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

Jessie Zheng: Thank you, operator. Hello, everyone and thank you for joining Vipshop second quarter 2023 earnings conference call. With us today are Eric Shen, our Co-Founder, Chairman and CEO; and Mark Wang, our CFO. Before management begins their prepared remarks, I would like to remind you that 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 may be 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 second quarter 2023 earnings conference call. We delivered strong second quarter results on the top line with profitability well ahead of expectations. Our value proposition in discount retail is resonating with brand partners and custom lead by the well execute merchandising strategy, which has been the key to driving the growth. The second quarter performance continued to be fueled by apparel category, which delivered over 30% GMV growth, reflecting broad-based strength. At the time, when consumers are making more regional decisions based on value for money, customer are coming back more and shopping with us more often. Paid membership growth remained robust.

By the end of the second quarter, active Super VIP member increased by 23% contributing to about 44% of our online spending. We are also pleased with the build out of merchandising capability and the optimizations of business process throughout our organization. They have helped drive a great efficiency profitability hit another new record high in the second quarter. More people look to us for value, more partners want to work with us to target their desired customers. This provides new levels for us to capture great mind share. In everything we do, we put the customer at the center. We hope that discount retail for branded products is the one that Vipshops stands for. And when people feel like buying clothes online, Vipshop is the first place to go.

With that in mind we are committed to enhancing our core competence to offer a reach and the diversity selection of greater value, as well as wallet free custom service and experience. On merchandising, we have secured more — a much more quality supply from co-brands we are constantly — consistently adding new brands, more popular products, and the range of trendy categories, more high-end international brands become available. Our ability to present new, fresh and fashionable items, the one our customers long expect from us has meaningfully improved as a long-standing discount retailer. We were able to provide the great pricing across every category, giving our best-in-class service to brand partners. But it’s far beyond that. Differentiate merchandising is also pivotal to create value for customers.

We are doing so slow, unique and customized of offerings, which have better conversions. And there’s a lot more we can do with a made for Vipshop line. Our buyer’s team continue to deepen that knowledge and expertise. They have put in place a set of rules and the process making it more efficient for brand partners to increase the quality supply at the competitive pricing to cater for custom needs. We are moving steadily towards our goal to help every customer find what’s the need on our platform. On service commitment, we keep listening to our customers, analyze and understand their evolving needs. We are determined to deliver a worry free experience by leveraging our merchandising customer service and the supply chain capabilities. For example, we are enhancing our merchandising efforts to make sure that everything is reliable sources, every product is our guaranteed quality and every step along the value chain is properly monitored.

We want every customer to feel that the experience of shopping with us is worry free enough to prioritize their spending here. Then we keep looking at where we can deepen engagement with our customers, personalized experience, channel efficiency and the quality customer growth and the top priorities. We have been deep mining customer and product insights to improve accuracy and the prediction in personalized recommendations. We have also made several upgrades to our App to increase the efficient of different channels. Engagement with SVIP customers has been quite encouraging. Penetrations into different cohorts of spending has improved year-over-year. As we navigate the external changes, we believe that our business model is structurally sound, the discipline and the dedication inherent in our day-to-day execution along us to stand firm as a unique player in e-commerce.

As long as we continue to optimize our merchandise portfolio putting the customer at the center of every decision we make, we will attract quality customers and benefit from deeper the customer loyalty and engagement. That will result in sustainable revenue and earnings growth for the long-term. At this point, let me hand over the call to our CFO, Mark Wang, to go over our financial results.

Mark Wang: Okay. Thanks, Eric, and hello, everyone. We are pleased to finish another quarter with strong profitable growth. During the second quarter, total net revenue increased by 13.6% year-over-year, and non-GAAP net income attributable to Vipshop shareholders increased by 15.8% leading to margin expansion across the board. This set of results was achieved through our enhanced merchandising capabilities to offer quality products at adequate value. Our diligent execution to grow customer engagement, as well as the company-wide efforts to optimize the efficiency of our business. Overall gross margin expanded to over 22% for the first time in three years, benefiting from much stronger momentum and a greater contribution from apparel and very healthy category margins.

