to 11.4% from 8.7% in the prior year period. Net income attributable to Vipshop's shareholders increased by 32.2% year-over-year to RMB3.0 billion from RMB2.2 billion in the prior year period. Net margin attributable to Vipshop's shareholders increased to 8.5% from 7.0% in the prior year period. Net income attributable to Vipshop's shareholders per diluted ADS increased to RMB5.35 from RMB3.66 in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders increased by 43.4% year-over-year to RMB3.2 billion from RMB2.2 billion in the prior year period. Non-GAAP net margin attributable to Vipshop's shareholders increased to 9.2% from 7.0% in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS increased to RMB5.79 from RMB3.65 in the prior year period. As of December 31, 2023, we had cash and cash equivalents and restricted cash of RMB26.3 billion and short-term investments of RMB2.0 billion. Now, I will briefly walk through the highlights of our full-year results. Total net revenues for the full year of 2023 increased by 9.4% year-over-year to RMB112.9 billion from RMB103.2 billion in the prior year. Gross profit increased by 19.0% year-over-year to RMB25.7 billion from RMB21.6 billion in the prior year. Gross margin increased to 22.8% from 21.0% in the prior year. Income from operations increased by 46.9% year-over-year to RMB9.1 billion from RMB6.2 billion in the prior year. Operating margin increased to 8.1% from 6.0% in the prior year. Non-GAAP income from operations increased by 43.3% year-over-year to RMB10.6 billion from RMB7.4 billion in the prior year. Non-GAAP operating margin increased to 9.4% from 7.2% in the prior year. Net income attributable to Vipshop's shareholders increased by 28.9% year-over-year to RMB8.1 billion, from RMB6.3 billion in the prior year. Net margin attributable to Vipshop's shareholders increased to 7.2% from 6.1% in the prior year. Net income attributable to Vipshop's shareholders per diluted ADS increased to RMB14.42 from RMB9.83 in the prior year. Non-GAAP net income attributable to Vipshop's shareholders increased by 39.1% year-over-year to RMB9.5 billion from RMB6.8 billion in the prior year. Non-GAAP net margin attributable to Vipshop's shareholders increased to 8.4% from 6.6% in the prior year. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS increased to RMB16.90 from RMB10.67 in the prior year. Looking forward to the first quarter of 2024, we expect our total net revenues to be between RMB27.5 billion and RMB28.9 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.

Operator, Operator

Thank you. Your first question comes from Alicia Yap from Citigroup. Please go ahead. Your line is open.

Alicia Yap, Analyst

Hi, can you hear me? Hello?

Jessie Zheng, Head of Investor Relations

Yes, we can.

Alicia Yap, Analyst

Can you hear me okay? Thank you. Good evening, management. I appreciate you taking my questions and congratulations on the impressive results. I have a couple of questions. First, do you expect that most of the future growth will come from increased frequency and spending from your existing loyal customers? Given the cautiousness surrounding consumer spending in China, are you concerned about a potential slowdown in growth if your loyal customers begin to shop less frequently and spend less? Additionally, do you have any plans or targets for a new user acquisition strategy?

Eric Shen, Co-Founder, Chairman and CEO

First, regarding our loyal customer base, we believe this group has shown strong resilience in spending over the past couple of years, particularly among our high-value Super VIP members. Their share of our total spending has risen to 45% in 2023, and we expect this contribution to continue growing in 2024. The frequency of their purchases has been increasing, and we see significant potential to further enhance this frequency. Currently, we have 7.6 million annual active SVIP members, with many more high-potential customers who could be converted into SVIP members. Non-SVIP members, especially those with significant spending potential, have proven to be an effective channel for acquiring new Super VIP members. In terms of acquiring new customers, we recognize that our annual active customer base in 2023 didn't meet our expectations, and we believe we can improve this year. We are exploring various strategies to enhance our value proposition in branded discount retail to increase customer interest in Vipshop. We plan to implement several initiatives to drive new customer growth, which will include not only traditional channels but also new and emerging ones. Additionally, we will focus on targeted marketing, mobile pre-installation, and branded advertising, making every effort to boost customer growth. As for the general consumption environment, we are not overly concerned, particularly regarding our high-value Super VIP members, since the average order size among our customers tends to be relatively low, ranging from RMB 200 to RMB 300, which we consider affordable. Therefore, we believe that as long as we prioritize branded discount retail, we can successfully drive customer growth and increase their spending.

Operator, Operator

Thank you. We will take our next question. Please standby. Your next question comes from the line of Eddy Wang from Morgan Stanley. Please go ahead. Your line is open.

