Earnings Call Transcript - VIPS Q1 2022

Operator, Operator

Ladies and gentlemen, good day, everyone and welcome to Vipshop Holdings Limited First 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.

Jessie Zheng, Head of Investor Relations

Thank you, operator. Hello, everyone, and thank you for joining Vipshop first 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 their 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 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 first quarter 2022 earnings conference call. We had a slower than expected quarter due to the resurgence of COVID-19 cases in China on top of an already challenging macro environment, which steepened the general customer sentiment. Starting in March with tightened controls and city lockdowns in many places, our warehousing and logistics capacity have been undergoing serious delays or disruptions. This has undermined our fulfillment efficiency and further discouraged consumers from spending, especially on discretionary items. Despite the great pressure on sales and consumption, we remained on track to execute our merchandising strategy to further strengthen our competitiveness for the long term. We are delighted to see that our proven business model enabled us to sustain a healthy level of profit and achieve resilient margins through disciplined operations. In the first quarter, we continued to provide support for core brands, offering them more leverage to improve sales through our upgraded merchant platform. We also brought in many new and trendy brands, enriching product selection on our platform. Furthermore, we expanded our high-value customers. Our Active Super VIP customer base grew by 37% year-over-year and contributed about 38% of online net GMV in the first quarter. With the COVID-19 outbreak developing, we have responded quickly to changing consumer demand by leveraging our merchandising capabilities. We added a range of product offerings in non-apparel categories, including products for everyday use. This helped to offset the soft demand in apparel categories. While we remain cautious ahead amid ongoing COVID-19 outbreaks, we are strongly committed to our strategic position as a discount platform for branded products. We will take this opportunity to look to create exceptional value for our brand partners and the consumers. 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 first quarter, despite soft top-line performance due to macro headwinds, our margins held up relatively well, thanks to our initiatives to manage cost and expenses with greater discipline. Our gross margin showed resilience after we implemented a number of cost-saving measures. For example, we were able to effectively improve the margin profile of many product categories after we became more focused on shifting traffic and resources to core brands while prioritizing lower-quality products. Our non-GAAP net margin also stayed well above 5%, as we became more efficient in our marketing spend. Looking ahead, we will continue to optimize operational efficiency and make every effort to deliver healthy and sustainable profitability. In addition, during the quarter, we fully utilized the $500 million share buyback program that we announced last year. On March 31 this year, we announced another $1 billion share buyback program, which we may execute from time to time over a period of 24 months. This demonstrates our confidence in our business potential and our commitment to creating shareholder value for the long term. 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 2022 were RMB24.2 billion as compared with RMB28.4 billion in the prior year period, primarily attributable to soft consumer demand for discretionary categories and a worse impact on warehouse and logistics networks caused by the resurgence of COVID-19 in China. Gross profit was RMB5.0 billion as compared with RMB5.6 billion in the prior year period. Gross margin increased to 19.8% from 19.7% in the prior year period. Total operating expenses decreased by 11.0% year-over-year to RMB3.9 billion from RMB4.4 billion in the prior year period. As a percentage of the total net revenues, total operating expenses was 15.4%, which stayed flat as compared with the corresponding period in 2021. Fulfillment expenses decreased by 5.5% year-over-year to RMB1.7 billion from RMB1.8 billion in the prior year period. As a percentage of total net revenues, fulfillment expenses was 6.7% as compared with 6.3% in the prior year period. Marketing expenses decreased by 41.3% year-over-year to RMB739.3 million from RMB1.3 billion in the prior year period, primarily attributable to a more prudent marketing strategy. As a percentage of total net revenue, marketing expenses decreased to 3.0% from 4.6% in the prior year period. Technology and content expenses increased to RMB390.4 million from RMB337.5 million in the prior year period. As a percentage of total net revenues, technology and content expenses increased to 1.5% from 1.2% in the prior year period. General and administrative expenses were RMB1.1 billion as compared with RMB956.7 million in the prior year period. As a percentage of total net revenue, general and administrative expenses were 4.2% as compared with 3.4% in the prior year period. Income from operations was RMB1.3 billion as compared with RMB1.5 billion in the prior year period. Operating margin was 5.1% as compared with 5.3% in the prior year period. Non-GAAP income from operations was RMB1.5 billion as compared with RMB1.7 billion in the prior year period. Non-GAAP operating margin was 6.0% as compared with 6.1% in the prior year period. Net income attributable to Vipshop’s shareholders was RMB1.1 billion as compared with RMB1.5 billion in the prior year period. Net margin attributable to Vipshop’s shareholders was 4.3% as compared with 5.4% in the prior year period. Net income attributable to Vipshop’s shareholders per diluted ADS was RMB1.61 as compared with RMB2.18 in the prior year period. Non-GAAP net income attributable to Vipshop’s shareholders was RMB1.4 billion as compared with RMB1.7 billion in the prior year period. Non-GAAP net margin attributable to Vipshop’s shareholders was 5.6% as compared with 6.0% in the prior year period. Non-GAAP net income attributable to Vipshop’s shareholders per diluted ADS was RMB2.09 as compared with RMB2.41 in the prior year period. As of March 31, 2022, the company had cash and cash equivalents and restricted cash of RMB14.3 billion and short-term investments of RMB5.0 billion. Looking forward to the second quarter of 2022, we expect that our total net revenue to be between RMB22.2 billion and RMB23.7 billion, representing a year-over-year decrease rate of approximately 25% to 20%. Please note that this forecast reflects our current and preliminary view of the market and operational condition, which is subject to change. With that, I would now like to open the call to Q&A.

