Earnings Call Transcript - VIPS Q3 2022

Operator, Operator

Ladies and gentlemen, good day, everyone, and welcome to Vipshop Holdings Limited Third Quarter 2022 Earnings Conference Call. At this time, I would like to turn the call 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 2022 earnings conference call. With us today are Eric Shen, our Co-Founder, Chairman and CEO; and David Cui, our CFO. Before management begins the prepared remarks, I would like to remind you that the discussion today will contain forward-looking statements made under 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 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 2022 earnings conference call. We delivered strong earnings growth in spite of a revenue decline in the third quarter, as we carefully executed our proven business model. During the quarter, macro and pandemic uncertainties weighed on the top line recovery, but customer trends improved month by month, and overall repeat orders and purchase frequencies held up well. Through further optimization of operations, we achieved 50% profit growth and meaningful margin expansion year-over-year. As we moved quickly to adapt to external changes, we also pushed ahead with initiatives to reinforce the strength of our platform for the long run. Let me share some of our business progress in the third quarter. First, we continued to enhance our merchandising capabilities. We attracted more diverse and high-quality partners to our platform and expanded our product offering, especially in the trendy and high-end segments. We deep dived into different categories to capture the emerging customer trend as people ramped up spending on outdoor and athleisure outfits, etc. Apparel-related GMV booked positive growth year-over-year during the quarter. We also worked more closely with key partners on the Made-for-Vipshop customized offerings, which have become an important line for many brands to achieve greater sales efficiency. Most of the products had better conversions than the average level of certain brands or categories. Second, we gained better customer traction. In addition to prudently investing in external channels, we increasingly leveraged our upgraded product selection to acquire and retain customers. An increasing proportion of customers are Gen Z and male customers who are attracted to more brands that reflect their values. Paid members continue to grow nicely, as more high-value customers enjoy the sensible membership’s privileges. Active Super VIP customers grew by 21% year-over-year and contributed 40% of online net GMV. Third, we worked hard to unlock technological capabilities throughout our business processes. We made great efforts to further digitalize our merchant platform, adding tools like membership systems and customer reviews for brand partners to better identify opportunities for growth. We also made continuous improvements in personalization, refining search speed, and enhancing basic recommendations for customers to discover their desired selections while tapping into their underlying needs. Looking ahead, our business has always been consistently based on the premise that customers love value for money, which holds even more true today. We are committed to offering exceptional values on a wide area of branded quality products. We will continue to win new customers and elevate the trust and loyalty of existing ones. We are confident in our prospects for quality and sustainable growth in the long term. 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. During the third quarter, our revenues came in line with our prior guidance. While the overall consumption was still under pressure, we did see a gradual recovery in spending on apparel-related categories, with strong execution across our business operations, which included preemptively securing supplies for seasonal trends and proactively launching promotional channels. We managed to minimize the negative impact from the pandemic resurgence on the top line recovery. Once again, we demonstrated strong profitability, with margins hitting their best levels since the beginning of 2021. Gross margin trended upward to 21.7%, thanks to our continued effort in optimizing cost structures across different categories. Non-GAAP net income increased by 55% to RMB 1.6 billion, and non-GAAP net margins stood above 7%, as we remained disciplined in our operations. In addition, we continued to preserve shareholder value by steadily executing our share buyback program. During the third quarter, we repurchased approximately $257.6 million of our ADS. In the near term, we remain focused on profitability and will work from every aspect to drive operational efficiency. We believe we are financially strong enough to navigate the ongoing uncertainties as well as to reinforce our business fundamentals, which will help us eventually return to a growth track. 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 2022 were RMB 21.6 billion, as compared with RMB 24.9 billion in the prior year period, primarily attributable to soft consumer needs for discretionary categories amid a challenging macro environment with the COVID-19 resurgence in China. Gross profit was RMB 4.7 billion, as compared with RMB 4.8 billion in the prior year period. Gross margin increased to 21.7% from 19.4% in the prior year period. Total operating expenses decreased by 13.9% year-over-year to RMB 3.7 billion from RMB 4.2 billion in the prior year period. As a percentage of total net revenues, total operating expenses decreased to 16.9% from 17.0% in the prior year period. Fulfillment expenses were RMB 1.6 billion, which largely stayed flat compared with the prior year period. As a percentage of total net revenues, fulfillment expenses were 7.5% compared with 6.5% in the prior year period. Marketing expenses decreased by 53.9% year-over-year to RMB 572.4 million from RMB 1.2 billion in the prior year period, primarily attributable to a more prudent marketing strategy. As a percentage of total net revenues, marketing expenses decreased to 2.6% from 5.0% in the prior year period. Technology and content expenses increased by 7.6% year-over-year to RMB 394.8 million from RMB 366.8 million in the prior year period. As a percentage of total net revenues, technology and content expenses increased to 1.8% from 1.5% in the prior year period. General and administrative expenses increased by 5.0% year-over-year to RMB 1.1 billion from RMB 1.0 billion in the prior year period. As a percentage of total net revenues, general and administrative expenses were 5.0%, as compared with 4.1% in the prior year period. Income from operations increased by 47.6% year-over-year to RMB 1.1 billion from RMB 770.8 million in the prior year period. Operating margin increased to 5.3% from 3.1% in the prior year period. Non-GAAP income from operations increased by 47.6% year-over-year to RMB 1.6 billion from RMB 1.1 billion in the prior year period. Non-GAAP operating margin increased to 7.2% from 4.2% in the prior year period. Net income attributable to Vipshop’s shareholders increased by 168.4% year-over-year to RMB 1.7 billion from RMB 628.4 million in the prior year period. Net margin attributable to Vipshop’s shareholders increased to 7.8% from 2.5% in the prior year period. Net income attributable to Vipshop’s shareholders per diluted ADS increased to RMB 2.70 from RMB 0.92 in the prior year period. Non-GAAP net income attributable to Vipshop’s shareholders increased by 55.0% year-over-year to RMB 1.6 billion from RMB 1.0 billion in the prior year period. Non-GAAP net margin attributable to Vipshop’s shareholders increased to 7.4% from 4.1% in the prior year period. Non-GAAP net income attributable to Vipshop’s shareholders per diluted ADS increased to RMB 2.56 from RMB 1.50 in the prior year period. Looking forward to the fourth quarter of 2022, we expect our total net revenues to be between RMB 30.7 billion and RMB 32.4 billion, representing a year-over-year decline rate of approximately 10% to 5%. Please note that this forecast reflects our current preliminary view of the market and operational conditions, which is subject to change. With that, I would now like to open the call to Q&A.

