Title

Presentation

Vipshop Holdings Limited misses on earnings expectations. Reported EPS is $0.27 EPS, expectations were $0.38.

Operator: Ladies and gentlemen, good day, everyone, and welcome to Vipshop Holdings Limited First Quarter 2023 Earnings Conference Call. At this time, I would like to turn the call over to Ms. Jessie Zheng, Vipshop Head of Investor Relations. Please proceed.

Jessie Zheng: Thank you, operator. Hello, everyone and thank you for joining Vipshop’s first quarter 2023 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 in 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 maybe made.

Please note that certain financial matters 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: Good morning and good evening, everyone. Welcome and thank you for joining our first quarter 2023 earnings conference call. We were off to a strong start in 2023. Our steadily leadership, combined with the long-term merchandising strategy and relentless focus on agility, execution and business fundamentals allowing us to navigate through micro challenges, stay even closer to brand partners and customers and capture the opportunities in the post-pandemic consumption recovery. During the first quarter, we saw good momentum in apparel-related categories, which booked a double-digit GMV growth year-over-year. Our abundance and device branded merchandise has great value will keep it to customer appetite for holiday and seasonal shopping along with a rebound in social activities.

Customer trends remained strong. The number of active customers regained the growth year-over-year and the average spending also grew nicely on more frequent purchases. Paid membership growth proven the even stronger. We ended the first quarter with a 15% growth in Super VIP members who represented about 42% of our online spending. Profitability was exceptionally strong as we continue to double-down execution for efficiency with a number of measures in place, but our efforts are more on building the strategic and long-term capabilities related to merchandise expansion, customer engagement and the service excellence that true differentiates us. On merchandising, we focus on living a sense of fresh needs as customers attract to all things new and trending.

On top of industry leading co-brands, we continue to expand into more high-quality affordable and premium brands that offer great time at great value and we are more holistic about differentiation our merchandise offerings. We continue to optimize the apparel product portfolio within the Made for VIP line. We will develop a general guideline for brand partners to customize the high-quality products that can fill in the gap in certain categories and price brands on our platform. In addition, we will be investing in our merchandising talent because we understand they are at the heart of our business model. Through well-designed internal certified programs, we intend to enable them with skill sets to expertise to take our merchandising capabilities to a new level.

Customer engagement, especially with our high-value cohort, is driven by a comprehensive set of upgrades. Our goal is to make Vipshop a enjoyable shopping destination not just the sale – not just to search. We are digging into the customer insights to provide more inspiration, relevant content and personalized offerings to our customers. We are creating innovative channel of promotion around the customer lifestyles, product lifecycles and the trading and trending categories. We expect these initiatives to increase repeat orders and cross-category purchases. Service has been another source of differentiation. We will demonstrate our best-in-class service involving three reasons of exchange as well as efficient and reliable logistics, there is a lot more we can do in terms of enhanced customer mind share as to price advantage.

Quality assurance, product authentic as well as tailored service through our loyalty program, we will keep driving change and need to capture the opportunities in this environment as consumers manage household budgets more carefully. We reinforce our value for money perceptions across our quality branded merchandise to keep Vipshop top of mind with customers. With this, we were positioned to grow the base of high-value customer and paid members and also grew engagement levels across customer cohorts. We believe we are in the better shape to achieve quality and consistent growth in both top and bottom line for the long-term. Lastly, as started in our earnings release, our CFO, David Cui will step down from his current position for personal reasons.

On behalf of the Board of Directors and the management team, I would like to thank David for his contributions and the tireless work over the past 3 years and wish him all the best in his endeavors. Mark Wang will succeed David as our new CFO starting from tomorrow. I would also like to warmly welcome Mark. His extensive experience in finance and accounting will make him a great vision to our team. At this point, let me hand over the call to David Cui to go over our financial results.

David Cui: Thanks, Eric and hello everyone. As Eric mentioned, today is my last time joining the earnings conference call as the company’s CFO. It has been a great honor to be part of a company that is in asset and steadfast at what they do. The past 3 years were full of challenges and uncertainties. But together with our dedicated management team and colleagues, we weathered through the hard times and emerged stronger with solid business foundation and financial position to achieve our long-term growth strategy. I would like to express my gratitude to the Board, Eric and investment communities for your trust and support along the way. Turning to the earnings results, we are pleased to deliver a strong quarter that exceeded our expectations.