Operator, Operator

Thank you. Our first question is from Thomas Chong with Jefferies. Your line is open.

Thomas Chong, Analyst

Hi, good evening. Thanks management for taking my questions. My first question is about the second quarter guidance. Can management comment on the impact of the pandemic on our business performance in April and so far in the month of May? And my second question is about the second half business momentum. Can management comment on the recovery momentum that we should expect as well as the margin outlook for the year?

Eric Shen, Co-Founder, Chairman, and CEO

The guidance for the second quarter actually reflects our current look at the uncertainties from the ongoing and potential restrictions to control the COVID outbreak as well as the general weak consumer sentiment. Entering – our business had actually been quite normal until the middle of March when the Omicron outbreak significantly impacted our business. Our warehousing and logistics capacity were disrupted or delayed and the whole supply chain faced a lot of problems. Some of our warehouses were closed down and logistics got delayed, with suppliers also facing restraints in terms of shipping and handling. Entering into April and until now in May, we have been facing continued pressure. I think even today, we still have over 1 million orders that cannot be delivered due to various reasons, including suppliers based in restricted regions, which undermined our fulfillment efficiency. So, we expect for May and June, we haven't seen clear signs of recovery. We don’t expect that the COVID impact will disappear very soon, especially as we have seen other places like Beijing facing restrictions or controls, and consumer sentiment has not come back. We also observe that the latest MBS data points to a very sluggish performance for discretionary items, including apparel. So, generally speaking, we don’t feel very optimistic for the momentum in the second half, but we don’t expect it will be significantly worse either. On the margin side, we are confident in maintaining a healthy level of profit and margins. While we face many challenges and uncertainties, we also maintain a very high level of discipline in our operations. We managed our cost and expenses much more carefully, scaling back a lot of low ROI spending. Thus, we are confident that we will deliver healthy and sustainable profitability for this year.

Thomas Chong, Analyst

Thank you.

Operator, Operator

Our next question is from Alicia Yap with Citigroup. Your line is open.

Alicia Yap, Analyst

Hi, thank you. Good evening, management. Thanks for taking my questions. I have a question related to the expansion into the non-apparel products. So can management elaborate a little bit more detail on the various kinds of products in this category? And can you remind us, is this a strategic change or a strategic business model shift or is this just a temporary approach to navigate through the soft demand for the apparel business? And then, second question is, any color in terms of what are some of the current inventory levels for the apparel brand? Can we get any leverage or is it just because consumption is so weak, so even though there is a lot of inventory? We can do some promotion discounts, but there is still a lack of demand? So any color you can share would be good?

Eric Shen, Co-Founder, Chairman, and CEO

Okay, first on standardized products. As a company, we still focus on the apparel category. Currently, we still have 70% from apparel and the rest 30% from standardized products. Standardized products serve as a very good complement to our overall platform. They can help us cater to a diverse range of customer needs, which is very dependent on season and many other factors. For instance, in summer, customers typically purchase a lot of standardized products in addition to summer clothing. Also, we approach standardized products very carefully. For instance, we want to ensure we have unique supply from top brands and very competitive pricing. We strive to meet customer needs, especially when they shop for clothing, offering them something else to choose from for a one-stop shopping experience. This is our strategy on standardized products. Given the COVID-19 outbreak, we are proactively adding from our non-apparel product offerings, especially including products for everyday use to meet customer needs. This aligns with our overall strategy to rely on standardized products. We will gradually improve the contribution from these standardized products to enhance the overall customer experience on our platform and also to improve their overall ARPU. Regarding brand inventory, many of our brand partners are severely affected by COVID. They have faced numerous store closures and possess large amounts of supply. However, we generally have the ability to secure quality inventory from brands and help them efficiently sell through this inventory. Simultaneously, some of the brand partners continue to face pressure, especially those based in restricted regions, including Shanghai. So, while the market is down, it may not be entirely bleak. As long as we can help a brand sell through their inventory, we provide a valuable proposition for them.

Alicia Yap, Analyst

Can I have a quick follow-up on the margins for the standardized product given the mix? How should we think about the total gross margin trends going forward or in the near term?

David Cui, CFO

For the standardized items, we carefully choose what products we will carry. Generally, we will not accept products with very low margins. Thus, overall, the impact on the margin is not that adverse. Furthermore, the apparel product still represents 70% of our total inventory, so we are committed to maintaining overall gross margin stability.

Alicia Yap, Analyst

Okay, thank you.

Operator, Operator

Our next question comes from Ronald Keung with Goldman Sachs. Your line is open.

