Thank you, operator. Hello, everyone, and thank you for joining Vipshop's second 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 will like to remind you that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US 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 US 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 Ya Shen - Chairman of the Board of Directors and Chief Executive Officer

Good morning, and good evening, everyone. Welcome and thank you for joining our second quarter 2021 earnings conference call.

In the second quarter, we kept up our solid business momentum with core operation - operating metrics continued to trend healthily. Our user base maintained its strong growth driving a continued increase in total GMV. During the quarter, our total number of active users grew by 32% year-over-year to 51.1 million, and our total GMV increased by 25% year-on-year to RMB48.1 billion. Our most valuable user group showed especially strong growth momentum, with cumulative Super VIP membership increased by nearly 50% year-on-year, contributing about a third of the total GMV in the second quarter of 2021. These encouraging developments was the result of our relentless efforts to calibrate our strategic focus and increase operational synergies.

In the second quarter, we continued to robust execute on our merchandising strategy. Our buyer teams successfully collaborated with increasing number of suppliers and brand partners. As a result, we have not only been able to attract ever increasing amount of unique branded merchandise to be sold on our platform, but have been able to do so at Vipshop's favorable discount price. In addition to our traditional deeper discount inventory covering extensive range of brands, we now also carry a considerable proportion made for Vipshop products. These are products especially customized for Vipshop by our branded partners. We are committed to increase the breadth and depth of our merchandising portfolio to offer users a differentiated selection of high quality merchandise, while creating dynamic price advantage for our discount sales.

In the second quarter, we have successfully instituted refinements at operational level. User experience is one of our clear priority. To this end, we implemented several initiatives including better matching of merchandising selection to target users, and improving overall incentive for our most valued users. On top of this, we also leveraged effective marketing to attract more younger users - younger shoppers to our platform.

Looking forward to the second half of 2021, we remain committed to execution of our merchandising strategy. We are dedicated to create value for our new and existing customers, while also increasing the value we add for our core branded partners. We believe this will solidify our leading position in China's discount retail markets.

At this point, let me hand over the call to our CFO, David Cui, who will go over our operational and financial results.

David Cui - Chief Financial Officer

Thanks, Eric, and hello, everyone. We are pleased to report a strong set of results for the second quarter of 2021. During the quarter, we delivered solid top line growth with total net revenue reaching RMB29.6 billion, representing a year-over-year increase of 22.8%. We also witnessed the sustainable growth momentum in business development, which is evidenced by our number of active customers and total orders are growing by 32% and 30% year-over-year, respectively. Non-GAAP net income attributable to Vipshop's shareholders also increased by 11.3% year-over-year to RMB1.5 billion.

In the second quarter of 2021, we repurchased approximately $301 million of our ADS in accordance with the $500 million share repurchase program we adopted in March earlier this year, showing both our confidence in the robustness of our business model and our dedication to delivering long-term value to our shareholders.

Before I get started with detailed quarterly financial highlights, I would like to clarify that all the financial numbers presented below are in RMB, and all the percentage changes are referred to year-over-year exchanges, unless otherwise noted.

Total net revenue for the second quarter of 2021 increased by 22.8% year-over-year to RMB29.6 billion from RMB24.1 billion in the same period last year, primarily driven by a large number of total active customers. Growing [sic – gross] profit for the second quarter of 2021 increased by 20.6% year-over-year to RMB6.0 billion from RMB4.9 billion in the same period last year. Gross margin for the second quarter of 2021 was 20.1% compared with 20.5% for the same period in 2020.

Total operating expenses for the second quarter of 2021 were RMB4.8 billion, compared to RMB3.8 billion in the second quarter of 2020. As a percentage of total net revenue, total operating expenses for the second quarter of 2021 were 16.4% compared with 15.8% in the second quarter of last year. Fulfillment expenses for the second quarter of 2021 were RMB2.1 billion as compared with RMB1.7 billion in the same period in 2020. As a percentage of total net revenue, fulfillment expenses for the second quarter of 2021 decreased to 6.9% from 7.0% in the second quarter of 2021 - in the second quarter of 2020.