Eddy Wang, Analyst

Thank you, management, for taking my question. I have three questions. First, I noticed that product sales per order in the fourth quarter of last year showed a year-over-year increase, which contrasts with the decline seen in the first three quarters. What do you think is the reason for this change, especially considering the overall trend of consumers downgrading their purchases? My second question pertains to the sales and marketing expenses in the fourth quarter, which were lower in dollar terms than in the second quarter of last year. This shift seems unusual when looking at the company’s history. What are your expectations for sales and marketing spending in 2024? Lastly, there appears to be a widening gap between GMV and revenue in the fourth quarter compared to the first three quarters. Could you clarify if this is due to significant changes in return rates or other factors? Thank you.

Eric Shen, Co-Founder, Chairman and CEO

On your question about average order size, it has been relatively stable. In Q4, we observed a slight year-over-year increase, mainly due to higher sales of winter clothing, which generally come with higher price tags, especially in colder weather when customers tend to purchase more expensive items like down jackets. This increase in average order size indicates that our loyal and highly engaged customers are not showing signs of reducing their spending; instead, their average ticket size has remained stable, and ARPU has been growing nicely. We benefit from this resilient consumption trend among our customer groups. Regarding sales and marketing expenses, in Q4, we outperformed expectations in sales, leading to a slight decrease in the sales and marketing spend ratio. Moving forward, we aim to be prudent and effective in attracting new high-quality customers in 2024 while keeping our sales and marketing expense ratio manageable. As for return rates, we experienced a year-over-year increase last year, growing by about 3 to 4 percentage points. However, our return and exchange services are part of our commitment to offering top-notch service to our customers and have not negatively affected our profitability over the last several quarters. The rise in return rates is mainly due to various factors, including a greater emphasis on apparel sales, which typically have higher return rates. Furthermore, customers are increasingly using Vipshop as a fitting room, and there is a trend of consumers becoming more cautious and selective with their spending, which may also account for the rising return rate.

Operator, Operator

Thank you. We will take our next question. Your next question comes from the line of Ronald Keung from Goldman Sachs. Please go ahead. Your line is open.

Ronald Keung, Analyst

Thank you, Shen, Mark and team. I have two questions. First, I'd like to understand our trends for the first quarter so far in January and February as a whole. How has demand been tracking since the Chinese New Year? Additionally, how should we view the difference between GMV and revenue for 2024 in comparison to the significant gap we observed in 2023? Second, regarding shareholder returns, I noticed we had a $1 billion free cash flow. We haven't executed many buybacks in the last two quarters. Now, with a $250 million regular dividend, what are the plans for the remaining free cash flow? Is there potential for further shareholder returns? Thank you.

Eric Shen, Co-Founder, Chairman and CEO

Okay. First on your Q1 guidance, we have observed positive business momentum in January due to favorable weather, as it remained quite cold at that time. This led to strong business performance. We have also seen recovery following the Spring festival. However, recently our sales have been ramping up slower than anticipated because of unexpected weather conditions, which have occasionally been quite cold, delaying the transition to spring apparel. Overall, we expect Q1 to be another quarter of relatively stable growth. Regarding the revenue and GMV growth gap, this year we anticipate a slightly higher return rate due to the continued higher contribution from apparel and SVIP. Nevertheless, we do not expect this return rate to significantly exceed what we saw in 2023, with an anticipated increase of at most 1 to 1.5 percentage points. This suggests that we may have the opportunity to narrow the revenue and GMV growth gap to some degree.

Mark Wang, CFO

Okay. Regarding your second question, thanks for your inquiry regarding cash dividends and share buyback programs. We have been focusing on a long-term capital policy, and the combination of the annual dividend and buyback reflects our confidence in long-term growth and profitability, as well as our long-term commitment to create value for our shareholders. Regarding the total amount of the dividend, we consider multiple factors such as working capital for business development, CapEx, profitability, and cash flow. The dividend amount will be reviewed and determined annually. As for buyback, we have repurchased nearly $2 billion from April 2021 to the end of 2023. The existing $1 billion buyback program, effective through March 2025, has utilized $452 million as of December 31, 2023. The remaining parts of the buyback will occur from time to time, considering pricing, valuation, and market fluctuations. Therefore, both cash dividends and share buybacks are ways we will provide returns to our shareholders, and we will implement these two regimes in parallel.

Operator, Operator

Thank you. Due to time constraints, that concludes today's Q&A 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 questions, 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.