Earnings Call Transcript - VIPS Q3 2021

Operator, Operator

Ladies and gentlemen, good day, everyone, and welcome to Vipshop Holdings Limited Third Quarter 2021 Earnings Conference Call. At this time, I would like to turn the call 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 third quarter 2021 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 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 that 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 third quarter 2021 earnings conference call. During the third quarter, our business demonstrated resilience despite macro headwinds and the general weakness in the retail industry. We continued our efforts to execute on our merchandising strategy while refining our operations. Everything we do as a business is intended to strengthen our core competence for long-term growth. As a result, key operational metrics, including our overall user base, GMV, and ARPU achieved year-over-year growth. Specifically, total active customers increased to 43.9 million, and the total GMV grew by 5% to RMB40.2 billion. Our most valuable customer growth continued its strong momentum during the quarter. Super VIP members grew over 40% year-over-year and contributed more than 1/3 of our total GMV. In the third quarter, we focused on strengthening our position and value proposition as a leading discount retailer among our brand partners and customers. In line with this goal, we prioritized core brands to better match traffic and resourcing for them and optimized our customers' operations, especially for high-value customers, including our Super VIP members. We are happy to see some encouraging results from these initiatives. For example, during the Super Brand Day sales event in the quarter, multiple brands recorded higher-than-expected sales, with a few hitting their highest single-day GMV in recent years. These brand partners are increasingly aware that Vipshop remains a reliable platform for them to increase sales efficiencies. As this perception strengthens, more brands are effectively motivated to maintain a closer relationship with us and the supply chain, creating a great value chain of unique and price-competitive products. This was further evidenced in the past quarter by the solid increase in the number of SKUs, their value in merchandising and the improving quality of branded products available on our platform. Moving to the customer side. In the third quarter, we were more focused in our approach to managing our existing and potential customers. We are committed to driving new customer growth but are now doing this more efficiently and effectively. We have put great emphasis on recapturing active customers and, more importantly, becoming better engaged with our Super VIP members. We have seen rapid growth in our number of Super VIP members compared to regular customers. They are significantly more resilient in terms of consumption, post higher retention rates and generate higher ARPU. Through this consistent and sustained effort, we aim to increase our competitiveness in China's discount retail market. Going forward, we will create more business synergy by empowering our co-brand partners and optimizing user experience to drive solid quality and sustainable growth of our business. 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 third quarter of 2021, our top line growth was in line with our expectations despite external challenges, thanks to the effective implementation of our merchandising strategy and refined operations. Notably, the increasing contribution of our high-value customers helped to improve our overall average revenue per user. We also continued to deliver solid profitability, as we maintained greater discipline in spending and focused on improving operating efficiencies. Looking ahead, we will continue to drive business synergies on both our merchandising and operational sides to deliver steady financial performance. 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 revenue increased by 7.5% to RMB24.9 billion from RMB23.2 billion in the prior year period, primarily driven by our growth in average revenue per user. Gross profit was RMB4.8 billion compared with RMB4.9 billion in the prior year period, and gross margin was 19.4% compared with 21.1% in the prior year period. Total operating expenses were RMB4.2 billion compared with RMB3.9 billion in the prior year period. As a percentage of total net revenue, total operating expenses were 17.0% compared with 16.9% in the prior year period. Fulfillment expenses were RMB1.6 billion and largely stayed flat compared with the corresponding period in 2020. As a percentage of total net revenue, fulfillment expenses decreased to 6.5% from 7.0% in the prior year period. Marketing expenses were RMB1.2 billion compared with RMB1.1 billion in the prior year period. As a percentage of total net revenue, marketing expenses were 5.0% compared with 4.9% in the prior year period. Technology and content expenses were RMB366.8 million compared with RMB305.1 million in the prior year period. As a percentage of total net revenue, technology and content expenses were 1.5% compared with 1.3% in the prior year period. General and administrative expenses were RMB1 billion compared with RMB848.6 million in the prior year period. As a percentage of total net revenue, general and administrative expenses were 4.1% compared with 3.7% in the prior year period. Income from operations was RMB770.8 million compared with RMB1.2 billion in the prior year period. Operating margin was 3.1% compared with 5.4% in the prior year period. Non-GAAP income from operations, which excludes share-based compensation expenses and amortization of intangible assets resulting from business acquisitions, was RMB1.1 billion compared with RMB1.5 billion in the prior year period. Non-GAAP operating margin was 4.2% compared with 6.4% in the prior year period. Net income attributable to Vipshop's shareholders was RMB628.4 million compared with RMB1.2 billion in the prior year period. Net margin attributable to Vipshop shareholders was 2.5% compared with 5.4% in the prior year period. Net income attributable to Vipshop's shareholders per diluted ADS decreased to RMB0.92 from RMB1.8 in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders was RMB1.0 billion compared with RMB1.4 billion in the prior year period. Non-GAAP net margin attributable to Vipshop's shareholders was 4.1% compared with 6.0% in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS decreased to RMB1.50 from RMB2.01 in the prior year period. As of September 30, 2021, the Company had cash and cash equivalents and restricted cash of RMB13.2 billion and short-term investments of RMB3.7 billion. Looking forward to the fourth quarter of 2021, we expect our total net revenue to be between RMB35.8 billion and RMB37.6 billion, representing a year-over-year growth rate of approximately zero percent to five percent. Please note that the 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

The first question comes from Thomas Chong from Jefferies. Please go ahead.