Marketing expenses for the second quarter of 2021 were RMB1.4 billion, as compared with RMB1.0 billion in the same period of 2020. As a percentage of total net revenue, marketing expenses for the second quarter of 2021 were 4.8% compared to 4.3% in the second quarter of 2020. The increase was primarily due to higher investment in advertising activities relating to customer acquisition and retention. Technology and content expenses for the second quarter of 2021 were RMB369.9 million, compared to RMB305.4 million in the same quarter in 2020. As a percentage of the total net revenue, technology and content expenses for the second quarter of 2021 decreased to 1.2% from 1.3% in the second quarter of 2020. General and administrative expenses for the second quarter of 2021 were RMB1.0 billion, compared to RMB804.6 million in the second quarter of last year. As a percentage of the total net revenue, general and administrative expenses for the second quarter of 2021 were 3.4% as compared with 3.3% in the same period of 2020.

Income from operations for the second quarter of 2021 increased by 18.6% year-over-year to RMB1.5 billion from RMB1.2 billion in the second quarter of 2020. Operating margin for the second quarter of 2021 was 5.0% as compared with 5.1% in the same period last year. Non-GAAP income from operations before the second quarter of 2021, which excluded share-based compensation expenses and amortization of intangible assets resulting from business acquisitions increased by 16.1% year-over-year to RMB1.7 billion from RMB1.5 billion in the second quarter of 2020. Non-GAAP operating margin for the second quarter of 2021 was 5.9% as compared with 6.2% in the second quarter of 2020.

Net income attributable to Vipshop's shareholders for the second quarter of 2021 was RMB1.1 billion, compared to RMB1.5 billion in the same period last year. Net margin attributable to Vipshop's shareholders for the second quarter of 2021 was 3.7%, as compared with 6.4% in the prior year period. Net income attributable to Vipshop's shareholders per diluted ADS for the second quarter of 2021 decreased to RMB1.56 from RMB2.24 in the second quarter of the previous year. Non-GAAP net income attributable to the Vipshop's shareholders for the second quarter of 2021 increased by 11.3% year-over-year to RMB1.5 billion from RMB1.3 billion in the second quarter of 2020. Please note that non-GAAP net income attributable to Vipshop's shareholders excludes a number of items, the details of which can be found in our earnings release. Non-GAAP net margin attributable to Vipshop's shareholders for the second quarter of 2021 was 5.0%, as compared with 5.5% in the same period last year. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS for the second quarter of 2021 increased to RMB2.10 from RMB1.92 in the second quarter of 2020.

As of June 30, 2021, the Company had cash and cash equivalents and restricted cash of RMB16.5 billion and short-term investments of RMB3.6 billion.

Looking forward to the third quarter of 2021, we expect our total net revenues to be between RMB24.3 billion and RMB25.5 billion, representing a year-over-year growth rate of approximately 5% to 10%. Please note that this forecast reflects our current preliminary views of the market and operational conditions, which is subject to change.

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

Question & Answers

Operator

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have the first question. This is coming from the line of Feitong Zhang from CICC. Please go ahead.

Feitong Zhang - CICC - Analyst

Hi, [Foreign Speech] This is Feitong from CICC. Thanks for taking my question. I have two questions. My first question is regarding to the competitive landscape, we observed some short video platforms are doing really well this year in their e-commerce business, and some brands are exploring the stocking at these channels. How should we think about the competitive landscape of the stock industry going forward? Any color would be very helpful. The second question is regarding to the third quarter guidance. How should we think about the third quarter guidance? Did we observe any impact from the pandemic in July and August that we factored in our third quarter guidance? Should we expect acceleration in the fourth quarter, if the pandemic gets well contained? [Foreign Speech]

Eric Ya Shen - Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

Jessie Fan - Head of Investor Relations

Okay, let me translate the first answer to the first question in terms of live streaming models. There are lot of platforms that are selling through live streaming, whether it's branded or it's slow - in-season, slow-moving old inventories, I think these platforms primarily are capturing a lot of customers attention. But no matter what, the most important thing is merchandising, whether it is pricing advantages or brand advantages, that's the most important thing for customers. For Vipshop, actually, we do less live streaming, but what we focus most is to creating differentiated value for customers in terms of both brand and merchandise and the pricing advantages. So, despite the fact that short video platform has some impact in terms of attracting a lot of time spent from customers, but it will have just some limited impacts on our own business. In terms of the Q3 guidance, there are a few factors entering Q3. We've seen consumer sentiment is not as strong amid a weaker macro environment, which was partially related to some natural disaster in certain province and the resurgence of COVID-19 here and there. And the report that we had a tough phase in the same quarter of last year as we did see some strong recovery from the end of COVID-19. And also Q3 is a traditionally a light season and also light for the apparel industry. Turning to Q4, typically Q4 is the peak season where apparel ticket sizes tend to be larger and we will run promotional events as everyone else within these industries. So Q4 should hold up relatively well as long as the COVID-19 pandemic ends at that time.