We achieved pretty good sales aspects as our teams responded to the fast changing consumer needs and aggressively secured inventory for the opportunities ahead as it sets us up in a good position going into the year. Margins remained on the expansion track with increased sales contribution from higher margin apparel-related categories and well-rounded measures of cost optimization, gross profit recorded double-digit growth and gross margin continues to expand meaningfully year-over-year. We continue to be disciplined in expenses and held fast to our high-quality growth strategy. As a result, we saw decent expense leverage. Non-GAAP net income increased by 46% year-over-year and net margin reached a new record high at 7.5%. Moreover, we continue to return value to our shareholders proactively.

During the quarter, we have fully utilized the remaining amount of our $1 billion share repurchase program and today, we announced an increase in the amount of existing share buyback program from $500 million to $1 billion. 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 2023 increased by 9.1% year-over-year to RMB27.5 billion from RMB25.2 billion in the prior year period, primarily attributable to the growth in active customers and spending driven by the recovery in consumption of discretionary categories.

Gross profit increased by 17.9% year-over-year to RMB5.9 billion from RMB5.0 billion in the prior year period. Gross margin increased to 21.4% from 19.8% in the prior year period. Total operating expenses increased by 4.2% year-over-year to RMB4.1 billion from RMB3.9 billion in the prior year period. As a percentage of total net revenue, total operating expenses decreased to 14.7% from 15.4% in the prior year period. Fulfillment expenses increased by 5.2% year-over-year to RMB1.8 billion from RMB1.7 billion in the prior year period. As a percentage of total net revenue, fulfillment expenses decreased to 6.5% from 6.7% in the prior year period. Marketing expenses increased by 10.2% year-over-year to RMB836.9 million from RMB759.3 million in the prior year period.

As a percentage of total net revenues, marketing expenses was 3.0%, which stayed flat as compared with the prior year period. Technology and content expenses increased by 0.6% year-over-year to RMB392.8 million from RMB390.4 million in the prior year period. As a percentage of total net revenue, technology and content expenses decreased to 1.4% from 1.5% in the prior year period. General and administrative expenses decreased by 0.7% year-over-year to RMB1.0 billion from RMB1.1 billion in the prior year period. As a percentage of total net revenues, general and administrative expenses decreased to 3.8% from 4.2% in the prior year period. Income from operations increased by 54.8% year-over-year to RMB2.0 billion from RMB1.3 billion in the prior year period.

Operating margin increased to 7.2% from 5.1% in the prior year period. Non-GAAP income from operations increased by 50.6% year-over-year to RMB2.3 billion from RMB1.5 billion in the prior year period. Non-GAAP operating income margin increased to 8.3% from 6.0% in the prior year period. Net income attributable to Vipshop’s shareholders increased by 69.6% year-over-year to RMB1.9 billion from RMB1.1 billion in the prior year period. Net margin attributable to Vipshop’s shareholders increased to 6.8% from 4.3% in the prior year period. Net income attributable to Vipshop’s shareholders per diluted ADS increased to RMB3.16 from RMB1.61 in the prior year period. Non-GAAP net income attributable to Vipshop’s shareholders increased by 45.8% year-over-year to RMB2.1 billion from RMB1.4 billion in the prior year period.

Non-GAAP net margin attributable to Vipshop’s shareholders increased to 7.5% from 5.6% in the prior year period. Non-GAAP net income attributable to Vipshop’s shareholders per diluted ADS increased to RMB3.52 from RMB2.09 in the prior year period. As of March 31, 2023, the company had cash and cash equivalents and restricted cash of RMB18.9 billion and short-term investments of RMB1.5 billion. Looking forward to the second quarter of 2023, we expect our total net revenues to be between RMB27.0 billion and RMB28.2 billion, representing a year-over-year increase of approximately 10% to 15%. Please note that this forecast reflects our current and preliminary view of the market and operational conditions, which is subject to change. Now, I would like to introduce Mark, our new CFO, who is also present at the call.

I would like him to say hello to everyone.