With a continuous focus on managing controllable costs and achieving expenses collaborate where we could. Profitability took a meaningful step-up and non-GAAP net margin attributable to Vipshop shareholders hit another record high at 8.6%. In addition, we continued to unlock value for our shareholders with $348.5 million of our ADS being repurchased during the quarter. We will keep executing the remaining amount of our $1 billion buyback program from time-to-time. Looking ahead, as Eric mentioned, we are operating the retail environment where consumers place value at the top of their list, you know, we see the opportunity to gain customers’ mind share. Our team is working hard to ensure our operations are ready to deliver on our long-term region in addition to addressing near-term priorities.

We’re committed to maintaining quality and healthy growth in both top and bottom lines. 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 second quarter of 2023 increased by 13.6% year-over-year to RMB27.9 billion from RMB24.5 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 23.4% year-over-year to RMB6.2 billion from RMB5.0 in the prior year period. Gross margin increased to 22.2% from 20.5% in the prior year period.

Total operating expenses increased by 13.7% year-over-year to RMB4.5 billion from RMB3.9 billion in the prior year period. As a percentage of total net revenues, total operating expenses was 16.1%, which stayed flat as compared with the prior year period. Fulfillment expenses increased by 22.8% year-over-year to RMB2.2 billion from RMB1.8 billion in the prior year period. As a percentage of total net revenues, fulfillment expenses was 7.8%, as compared with 7.2% in the prior year period. Marketing expenses increased by 60.86% year-over-year to RMB892.5 million from RMB555.6 million in the prior year period. As a percentage of total net revenues, marketing expenses was 3.2%, as compared with 2.3% in the prior year period. Technology and content expenses increased by 7.6% year-over-year to RMB443.0 million from RMB411.8 million in the prior year period.

As a percentage of total net revenues, technology and content expenses decreased to 1.6% from 1.7% in the prior year period. General and administrative expenses decreased by 19.4% year-over-year to RMB963.1 million from RMB1.2 billion in the prior year period. As a percentage of total net revenues, general and administrative expenses decreased to 3.5% from 4.9% in the prior year period. Income from operations increased by 51.1% year-over-year to RMB1.9 billion from RMB1.3 billion in the prior year period. Operating margin increased to 6.9% from 5.2% in the prior year period. Non-GAAP income from operations increased by 48.2% year-over-year to RMB2.3 billion from RMB1.6 billion in the prior year period. Non-GAAP operating margin increased to 8.2% from 6.3% in the prior year period.

Net income attributable to Vipshop’s shareholders increased by 63.5% year-over-year to RMB2.1 billion from RMB1.3 billion in the prior year period. Net margin attributable to Vipshop’s shareholders increased to 7.5% from 5.2% in the prior year period. Net income attributable to Vipshop’s shareholders per diluted ADS increased to RMB3.75 from RMB1.97 in the prior year period. Non-GAAP net income attributable to Vipshop’s shareholders increased by 50.8% year-over-year to RMB2.4 billion from RMB1.6 billion in the prior year period. Non-GAAP net margin attributable to Vipshop’s shareholders increased to 8.6% from 6.5% in the prior year period. Non-GAAP net income attributable to Vipshop’s shareholders per diluted ADS increased to RMB4.30 from RMB2.45 in the prior year period.

As of June 30, 2023, the Company had cash and cash equivalents and restricted cash of RMB18.3 billion and short-term investments of RMB1.5 billion. Looking forward to the third quarter of 2023, we expected our total net revenue to be between RMB21.6 billion and RMB22.7 billion, representing a year-over-year increase of approximately 0% to 5%. Please not that these forecast reflects our current and 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: Thank you. [Operator Instructions] Our first question comes from the line of Thomas Chong from Jefferies. Please ask your question, Thomas.