Thomas Chong, Analyst

So my first question is about SVIP. So how should we expect the growing trend of SVIP as well as GMV in Q4 and next year? And my next question is about the competition landscape, especially in the discount retail sector. So any thoughts on the live streaming e-commerce?

Eric Shen, Co-Founder, Chairman, and CEO

In terms of your question on SVIP, we have been focused on adding more SVIP members to our platform, and we've seen solid increases of over 40% in the third quarter. We will continue to improve their experiences so that more high-value users could be converted into SVIP members. You probably noticed that SVIP members compared to regular users have much higher ARPU and retention rates. In the future, we expect they will continue to contribute more to our platform as they accounted for over 1/3 of our total GMV in the past quarter. In Q3, we also further expanded and optimized the SVIP membership privileges to drive user growth. For example, we provided an extra 5% in benefits, expanding to more of our category segments. We also have dedicated Super VIP membership stores and a special sales day for them. Furthermore, we have cross-platform benefits, including a joint campaign with a variety of other platforms. We believe we will see considerable growth in SVIP members. Regarding the competitive landscape, Vipshop is fundamentally different from other marketplace platforms. We are keenly focused on discount sales for brands and have the potential to become China's online outlet. We believe discount is a resilient, long-proven business model. With the middle class in China increasing and their spending power growing, we believe there is still plenty of room to grow. We do notice that live streaming platforms attract user traffic, but they are mainly part of a brand's multichannel marketing strategy that brings incremental traffic. Regardless of the format, we believe it ultimately depends on the quality of the merchandise. Our customers are primarily focused on quality branded products with competitive pricing and hassle-free return and exchange services. Therefore, we believe that we are still leading the sales in this market segment and have significant room for growth.

Operator, Operator

We have the next question coming from TH Capital. Please go ahead.

Unidentified Analyst, Analyst

Can you hear me?

Jessie Zheng, Head of Investor Relations

Yes.

Unidentified Analyst, Analyst

Okay. I have two questions. My first one is about your marketing and user base. I know your marketing efforts in previous quarters were quite impressive. However, we have noticed that the number of your sponsorship in TV drama came down in this quarter. So I was wondering if you can shed some light on the marketing strategy and how that will continue to fuel the growth of your user base? Some highlights on your progress of male customer acquisition will be great. The second question is we have noticed that you established several new companies lately; it looks like your business scope has expanded into new areas such as consumer finance and advertising, etc. Can we assume that you are stepping into new business to diversify your revenue growth? That's it. Let me translate myself.

Eric Shen, Co-Founder, Chairman, and CEO

Okay. To your first question on marketing strategy, we have continuously invested in acquiring new users. In the past, we have not been as efficient in new customer acquisition. Recently, we have been more integrated in allocating our marketing resources towards existing and potential customers. We found that people who used to come to our platform, these inactive customers, can be reacquired for less money than acquiring new customers. So we are focused on increasing efficiency and effectiveness in our approach. Regarding TV drama sponsorship, it is not something we do regularly every quarter; it depends on whether it aligns with the right drama and user group for us. We are exploring other new media formats like Bilibili, Little Red Book, and Douyin to tap into further customer acquisition channels to attract younger shoppers to our platform. In terms of male customers, the contribution from male customers increased by about 3% year-over-year. We are seeing a growing proportion of male customers on our platform seeking menswear, sportswear, and bags. We plan to continue to drive the growth of male customers. As for the new ventures represented by our consumer finance branch, we had applied for a license for that entity a while ago, and it has now been established. However, it does not mean we are expanding into new business lines significantly. We are still focused on discount sales for brands, which we see as a market with substantial growth potential. We will continue to emphasize our online business while also leveraging offline retail as a complementary aspect of our overall business.

Operator, Operator

The next question comes from the line of Guohan Wang from Daiwa. Please go ahead.

Guohan Wang, Analyst

Okay. I'm Guohan from Daiwa Capital on behalf of John Choi. We understand the Super VIP is one of our contributors substantially to our ARPU growth this quarter. I want to have a better understanding on the conversion rate from new users to our SVIP programs, and how imperative it is to convert these users. Additionally, do we have more room for ARPU improvement for SVIP? So that's my question.

Eric Shen, Co-Founder, Chairman, and CEO

In terms of your question on SVIP, I'm not sure if I understand what you mean by conversion rate, but I can reference a couple of numbers. Compared to regular users, SVIP members exhibit much stronger engagement and a more resilient consumption pattern. We believe that there is still a significant opportunity for SVIP members to improve their ARPU since we have seen consistent growth in this area over the past few years. Besides apparel categories, we can also offer standardized products for these SVIP members, indicating more potential for ARPU growth in this segment.