Operator, Operator

Thank you. The first question comes from Thomas Chong from Jefferies.

Thomas Chong, Analyst

Thanks management for taking my question. My question is about consumer sentiment given the outbreak of the pandemic as well as the macro headwinds. Just wanted to get some color from management about the trend in recent months as well as looking into 2023. Thank you.

Eric Shen, Co-Founder, Chairman and CEO

Thank you, management, for taking my question. My question is about consumer sentiment given the outbreak of the pandemic and the macro headwinds. I would like to get some insight from management on the trends in recent months and what to expect for 2023. Thank you.

Jessie Zheng, Head of Investor Relations

So, actually in recent months, our business has obviously been affected by the pandemic challenges and consumers are still staying on the sidelines. But on the bright side, we have seen our customer trend improving month by month and has been moving towards close to being flat or even having some growth. So, we are actually on the right track in terms of customer numbers. We expect in the coming months, GMV should stay relatively stable. For next year, we still will focus on customer growth as long as we have the right customers and platform. With the pandemic challenges hopefully going away over time, we are pretty optimistic about our GMV and customer growth for next year.

Operator, Operator

We’ll now take our next question. Please stand by. This is from the line of Ronald Keung from Goldman Sachs. Please go ahead.

Ronald Keung, Analyst

Thank you, management. The first question is on your fourth quarter revenue guidance, which implies that the year-on-year decline has sequential improvement compared to the third. I would like to hear how we did in the Singles’ Day November event, and has our business seen some inventory-driven demand or supply-driven demand that is driving some sequential improvement? The second question is regarding our net margin, which has reached a new high. Within that, we’ve seen that our marketing cost fell around 50% year-on-year. Is this a new normal or should we anticipate spending a bit more next year? How should we think about the margin outlook for next year? Thank you.