Feitong Zhang - CICC - Analyst

Thanks, very helpful.

David Cui - Chief Financial Officer

I would like to add on something what Eric just mentioned. Number one is that, remember last Q3 we had a booming business post COVID-19. So we had a larger base for this year, so that's why we had softer guidance for Q3 this year. So that's number one. Number two is that we should notice that our active customer base actually grew year-over-year 32%. So that does provide a foundation for us to grow our future business. and that's also a strong indicator that our business is healthy and then that should help with our future growth.

Feitong Zhang - CICC - Analyst

Thanks. [Foreign Speech]

Operator

Thank you. We have the next question, which is coming from the line of Eddy Wang from Morgan Stanley. Please go ahead.

Eddy Wang - Morgan Stanley - Analyst

[Foreign Speech] I have two questions. First, yes, regarding the - can you give us the breakdown of by month in the second quarter, because we remember that in May when - during the first quarter earnings call you mentioned that your guidance for the second quarter actually has been a little bit conservative. So, we all expect that you will have a quite strong growth. But in June, actually, it seems like that your sales situation is relatively weaker than expected. So, can you give us more color on that? And second question is can - also give us some color about how the apparel demand actually in July and so far in August. Because if you look at the NBS, the retail sales of apparel, which show a certain weakness for the apparel demand. So I'm not sure whether or not this also impact our guidance for the third quarter? Thank you.

Eric Ya Shen - Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

Jessie Fan - Head of Investor Relations

Okay, in terms of the trend that we have seen in June, as you mentioned, our guidance of 20% to 25%, actually in June we were already seeing a slower sales due to the longer promotional event of our whole e-commerce space. In the past, the e-commerce space tends to hold one day or two days, three days promotional events. This has become a month long promotional event, and that it's becoming less and less attractive to customers. And back in June, we tried to deliver some coupons to customers to encourage their spend, but it does not - it did not turn out very well. So we actually had some control over our marketing spend. And entering into the first half - the first - one and a half months in the third quarter, we did see some weakness in the apparel category. It's not as strong as we had anticipated, but it's also not as bad as we probably had imagined. We think that primarily due to the resurgence of the COVID-19 here and there, and we are seeing the trend moving slower than before. But at the same time, we also see branded merchandise, actually they have very good inventory, because the offline stores are not very - not a very good media place for sales due to the COVID-19. So actually, they have increased inventory online for us. So we have to see a few - a couple of months to see how this trend turns out.

Eddy Wang - Morgan Stanley - Analyst

[Foreign Speech]

Operator

Thank you. We have the next question from Ronald Keung from Goldman Sachs. Please go ahead.

Ronald Keung - Goldman Sachs - Analyst

Thank you. Thank you, Shen and David, Jessie. So I have two questions, and I'll translate to Mandarin. The first question is on, also in our third quarter revenue guidance of 5% to 10%, just want to know how that user growth and ARPU is kind of put within this forecast? Just want to see whether our user growth remains quite strong, or maintaining the trends in the second quarter? Or - and would that imply kind of ARPU would decline further on a year-on-year basis? And how do we see that into the fourth quarter, as what we talk about as the peak season? And then my second would be on marketing spending that we spent around 37% more in marketing spend in the quarter. You mentioned about some control during June in couponing, but this is still quite an increase. And so, are we expecting more spending as we head into the second half? And how should we think of sales and marketing as a percentage of revenue, which is one of the metrics which has been around 4.8% of revenues in the second quarter? [Foreign Speech]

Eric Ya Shen - Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

David Cui - Chief Financial Officer

Hi, Ronald. I'll take on the second question regarding the marketing expenses. So with respect to marketing expenses, this is probably the area that we have more discretion and the marketing expenses with little bit between new user acquisition and existing user retention. So, we have more discretion in terms of how we allocated the spending. And then as you can see in the second quarter, we grow our active customer base by 32%. We would expect that we will continue to grow our customer base. And in terms of the strategy, we will be carefully evaluating how to execute in terms of the marketing strategies. And the objective for us is to maintain our marketing expenditure at a stable level, not to - in terms of the percentage of revenue. We expected that number should remain stable. We will try to improve our efficiencies in terms of how we spend that dollar.