Mark Wang: Okay. Thanks, David. Good morning and good evening, everybody. I am very glad to have this opportunity to attend the first quarter earnings release and meet all of you. By way of short introduction, I have more than 15 years financial management experience. Previously, I worked out with the CFO of [indiscernible] Group. Prior to that, I am the Vice President of Finance in Xiaomi Group. It’s my great honor to take CFO in Vipshop. I would like to take this opportunity to thank David for his great efforts during the past years. And I am looking forward to working with management and do everything I can to contribute to the future success of our business. Thanks.

David Cui: Okay. With that, I would like – now like to open the call to Q&A.

Operator: [Operator Instructions] First question comes from Thomas Chong with Jefferies. Your line is open.

Thomas Chong: Hi, good evening. Thanks management for taking my questions and congratulations on a strong set of results. My first question is more about the consumption recovery, in particular, the consumer sentiment that the management observed in recent months? And also, how should we think about the monthly GMV trend recently and also our expectations for the coming quarters? And my second question is about the [indiscernible] of our marketing campaign. Can management comment about how you are seeing the industry preparations for this event and our strategies for this year?

Eric Shen: Okay. In terms of the general consumption or current trend in the past several months, actually, we do see a very strong recovery after spring festival when people are coming back to normal life and work after 3 years of the pandemic effect. So we do see a very strong recovery in apparel-related categories as people are going out more often to meet friends and along with a strong rebound in social activities. And that momentum in April and May were really well, and it continues into the quarter-to-date. It seems that we do see a lot of pent-up demand as people are going out for travel, having parties or meeting friends. And in terms of the June 18 promotion. Of course, it’s a very important promotional event in the e-commerce sector.

It’s – this year, it starts very early and it’s going to be extended length of period up to 1 month of promotion. I think everybody is making a lot of efforts to prepare for the promotional campaign, and we do nothing on year than before. We still focus on apparel-related categories, we still we are branded discount retail and we focus on securing a strong flow of our branded merchandise and discounts. So we will be here for the campaign as well.

Thomas Chong: Thank you.

Operator: [Operator Instructions] The next question comes from Natalie Wu with Haitong International. Your line is open.

Natalie Wu: Hi, good evening. Thanks for taking my question. Just one for the longer-term prospects, just curious, Shen-zong, I don’t know what kind of the expectations do you have post the reopened bonus and the low base effect, let’s say, beyond next year? What kind of the normalized growth rate are you anticipating? And also just wondering if the high margin of the first quarter can be sustained in the future? Thank you.

Eric Shen: Okay. In terms of long-term growth target, I think at least for this year, we still have very high hope because we do benefit from the current environment especially in branded discount retail, and that we are going to take advantage of the opportunity when consumers manage their household budgets more carefully after the pandemic. So we are pretty optimistic about the full year growth. In terms of profitability, we also have very high confidence, although we achieved a record high level of non-GAAP profit margin, we have – we may see small fluctuations from quarter-to-quarter. But remember, we still focus on high-quality growth. We’re not growing just for growth. We look for quality profitable growth. And with the number of matters already in place in terms of efficiency gains, we are confident that we can still further expand our margins.

And we are also very – we also continue to be very disciplined in terms of cost and expenses, and we do very careful calculation as to where to spend our money, and we want to make sure that every dollar we spend has returned. So we are pretty confident that we can maintain a relatively high level of profitability.

Natalie Wu: Just curious post the [indiscernible] bonus in the next year and much longer-term, can we still manage higher than average growth rate compared with other e-commerce players? Thank you.

Eric Shen: In terms of long-term growth, we cannot fully guarantee what we are going to achieve for the next couple of years because we do see increased competition from our peers in terms of promotion, subsidies and also a lot of emerging formats like live streaming grabbing time spend from customers. The only thing we can do is actually to be ourselves, to be good at what we are really good at and to offer our customers with brand – better merchandise offerings, better pricing and better experiences and try to strengthen our leadership in branded discount retail. We may not grow as rapidly as a lot of people imagined, but we are going to grow very solidly. So we are optimistic about our long-term growth, but we are also fully aware that the competitive landscape is evolving from time to time, and we are fully prepared for that.

Natalie Wu: Understood. Much appreciated. [Foreign Language]

Operator: [Operator Instructions] The next question comes from Jialong Shi with Nomura. Your line is open.