Eric Shen, Co-Founder, Chairman and CEO

I would like to hear how we performed during the Singles’ Day event in November, and whether our business experienced any inventory-driven or supply-driven demand that contributed to some sequential improvement. My second question is about our net margin, which has reached a new high. We noted that our marketing cost decreased by about 50% year-on-year. Is this the new standard, or should we expect to increase our spending next year? How should we view the margin outlook for the upcoming year? Thank you.

Jessie Zheng, Head of Investor Relations

Let me first translate Eric’s comments. For Q4, we expect revenues to narrow further to a single-digit decline, despite the fact that we have been more or less disrupted by the pandemic, especially since we are located in Guangzhou, and our office headquarters have been in restricted areas and we have to work from home. We are still facing a lot of uncertainties. On the logistics side, we have several million parcels pending delivery. That’s definitely going to impact our business. However, we are quite confident that we will navigate through these uncertainties and achieve normal business growth. On the profitability side, we have a strong profitability record and will demonstrate our efforts in various areas concerning cost savings and rational spending initiatives. For example, we have prudently invested in external channels for customer acquisition, and we’re proactively trying to attract the right new customers based on the LTV model. We aren't going to spend very freely, which has helped us save on customer acquisition costs. We have also streamlined our cost structure throughout our business processes, achieving significant cost savings. Lastly, we are not blindly sending away coupons. We’d rather work with many brand partners to share the costs and be quite prudent in delivering coupons. We have seen solid profitability, and we are confident in managing this kind of profitability. It’s not a one-time thing; we are going to achieve sustainable profitability.

David Cui, CFO

Eric partially answered your questions regarding the profit margin and the marketing expense ratio. I would like to add two more points. One is that our improvement in our profit margin is not just coming from our savings on marketing expenses, but also from our improvements in gross margin, as a result of our operational efficiencies and better selection of our inventories that we carry. We pay particular attention to our products' margin and the rebates we offer. The second point is that we focus our efforts more on our Super VIP growth, which results in a much better customer portfolio for us. The number of our Super VIP customers grew significantly in this quarter compared to last year.

Operator, Operator

This is from the line of Alicia Yap from Citi.

Vicky Wei, Analyst

Good evening, management. Thanks for taking my question. This is Vicky Wei on behalf of Alicia Yap. My first question is, would management provide some details on the impact from logistic disruption and the latest return rate trend? And how should we think of the fourth quarter ARPU trend? My second question is, would management provide some color on the latest competition and brands’ attitudes as well as inventory levels?

Eric Shen, Co-Founder, Chairman and CEO

Good evening, management. Thanks for taking my question. This is Vicky Wei on behalf of Alicia Yap. My first question is, could you provide some details on the impact from logistic disruptions and the latest return rate trend? Additionally, how should we view the fourth quarter ARPU trend? My second question is, can you give us some insight into the latest competition, brands' attitudes, and current inventory levels?

Jessie Zheng, Head of Investor Relations

On the logistics side, currently, we have roughly 4 million orders pending delivery. Some of the orders are actually in our warehouses or waiting to be delivered. Of the 4 million, approximately 1.4 million are going to Xinjiang, which has been locked down for over three months. It’s a tough time. Recently, the delay has extended to places like Wuhan, Sichuan, and Guangdong. With the delay, we expect to see some increase in cancellation or return rates. However, 4 million is still a manageable portion of our total orders. We expect that as the pandemic challenges diminish, delivery and fulfillment efficiencies will return to a normal pace, allowing us to meet customer needs. Regarding competition, we believe our brand partners have several channels to choose from but one thing is certain: offline stores are still struggling, especially with the COVID resurgence in the latest third and fourth quarters. They have a lot of inventory to clear, making it difficult for them to be profitable. We believe these brand partners should switch to online channels, including us and other options like live streaming, to clear their inventory. We are one of their partners and have a strong value proposition in discount retail, being able to secure a lot of supply at deep discounts. Many suppliers that are not performing well on other channels are turning to our platform, with many customizing their offerings for Vipshop. As long as we maintain our strong value proposition in branded quality products with deep discounts, we believe we can meet the growing demands of customers seeking value-for-money products.