Thomas Chong: Hi, good evening. Thanks management for taking my questions. I have two questions. The first question is regarding the consumer sentiment. Can management comment about how we think about it and the monthly GMV trend recently, as well as our expectations in coming quarters. And my second question is about our margin outlook. Given the strong margin in Q2, how should we think about it in coming quarters? Thank you. [Foreign Language]

Eric Shen: [Foreign Language] [Interpreted] Okay. In terms of GMV trend as we enter into the third quarter, until now, it’s been 1.5 months, everything is on track, and it’s tracking in line with our guidance of 0% to 5% revenue growth. And we are pretty confident that the total GMV will continue to be on track and especially for Q4, we still see a very good opportunity to ramp up the GMV growth because, as you know, Q3 is typically a slow season for apparel and summer apparel has lower ticket size. While entering into Q4 when people are going for winter clothes, which are typically a higher ticket size and that presents a better opportunity for us to grow the GMV better, not because of the strength in apparel categories. And for the longer term, we are very confident about the consistent and sustainable GMV growth, because not as we don’t have the COVID and everything is in normal operations, and we are pretty confident about our merchandising capability to grow the GMV for the longer term.

In terms of the margin trend in Q2, we did a pretty good job, and we think we have — we now have a very good handle all the margins, including GP margin, OP margin, NP margin. And it’s a long-term capability that we have built out because of the discipline and dedication in our daily operation. And we are confident that we will maintain a consistent earnings growth and keep the order margins on a very healthy level.

Operator: Right. Thank you, Thomas. Our next question comes from Alicia Yap from Citigroup. Please ask your question, Alicia.

Alicia Yap: Hi, good evening, Eric, Mark and Jessie. Thanks for taking my questions. I have two questions. First, can management share with us the reason for the improved gross margin this quarter? I mean usually, during the promotional period, gross margins tend to trend a little bit lower. But this quarter, it’s actually exceptionally good. So could this improved margins be sustainable that this is a new gross margin level going forward? And then second question is the consumption pattern. Specifically within your apparel, what type of like fashion or kind of the design or anything that is particularly doing well. Just kind of wanted to get a sense of what the consumers are spending. Are they more catered towards apparel that is have a deep discount or actually more on the sportswear or any color you can share within the apparel category would be appreciated. Thank you.

Jessie Zheng: [Foreign Language]

Eric Shen: [Foreign Language] [Interpreted] Okay. Going back to your first question on GP margin. We did have a very good performance on GP margin even during the promotional period in Q2. As we mentioned earlier, we have a very good cost control to help our GP margin grow. For example, we don’t actually blindly participate in the industry-wide subsidy campaign. And we don’t want to waste the money delivering on necessary compounds or vouchers to our customers. And still, we are able to achieve a very good gross margin profile. And we are confident that we would maintain this level of gross margin of a longer term. We wouldn’t expect a big swing from quarter-to-quarter, no matter whether we had promotional big dimensions or not.

In terms of the performance within the apparel categories, we had a very, very strong growth in the second quarter partially, because of the pent-up demand, as compared to last year. And today, we don’t have COVID and everybody is going out for traveling and dining out, et cetera. So given such active social activities, we did see a very good momentum within apparel categories, and we actually see broad-based strength across different categories, including women’s wear, men’s wear, kid’s wear, underwear, et cetera. And for mix and match purposes, consumers also spend a lot on shoes and bags, which are also going very well. Of course, for deep discount products, we think consumers are more susceptible to this product offering, because they now place value on top of their list and they make very rational decisions and look for value for money products.

And if we look at more details within apparel categories, as you mentioned, the fashion sportswear a trend which started a couple of years ago, has been growing very well. And for women’s wear, we do see a very diverse trend for different styles, designs and some of the designer brands are growing very well and of course, some among that popular. So basically, I think we’re seeing very good momentum in apparel category.