Jialong Shi: Okay. First of all, thank you very much for management for taking my questions. I have two questions here. My first question is about the Super VIP. So I just wonder what is the latest number of quarterly Super VIP members? And what was the GMV in 1Q contributed by Super VIP member? Is the more on – how many of VIPs active customers may be converted into Super VIP member? And my second question is about the growth outlook for second half. Just wonder if management can provide any colors as to how much the top line may be able to grow in the second half? Thank you.

David Cui: I’ll answer the first question. In Q1 2023, we had active purchase Super VIP 6.3 million, which represents a 10% increase year-over-year, who contributed about 42% of our total to the revenue. So in response to your question regarding how many can be converted with Super VIP, we have over 85 million active customers in – annual active customers, I would say, that could be considered for the conversion. And also, we have exceeded like 200 million registered customers that we could [indiscernible]. So basically, also, we have – among all these active customers, we have roughly about 15 million we consider high-value customers who contributed a higher ARPU, right? So this could be a target for the conversion.

Eric Shen: Just adding to David’s point in terms of the SVIP, we are going to continue to expand the base of our SVIP members. We’re going to increase their membership privileges to motivate them to spend more to stay longer and to place, repeat orders and to do a lot more cross-category purchases, to increase their frequency of repurchases as well. So this is our – on the priority list of our customer expansion. In terms of the growth for the second half of this year, we actually have seen very good momentum in customer trends in both Q1 and Q2. These have laid a solid foundation for the momentum going into the second half. And we are pretty confident that we can continue to expand our customer base with reasonable spending.

We have find out scientifically to increase customers at a relatively rational spending, and we are pretty confident that we can continue to expand our customer base. In addition to that, we have a lot of things that we can do in terms of merchandise expansion, creating clear pricing advantage and leverage a personalized offering to increase the conversion of our customer purchases. And in terms of merchandising offerings, we can be quite stable between apparel-related categories and the non-apparel-related categories. So we do have a comprehensive set of initiatives to maintain a very good and healthy growth of our business momentum.

Operator: [Operator Instructions] The next question comes from Wei Xiong with UBS. Your line is open.

Wei Xiong: Thank you, management, for taking my question. My first question is regarding the competition. In the e-commerce industry as some of our peers have recently announced their plan to be more aggressive in investments in terms of user growth and the price competitiveness. So just wondering what actions can we take to maintain our value proposition in light of the heightened competition? And second, just to follow-up on the marketing expense. So given that we have the big promotion coming up, and we do want to step up the investment related to user growth when the ROI is positive. So how should we think about the marketing expense trend in the second quarter as well as the marketing expense ratio for the full year? Thank you.

Eric Shen: Okay. So in terms of competition, how we are going to compete in this environment? Actually, we still focus on what we are really good at. We focus on apparel-related categories. We actually prioritize on traffic and resource our allocation to popular brands and to encourage them to grow faster than our platforms and some other platforms. In terms of product selection, we have our long-term expertise through our professional buyer team, and we know what consumers are really looking for, and we have very strict requirements in terms of pricing with brand partners. We want to make sure our product selections will cater to consumer demand needs in terms of product selection as well as our pricing. In addition, we actually worked very closely with some of our core brands to customize high-quality product offerings for our customers.

We will continue to further differentiate our merchandising offering and to create more value to our customers. We understand there are a lot of formats of e-commerce, including live streaming, and we continue to be largely shelf-based e-commerce player because we know there are merits that live streaming cannot compare with. For example, we have a lot more SKUs, and we offer a lot more selections to our customers. So, there are certain merits that live streaming or other players cannot meet customer demands. We understand there is going to be a lot of competition and even pricing wars ahead, but we know how to manage that, and we still focus on building our strategic and long-term capabilities in terms of merchandising to offer our customers with more unique and better priced product selection.

In terms of marketing spends, you don’t have to worry too much about that. We are quite optimistic in terms of our marketing spend overall. It’s going to be quite manageable in Q1. I think marketing spends as a total – as a percentage of total revenue is 3%, is not going to jump to 4% or 5%. It’s only going to be very incremental increase on the basis of probably 3%, probably a 10% increase to 3.3%, at most.

Wei Xiong: Thank you. Very clear. Thank you, management.

Operator: [Operator Instructions] Our next question comes from Andre Chang with JPMorgan. Your line is open.