Operator, Operator

Thank you. We’ll now take the next question. Please stand by. This is from the line of Andre Chang from JP Morgan. Please go ahead.

Andre Chang, Analyst

Thank you, management, for taking my question. My question is about the future upside of our gross margin. We noticed that the efficiency-product strategy has helped the company improve gross margin over the past two years, but there is still a significant gap compared to the gross margin that the company achieved probably five years ago. I wonder whether the management still sees good room to improve gross margin towards the historical level through the current strategy or other means, or do we see the near-term benefits being released with margins remaining relatively stable here?

Eric Shen, Co-Founder, Chairman and CEO

Our gross margin has improved thanks to our efficiency-product strategy over the past two years, but there remains a notable gap when compared to the margins we achieved around five years ago. I would like to know if management believes there is still potential to enhance the gross margin toward historical levels using this strategy or other methods, or if we should expect only short-term benefits with margins staying relatively stable.

Jessie Zheng, Head of Investor Relations

On GP margin, one thing to bear in mind is that we always focus on achieving solid and sustainable net profit margin. Regarding GP margin, one of the biggest factors is actually the cost savings from customer rebates or coupons. Currently, we are quite prudent on this side. For example, this month, we probably achieved 21% of our GP margin, and if we invested heavily in rebates or coupons, that could go down to 19%. So, that’s one of the biggest savings. Second, regarding the take rate, we have said many times that we aren't going to increase the take rate from brand partners because they are struggling with their business. Therefore, that line should remain stable. This indicates that the gross margin won't return to the level of five years ago, around 25%. It should largely remain stable at the current level we've seen for Q3 and Q4, which is something like 20%. As for net profit margin, we still have substantial potential for growth through further optimization of our operations. We can still achieve operational leverage on procurement, customer acquisition, and various G&A expenses. Thus, for net profit margin, we still have room for growth.

Operator, Operator

This is from the line of Eddy Wang from Morgan Stanley. Please go ahead.

Eddy Wang, Analyst

Thank you for taking my question. My question is about the changes in user behavior. We noticed that net sales per customer and net sales per order actually declined year-over-year in this quarter, but on the other hand, if we look at GMV per customer and GMV per order, those figures remained quite stable. Not sure if this is due to the COVID impact, or if the GMV generally increased, which has resulted in this decline? What are your thoughts on the further trends of this metric? Thank you.

Eric Shen, Co-Founder, Chairman and CEO

Thank you for taking my question. My question is about the changes in user behavior. We noticed that net sales per customer and net sales per order actually declined year-over-year in this quarter, but on the other hand, if we look at GMV per customer and GMV per order, those figures remained quite stable. Not sure if this is due to the COVID impact, or if the GMV generally increased, which has resulted in this decline? What are your thoughts on the further trends of this metric? Thank you.

Jessie Zheng, Head of Investor Relations

Actually, the difference between GMV per order and revenue per order is primarily attributable to the higher contribution from apparel categories. We performed quite well in Q3 for apparel categories, which booked positive year-over-year growth at 3.5%. Normally, apparel categories carry relatively higher return and rejection rates. That’s why you see ARPU had declined a bit during the quarter. However, the GMV per order remains stable. Returns and exchanges are manageable, reflecting consistently in our income statement with very little impact on the profit level. David?

David Cui, CFO

Yes. I think Eric has addressed the key points on this question. Just to clarify, the drop in ARPU is not due to standardized items. It is purely due to the revenue mix, as apparel, clothes, and shoes categories have increased. We did quite well in that segment. Apparel has higher return rates, and we believe that return rates in the future will remain relatively stable and won’t adversely affect ARPU. The other reason you pointed out is due to softer consumer demand, as people are spending less, particularly during the summer season. Overall, consumption is soft, contributing to the decline. 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 questions or follow-ups, please don’t hesitate to contact us. We look forward to speaking with you next quarter.

Operator, Operator

Thank you. This does conclude the conference for today. Thank you for participating. And you may now disconnect.