Operator: Thank you. Our next question comes from the line of Natalie Wu from Haitong International. Please ask your question, Natalie.

Natalie Wu: Hi, thank you for taking my question. I have one regarding the future growth cross back. So for the 0% to 5% year growth guidance of the quarter. Is it mainly affected by macro or competition or simply the base effect? If the latter, is it safe to say this number could indicate a similar normalized growth rate entering into 2024? Or you will shift your strategy to increase sales and marketing for better growth by then? [Foreign Language]

Eric Shen: [Foreign Language] [Interpreted] Okay. In terms of the guidance for Q3, the 0% to 5% revenue growth is primarily because of the slow momentum in slow — relatively slow season for apparel categories. And you know, we are pretty strong in apparel and when we enter into Q3, we will have lower growth. But the GMV growth is actually much better, but apparel naturally carry higher return rates. And partially — and of course, we also find that consumers are more cautious about their spending. And when they place their orders, they have to think over and over and then the return rate would be trending higher. Another reason for return rate is that we provide a worry-free services for return to exchanges and a lot of customers appreciate our service.

And this is part of our initiative to actually to provide excellent services to customers for the long-term to gain their customer taking their mind share. So — and it’s already built in our business model, and we actually don’t care too much about its short-term impact. And going into Q4, we’re definitely returning to a stronger growth rate. The base effect is also in play, as I mentioned, because last year, COVID impact was actually more not meaningful in the third quarter. So we probably don’t have an easy comp to compare. For the longer term, of course, we are looking at a very much healthier growth rate we still want to leverage our value proposition in discount retail for branded products and to grow our business — and in — already in this quarter, we are starting to prudently increase our spending — our marketing spending to try to capture the opportunity to grow more customers.

So we are we are confident that we can grow better than the guidance we provided.

Operator: Thank you. Our next question comes from Eddy Wang from Morgan Stanley. Please ask your question, Eddy.

Eddy Wang: [Foreign Language] Thank you, management for taking my question. My question is also regarding the return rate. Can you share with us the trend of the return rate in first quarter, second quarter and the third quarter so far, because we have seen that if you look at the fulfillment rate in the second quarter, actually, we see a little bit higher than the first quarter. And so should we expect that this fulfillment rate — expense ratio to a little bit higher going forward? Thank you.

Eric Shen: [Foreign Language] [Interpreted] Okay. In terms of the gap between revenue and GMV, actually, we have seen return rate is starting to trend up from the first quarter. And in the second quarter, it’s going up quite significantly. So we expect that Q3 would maintain a similar level as Q2 and Q4 is [Indiscernible] potentially could be higher, but it should not be much higher, because we have started to take some initiatives to bring the return rate to a more normalized level. But having said that, the gap between our revenue and GMV that we have seen for the past several quarters could be the benchmark for your estimate for future revenue versus GMV, it’s going to be a little bit different than the level we have seen in the past several years.

And return rate, we had mentioned earlier, one of the reasons is that consumers — many consumers at VIPs, they love to shop on our platform. They enjoy trying on and if they are not satisfied, they would just return or exchange over through our very free services. And another reason is that potentially, consumers are more cautiously on spending nowadays, because they manage their household budgets more carefully. And in terms of fulfillment expense, return rates is part of the reason that fulfillment may trended higher in the second quarter. But it’s the cost associated with the returns or exchanges mostly delivery cost back and forth. So it’s just a part of the model — the business model we’re building it’s for the full-year or the longer term, we think fulfillment expense ratio is still manageable, not going to be extremely high.

Probably some slower season is going to be high, but in peak season especially for apparel, it is totally manageable.

Operator: Thank you. Our next question comes from the line of Andre Chang from JP Morgan. Please ask your question, Andre.

Andre Chang: [Foreign Language] I have a question for shareholder return and share buyback. I noticed that the company has bought back $350 million round of ADS this quarter versus current program of $1 billion over two years. So the pace is significantly faster than the average pace of the program. And also the buyback amount is equivalent to our free cash flow. So my question is about what’s the philosophy and the strategy of our share buyback and the shareholder return can management share with us what the principle for you to buy at what kind of level, what kind of pace, so investors can understand the shareholder return you can get from here? Thank you.