Jessie Fan - Head of Investor Relations

Okay, back to your question on trends. As you may have noticed that our ARPU for the second quarter decreased by 7% year-over-year. So for Q3 and Q4, we don't expect similar deceleration within the growth - the decline would be much moderated. We have spent a lot of time in reacting - in reactivating our old customers as well as attracting new customers. But recall in the second quarter of last year, we actually stopped spending money on attracting new customers. So when entering into this year, we saw an increasing number of new customers and who may need some time to ramp up their spending, so which is due actually impacting the overall ARPU. But we think the general trend for ARPU going ahead will be stabilized. We are confident because we've seen very strong growth in Super VIP memberships, who grew about 50% year-over-year in the second quarter, and we found that they have been very loyal and spending much more than an average customer. Actually Super VIP members spend almost 10 times an average customer. So as long as we can grow our Super VIP members, we are confident that the ARPU will improve over time.

Ronald Keung - Goldman Sachs - Analyst

Understood. Thank you. Thank you, management.

Operator

Thank you. We have the next question. This is coming from the line of Thomas Chong from Jefferies. Please go ahead.

Unidentified Participant - - Analyst

Good evening, management. I'll ask questions on behalf of Thomas Chong. So, I have two questions. The first question is about, can management share some colors about the outlook for the second half of the year, and also 2022 including the revenues and the gross profit margin and net profit margin? And my second question is, we mentioned about attracting young users. Do we have any like updates about initiations on user acquisition? [Foreign Speech]

Eric Ya Shen - Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

Jessie Fan - Head of Investor Relations

So, in terms of first question on the outlook of the second half and beyond, we think discount sale is actually a resilient and long-term business, and many consumers have a mindshare for discount sales. With our customer base is continuing to expand, we are very optimistic that we're going to have a relatively stable growth outlook. And in terms of net margins, we've mentioned many times, we will continue to balance our top line growth and profitability. And we've been very profitable for many quarters, and in the future we will continue to maintain a solid level of profitability. And our - second question on new customer acquisition, we have various customer acquisition channels. And in the past we had been leveraging a lot of traditional channels like, digital advertising to acquire younger shoppers, especially those who are born after 2000. We have been seeing very decent ramp up in the contribution of the shoppers who are born after 2000 up by 6% year-over-year in the second quarter. And in the future, we will try to be more active in exploring more innovative customer acquisition channels, such as live streaming, short video, etc., to attract increasing number of younger shoppers to our platforms.

Unidentified Participant - - Analyst

[Foreign Speech]

Operator

Thank you, shall we move for the next question? The next question comes from the line of Nelson Cheung from Citi. Please go ahead.

Nelson Cheung - Citi - Analyst

Hi management. Thanks for taking my questions. So I have two follow up questions. The first question is regarding your guidance and your outlook. So looking beyond the third quarter revenue guidance and your expectation on fourth quarter, do you have any preliminary view on next year, or medium term normalization growth of the discount merchandising industry? And do you expect Vipshop to grow faster than the industry growth in future? So my second question is also regarding the new user profile. So wondering if management can provide more qualitative colors in terms of user mix from lower tier cities, and their spending behavior from the new acquisition channel like this short video platform? [Foreign Speech]

Eric Ya Shen - Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

Jessie Fan - Head of Investor Relations

Okay. In terms of the industry outlook versus Vipshop, you should be well aware that we are a fundamentally solid business. And if compared to traditional e-commerce platforms, we might see less - we might face greater competition. But if you look at the apparel-related segment, we are the number one in discount sale. We are very confident that our core competency in discount sale will outpace other peers in this particular segment. As you may know that the general ecommerce industry still grow like 20% year-over-year. But for us, we are looking for relatively steady growth for the long-term future. In terms of users and user behavior across different tiers of cities, we have been seeing very stable trend in terms of GMV contribution, user acquisition or ARPU, there is not so much changes in the behavior of different tiers of cities.

David Cui - Chief Financial Officer

Let me add on something on this. So, I think we want to differentiate ourselves with other e-commerce platforms in terms that, we only focusing on apparel-related categories, and while the other e-commerce platforms may carry many more other categories. So, we are confident that we have the - maybe the leading leaders in terms of how we process apparels sales and inventories. So we should outperform in these categories as compared to other e-commerce platforms.

Nelson Cheung - Citi - Analyst

Thank you very much.

Operator

Thank you. We have our next question. This is coming from the line of Natalie Wu from Haitong International. Please go ahead.