David Cui, CFO

I can add to that. On our platform, we have a considerable number of high-value customers who have higher spending frequencies and buying power. We aim to convert these high-value customers to our Super VIP members. Of course, we also have new customers who become Super VIPs. By providing targeted membership benefits and services, we aim to improve their experience on our platform, allowing more high-value users to convert into Super VIP members. Compared to regular customers, Super VIP members have much higher retention rates, so while we do not track conversion rates, we do see higher retention. Additionally, the annual ARPU is significantly higher than that of regular customers. Thank you.

Guohan Wang, Analyst

Thanks. Sorry, may I have a follow-up question? Given our growing entries into new channels like Bilibili and short videos, from a management perspective, which channel do you see providing the highest ROI and longer user lifetime value? Considering that some channels might not yield strong appetite for our discount model based on user profiles. So, I will translate myself.

Eric Shen, Co-Founder, Chairman, and CEO

We primarily rely on targeted marketing for customer acquisition, including Douyin, Toutiao, WeChat, etc. We also sponsor TV dramas and variety shows and implement pre-installed apps on mobile devices. For innovative new channels like Bilibili, we are exploring two types of ads: one aiming for targeted transactions and the other seeking to increase customer awareness of Vipshop. We are actively exploring different channels and plan to utilize multiple avenues for customer acquisition.

Operator, Operator

We have the next question coming from the line of Feitong Zhang from CICC. Please go ahead.

Feitong Zhang, Analyst

Management, it's Feitong from CICC. We have one question regarding the fourth quarter guidance. How should we interpret this guidance? Is it conservative? What trends are we seeing in November and December? My second question relates to the inventory trend. What is the trend of the industry inventories impacted by the weak macro environment? Is the industry facing more excess inventories or a shortage of supplies from overseas brands, and how would this impact our business?

Eric Shen, Co-Founder, Chairman, and CEO

The guidance for Q4 is based on several factors, notably the external environment which remains challenging. There are lingering uncertainties affecting consumer sentiment. Thus, our guidance of 0% to 5% growth is not optimistic. For example, during the Double 11 event, orders placed on our platform did not reach many locations due to the resurgence of COVID-19 cases. During this event, we did observe some good developments, while we expect our anniversary event on December 8 to perform better due to increased demand for autumn and winter clothing as the weather gets colder. We do see some positive signs. I want to clarify that internally, we are upgrading our business strategy to focus on core brands and enhance brand quality while eliminating unqualified ones, which may impact our business in the short term. Regarding inventory, we believe that the current levels within the industry are adequate. Despite the resurgent COVID-19 cases affecting offline businesses, many are dealing with excess inventory that we can clear. Additionally, we are securing unique, competitively priced merchandise from our brand partners alongside efforts to clear inventory. Thus, we are confident in managing our inventory levels effectively.

Operator, Operator

We have the next question from the line of Joyce Ju from Bank of America. Please go ahead.

Joyce Ju, Analyst

My question was actually regarding our offline outlet business. I'm trying to understand that in previous quarters, our offline outlet business had quite solid growth. I would like an update on this quarter's growth for our outlets, along with our going forward CapEx plan. Additionally, have we seen any pandemic-related impacts affecting traffic to these outlets, and how do GMV and revenue contributions compare across offline and online channels as well as our offline stores?

David Cui, CFO

I'll take on this question. Even with the impact of COVID-19, our offline business has still grown well by roughly 18% in this quarter. Our outlet stores showed significant growth, contributing about 6% to 7% of our total revenue and GMV.

Joyce Ju, Analyst

And could you also share the CapEx plans for outlets?

David Cui, CFO

We will continue to grow that business. Each year, we plan to build two or three new outlets. We have added a couple of new outlets this year and will maintain this momentum for the next three to five years as originally planned. Depending on the size of the new outlets, we expect the CapEx requirement to be between RMB500 million and RMB800 million.

Operator, Operator

We have the next question coming from Natalie Wu from Haitong International. Please go ahead.

Natalie Wu, Analyst

My question is regarding the user cohort. For those active customers newly acquired last year, I would like to understand if there are any noticeable differences compared to previous cohorts, such as ARPU, preference categories, shopping frequency, retention, etc.

Eric Shen, Co-Founder, Chairman, and CEO

Regarding user metrics, as you may have noticed, overall ARPU declined 7% in Q2 but returned to positive figures in Q3 as we continued investing in growing our Super VIP members and their spending power. We have seen ongoing increases across all metrics for Super VIP members. We believe there is still significant room for ARPU growth going forward. As for shopping preferences, apparel remains the preferred category for most consumers, contributing relatively stable metrics. We have also seen strong momentum in sportswear and footwear. In terms of user mix, we have observed increasing contributions from male customers as well as from Tier 1 cities and customers in their 20s. Overall, we recognize positive growth in our customer base and will continue to expand.

Natalie Wu, Analyst

And how about retention?

Eric Shen, Co-Founder, Chairman, and CEO

Retention rates for newly added customers from the past year remain relatively stable.

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 questions or follow-up, please don't hesitate to contact me. We look forward to speaking with you next quarter.