Eric Shen: [Foreign Language] [Interpreted] Yes. Okay. Actually, we don’t have a specific philosophy or rules as to the buyback program. We just buyback when the share price is much underappreciated, as compared to fair value. So we don’t have a specific pace. We are just very committed.

Mark Wang: Okay. This is Mark. Thanks for your question. Yes, we would like to return value to our shareholders. So we have been steadily executing our buyback programs. And as of the second quarter, we have utilized around $435 million of our current $1 billion share repurchase program. And that means starting from second quarter 2021, we have returned a total of about $2 billion to our shareholders as of the second quarter of 2023. I think we will continue to execute this program from time-to-time. And yes, so another thing is that just mentioned by Eric, that we will also focus on the share price and also our enterprise values, okay? If we believe that the share price — we believe the market cap is really below the value, and then we will do our share buyback from time-to-time. Thank you.

Operator: Thank you. Our next question comes from Jialong Shi from Nomura. Please ask your question, Jialong.

Jialong Shi: Thank you very much, Eric, Mark, Jessie for taking my questions and good evening. [Foreign Language] I have two questions. The first one is a follow-up question on this return rate. So just wondering how bps return rate for the apparel category, compared to those of the peers or compared to the apparel industry — the average return rate for the apparel industry in China during the same period. And also for this increase in return rate since this year, other than this consumers cautiousness, just wondering whether or not the competition might have also played a role in this increase in return rate for the power category. My second question is about the Super VIP member. Just wonder what is the latest number of quarterly super VIP members. How much of your GMV in the second quarter was contributed by Super VIP? Thank you.

Eric Shen: [Foreign Language] [Interpreted] In terms of return rates as to the Vipshop versus peers, we are a shelf-based e-commerce player, and our business model is quite unique. We are a discount retailer and we often offer flash sales and consumers have to make real-time decisions and their shopping curve, if they put any products in it, they only have 20-minutes to decide whether to buy or not. And our peers, they have some ways to motivate their customers not to return, for example, they would deliver coupons of vouchers through their customer service staff. So we are running on a very different business model. And typically, our return rate is 2 to 3 percentage points higher than our peers according to our estimate. Whether it’s industrialize phenomenon as to return rate trending up, we are still doing some research, because we don’t have the full set of data from the — all the industry players, we just have some of them.

So we don’t have a conclusion on that. We’re still evaluating the situation. As to consumer sentiment, we mentioned probably part of the reason is that consumers are becoming more cautious, but that’s also our estimate. We don’t have a solid concrete scientific way to determine whether it’s because consumers’ wallet is shrinking. So we don’t have a conclusion on that. But it’s our best estimate that probably they are becoming more rational. And as to the competition, we don’t think it is behind the return rate. Because typical consumers pay for all the items, they put in their shopping card and then they decide whether to keep on regional whether to keep them or to return one or two. So we’ve already made their decision to shop on our platform.

And they just need to consider whether to keep all the items or they just need to return some of that. So it’s not because of the competition. So in summary, we don’t have a final conclusion on why the return rate is trending up. And as to — at VIP, we — as of June 30, we have a total of 6.7 million Super active VIP members, who contributed to 44% of our online spending. In terms of GMV, that should be a little bit higher. Again, SVIP have a little — much higher return rate than Non-SVIP members, because they love VIP shop, — love one of the reasons they love to shop on our platform is because we offer worry-free return on exchanges. And they think this is a place that is very reassuring for their customer experience. So that’s one of the reasons why the return rate is trending [Technical Difficulty]

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: Thank you for taking the time to join us today. If you’re having any questions or follow-up, please don’t hesitate to contact our IR team. We look forward to speaking with you next quarter.

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

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