Ronald Keung, Analyst

Thank you, Shen and David. Thank you, management. My first question is on your second quarter revenue guidance, whether that assumes a similar growth rate for May and June to what we’ve seen in the April run rates and some expectations for June 16 for us. Any expectations on that that we’re assuming some stronger growth moving into the month of June and some of the cancellation rates that we are seeing? The second question is on free cash flow; we’ve seen a reduction in that. So I want to hear what were the reasons behind it? And besides the buyback program that we’ve been lodged, I want to hear any updates on any dividend policies, any potential, and also for the Hong Kong listing? Thank you.

Eric Shen, Co-Founder, Chairman, and CEO

Okay. The second quarter guidance actually already factored in the April and May run rates from our observation; we have had a similar downside trend as observed in April and expect June to continue this momentum. It will certainly show a year-over-year decline. Couple that with COVID-19 cases and related restrictions and controls going down, consumer sentiment has not returned yet. So, this creates the reality for this quarter-to-date. Thus, our second quarter guidance is simply a reflection of that reality. Regarding cancellation rates, we have noticed that from the middle of March, the rate of cancellation of orders has increased due to logistics delays. The cancellation rate increased by 6 percentage points year-over-year, resulting in significant losses for us. Increasing customer cancellations dampen the general sentiment towards the e-commerce sector. We hope that with the restrictions gradually being lifted, confirmation rates will normalize over time.

David Cui, CFO

We have been profitable for over 38 quarters. So, we are confident that we will continue to be profitable even though we encounter difficult times and softer business. Generally, the free cash flow should mirror our profitability. In Q1, our operating cash flow turned negative due to significant payments to suppliers and other miscellaneous expenses. Thus, the decrease in accrued expenses and accounts payable is the main reason for the negative cash flow. In the long run, cash flow should reflect our profitability. In terms of the Hong Kong listing, it remains on our radar. Our board and management are still evaluating the options, and we still have some time to execute this plan. Regarding dividends, we currently don’t have a plan to issue dividends, but we are committed to our share buyback program.

Ronald Keung, Analyst

Understood. Thank you.

Operator, Operator

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

Natalie Wu, Analyst

Good evening management. Thanks for taking my question. So, my question is about the product mix shift. Since you mentioned that you decided to shift the product mix towards standardized goods in the future, could you give us more details about which categories will help standardize the products you are referring to? In 2018 and '19, you also tried some category expansion, so I wonder if there is a difference regarding a large round of standardized product shifts? Additionally, how should we differentiate ourselves from other general e-commerce platforms if we shift towards standardized products? Thank you.

Eric Shen, Co-Founder, Chairman, and CEO

In terms of our strategy on standardized products, all categories are already on our platform, including beauty products, home goods, kitchenware, life necessities, and healthcare products, etc. These non-sized products are standardized items we are focusing on. We will manage the product offerings very carefully in each category; we don’t seek as many SKUs as found on other platforms. We want to ensure we have a quality supply from brands, which may sometimes consist of unique offerings from top brands. We must provide competitive pricing and reasonable gross margins. Hence, we approach standardized items with caution. Currently, these standardized items represent 30% of our offerings. Our goal is to gradually improve this contribution to, let’s say, 33% over time, which is an increase of 10% from our current basis. Standardized items will not drag down the overall gross margins, and they will actually improve ARPU from our customers. Over time, we believe we will create a more balanced customer experience on our platform.

Natalie Wu, Analyst

Got it. Thank you.

Operator, Operator

Our next question is from Robin Leung with Daiwa. Your line is open.

Robin Leung, Analyst

Hi, this is Robin asking on behalf of John Choi. Thanks management for taking my questions. This quarter, the gross margin is slightly higher than our expectations. Is it because of the change in the category mix? As I remember, the SVIPs carry lower margins, but the mix this quarter is also higher. So, I wonder what led to the better-than-expected gross margin this quarter? And what is the trend for the second half if SVIP continues to increase in the mix? Are we going to see any impact on gross margin?

David Cui, CFO

This year, we have implemented many cost-saving measures to improve our margin, including the selection of the products and brands we carry on our platforms. For example, we were able to enhance the margin profile of many categories after strategically shifting our resources to core brands and deprioritizing some non-core brands, which helped improve our margin. For coming quarters, we will remain disciplined and ensure that we achieve a healthy margin, ultimately delivering a strong bottom-line net margin. In terms of category mix, apparel still represents 70% of our total GMV, supplemented by standardized products. As we've discussed earlier, we are judicious in selecting standardized products to ensure our overall gross margin remains stable and may even improve it.

Eric Shen, Co-Founder, Chairman, and CEO

In terms of customer growth for the second half, our customer growth has been relatively consistent with our overall business performance, as our ARPU has remained steady over time. We will evaluate our marketing spend continuously, especially given the uncertainties. We are facing a considerably less favorable environment for customer acquisition. Thus, rather than indiscriminately spending, we want to focus on acquiring high-quality customers. We will carefully assess their lifetime value to ensure they become valuable long-term customers for our platform. We are committed to customer growth and believe that we will maintain a relatively stable customer base in the coming quarters.

Robin Leung, Analyst

Thank you.

Operator, Operator

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 our 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.