Unidentified Participant - - Analyst

Hi, good evening, management. Thanks for taking my question. And I'm asking the question on behalf of Natalie. My first question is concerned about new initiatives of the Company. So can management share any color to help us understand are there any new initiatives or businesses that we are now taking a trial in? And can we share about their recent developments? My second question is more concerned about our user engagement and user experience. Just now I think management mentioned that there were some refinements in second quarter about improving the user experience on the platform. Just wondering what specifically were those refinements? And are there any operating metrics that could help us understand the improvement in user engagement? [Foreign Speech]

Eric Ya Shen - Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

David Cui - Chief Financial Officer

I'll add something on this. As mentioned earlier, as of the end of Q2, our paid Super VIP grew by nearly 50%. So Super VIP members tend to spend a lot more than an average customer. So it's already contributed one-third of our total GMV. So in Q2, we actually further increased our incentive to our Super VIP members, including an extra 5% off on selected merchandise. We provided a better targeted product to Super VIP members and improved our services. So in May, we also added a certain life of privileges for Super VIP members. And in future we will continue to provide more popular membership privileges to improve their shopping experience. And hopefully that will translate to more active customers into Super VIP memberships.

Jessie Fan - Head of Investor Relations

Okay, back to our first and second question. The first question is on the new business development. Actually, we have been very focused on our core business. We've made it clear that we reinforced our executional merchandising strategy and everything we do centered on that strategy. We're focused on discount sale and enhance our buyer capabilities. To that end, we are trying to optimize our brand portfolio and target acquisition with brands to enhance our competitiveness, and we are consolidating our long-term core competency in the discount retail market. So 99% of management focus is on discount retail and the execution of merchandising strategy. Of course, we are trying a lot of efforts in innovated areas. We've been investing to fulfill our innovation, but that's not our current priority. In terms of enhancing our user experiences through some operational refinements, you have to be aware that all of consumers are looking for good brands, good merchandise with good prices and good quality, and that should be matched with good services. So we've been investing heavily in bringing our user experience to the next level, including a hassle less return or exchange leveraging our relationship with Shunfeng Express delivery. And on the other hand, we have been increasing our efforts, our front end and back end, in terms of customer service with things that our core metrics, evaluating customer service standards, like an NPS is improving very significantly. So in the future, we'll continue to invest in our efforts in bringing - enhancing our customer service and enhancing our user experience.

Unidentified Participant - - Analyst

Thank you, management.

Operator

Thank you. We have the next question from the line of Robin Leung from Daiwa. Please, go ahead.

Robin Leung - Daiwa - Analyst

Hi, thanks management for taking my question. This is Robin asking on behalf of John Choi. I have two questions. Given that user growth is strong over the past four quarters, but ARPU is still showing a year-on-year decline, should we expect the ARPU to ramp up in 2022 when new users normalize, and the spending from their older users that we acquired this year to ramp up their spending? Would it be first half next year or the second half of next year? And should we expect to see less couponing by that time? And also the second question is on regulations. Are we seeing any like positive or negative impacts on our Company? [Foreign Speech]

Eric Ya Shen - Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

Jessie Fan - Head of Investor Relations

Okay. On your first question on ARPU trends, we have mentioned our ARPU is on a decline in the second quarter, but it's going to be at a moderate pace in the quarters ahead, because it takes time for new customers as well as our old customers, which means historically they'd spend money on our platform, but recently haven't come to spend. So it takes time for these two types of customers to ramp up their spending. But on a quarter-over-quarter basis, we have seen very apparent pickup in their spending. So actually, we are not too worried about that. As long as we can grow our user base, ARPU is going to improve over time. And we've also mentioned that we are going to invest heavily in our SVIP membership program. We want to improve their ARPU going ahead. So with their - as their spending has contributed a third of our total net GMV, we are going to translate more customers into SVIP members and that would help us to improve the ARPU over time. On your question on regulation, overall we believe the recent developments in terms of internet regulations such as [Indecipherable] and unfair competition, as well as data security, especially the ban on forced exclusivity on merchants will benefit Vipshop to some extent. That means we'll have a more open and transparent market with fair competition. We will have more opportunity to partner with an increasing number of brands, which will further reach our branded merchandise selections on our platform. So generally, we are very welcoming this regulatory development, because Vipshop is going to benefit from them more or less.

Operator

Thank you. Due to time constraints, that concludes our Q&A session for today. I will now like to hand the conference back to Jessie for any ending remarks. Please take over.

Jessie Fan - 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 me. We look forward to speaking with you next quarter.

Operator

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Q2 2021

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