Andre Chang: Let me translate my question into English. Thank you, management for taking my question. I have two questions. The first one is to understand more about the growth driver. What are the user group, geographic group and also the category that is driving the revenue growth acceleration in this quarter? Two, we noticed GMV growth is clearly faster than revenue growth this quarter. Does that mean the company is making good progress on the marketplace 3P business? If that’s the case, what’s the driver? And does that contribute to the margin improvement as well? Thank you.

Eric Shen: Yes. In terms of category, overall, apparel categories are doing much better at double-digit GMV growth in Q1 than non-apparel categories. We did see broad-based recurring in subcategories like women’s wear, menswear, sportswear, kids wear and shoes and bags because people are going out often and they need to mix and match. In terms of geographic recovery, actual recoveries in across different tiers of cities, more or less with Tier 1 cities slightly outperforming, but not much. Understandably, they were also hit most by the pandemic. On the GMV and the revenue gap, actually, it’s not about NP. We have no change in our strategy as to NP. It’s actually due to higher contribution from apparel categories in Q1 and apparel categories, carry relatively higher return or rejection rate.

But remember, return on mix change is key to achieving excellence in service and customer experience. Over time, this will elevate the trust and the loyalty of our customers and translating to better customer revenue growth. And – because you know, we focus on high-quality merchandising selection, services as well as price advantages, so those are the things that we are going to focus for the long-term. And regarding NP, we don’t actually see any change in terms of its contribution in the last several quarters.

Andre Chang: [Foreign Language]

Operator: Please standby for the next question. The next question comes from Ashley Xu with Credit Suisse. Your line is open.

Ashley Xu: My question is related to consumer behavior that you have seen on the platform. Do we see continuous signs of consumption downgrade? And would we be changing our strategy in product direction to focus more on lower price range to cater such demand? Thank you.

Eric Shen: Okay. In terms of consumption trend, I think we haven’t seen very clear downgrades in terms of consumption among our current customers. Actually, order – average order size ranges from RMB200 to RMB300 for our customers. And it seems that after the pandemic, they think it’s worth it spending more – a little bit more on apparel and related categories because they need to travel a lot. And we actually don’t carry a lot of premium stuff like gold or premium watches. So, we actually don’t have a very strong say in whether a lot of customers are actually downgrading their consumption. What we have observed from our customer trend is that actually customer visits, active customers and average orders and ARPU are all trending pretty well.

In this environment, of course, there are a lot of people are talking about whether cheap stuff are going to sell much better, we are not quite sure about that because we haven’t seen that has happened on our platform. It seems that our customers continue to buy what they used to buy.

Ashley Xu: [Foreign Language]

Operator: Please standby for the next question. The next question comes from Charlene Liu with HSBC. Your line is open.

Charlene Liu: The first question I wanted to ask is, obviously, we are seeing cumulative [indiscernible]. Can we discuss the key drivers behind that growth and also more specifically, what acquisition channel contributed to that user growth or what is the key acquisition channels that contributed the most growth? The second question is regarding dividend. Obviously, we have seen the management of the company announced the new buyback plan, so I wanted to just get the latest of mind the topic of dividend. Thank you so much.

Eric Shen: In terms of our customer acquisition, actually, we continue with our different channels, including targeted marketing, which includes pre-installations, app store installations, etcetera. And in particular, we are trying to enhance our personalization targeting our new customers to offer them with better selections of products so that they can convert sooner than before. And we continue to invest in TV dramas with sponsorship, those 15-second sponsorships in TV dramas are proved to be very effective in increasing our branding exposure to a wide range of consumers. And we also do a lot of marketing on social media to increase our branding, so that they can be converted sooner or later. So, overall, we try to invest in different channels, marketing channels, at a manageable cost so that we can ensure that we are efficiently enough in terms of customer acquisitions.

In terms of share repurchase programs. We have been returning value to our shareholders proactively through the last couple of years. And with the current share price still underappreciated, we think the best way to increase shareholder value is to invest in our own company. So, we will continue with this practice, and we are pleased to hear that a lot of investors actually have very positive feedback regarding our share buyback program. And we will definitely be committed to shareholder value creation for our investors, and we want to make sure that investors have a stable return through investing in our company.

Charlene Liu: Helpful. Thank you so much.

Operator: I show no further questions at this time. So, at this time, I will now turn the conference back to Jessie for any closing remarks.

Jessie Zheng: 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 IR team. We look forward to speaking with you next quarter.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.