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Vipshop Holdings Limited beats earnings expectations. Reported EPS is $5.79, expectations were $0.74. VIPS  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Jessie Zheng: Thank you, operator. Hello, everyone and thank you for joining Vipshop’s fourth quarter and full-year 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 the discussion today will contain forward-looking statements made under 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 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: Good morning and good evening, everyone. Welcome and thank you for joining our fourth quarter and full-year 2023 earnings conference call. We delivered a strong finish to the year of 2023 with a set of results well ahead of expectations. This has been achieved with the successful execution of our merchandising strategy to see the opportunities in value spending amid strong seasonal demand. In the fourth quarter, apparel categories were once again the bigger driver with a 29% growth in GMV year-over-year. For the full-year, apparel categories have been consistently outperforming the industry average up 24% from a year ago. That helped us close RMB200 billion in total annual sales for the first time in our history. We also gained strong momentum with high value customers.

In the fourth quarter, active Super VIP members increased by 14% from a year ago and accounted for 46% of our online spending. On an annual basis, we had 7.6 million active Super VIP members, who purchased 45% on our platform. Our strategy is simple. It’s to be laser focused on discount retail for brands. We embrace change and focus on retail fundamentals. We are consistently adapt, so that customers can find desired plan, seek great value and enjoy value free service with us. That’s how we try to gain further mind share. When customers feel like shopping for clothing, they would come to us first. On merchandising expansion, we did well to enrich and diversify our brand portfolio. Our team brought in over 1,500 new brands last year, covering more trendy and high end brands.

A majority of apparel related sales came from the several 100 core brands, who took advantage of our further channel, like Super Brand Day, Super Category Day and Today’s Top Brands, which all hit record highs in sales last year. New brands also ramped up sales quickly, leveraging our target support from traffic allocations, customer engagement to promotional campaigns. Our merchandising team is more skilled through our internal certificate program. They demonstrate the expertise to identify, select and the negotiation for quality brand goods at a deep discount across the wider range of categories. They build strong relationships as they work closely with brand partners to address their business needs and challenges. We now have a talent pipeline ready for more opportunities to differentiate our product offering.

We made for Vipshop brand partners are happy to deepen their collaboration with us after they see meaningful sales contribution. Currently, we have over 150 brand partners in this program. They provide a unique supplement to our value offering within trending category and a certain price range. Giving value is top of mind with most everyone right now. Being able to deliver affordable experience every day differentiates us in the market. The key is to better leverage merchandising capability to provide efficient and cost effective inventory solution for brand partners. This has been and will continue to be the foundation for us to secure increased supply at competitive pricing, especially in unique and customized products. Lastly, we stay true to being customer centric.

We are making shopping easy for customer, taking a simple, clear and direct way to interact with them. Also leveraging the first-party model, we are gaining trust from customer who rely on us to bring them great brands and real value. We continue to enhance product authenticity through upgrade supply chain management from all aspects. This also differentiates us in an environment where everyone is touting lower pricing. We are happy to see customers coming back and spend more because of trust, value and ease they will enjoy here. There is still a lot of potential in growing customer wallet share and the loyalty program has been at the heart of it. Last year, Super VIP members renewed at high rent, and they spend a lot more with us, with average spending over 8x as much as non-SVIP members.

When we look at our business today, we now have a more compelling foundation. We believe our business model is a dear low one that allow us to reinforce the value propositions that are most relevant to our brand partners and customers. We will continue to be pragmatic efficiency and flexible to fuel the long-term growth. At this point, let me hand over the call to our CFO, Mark Wang to go over our financial results.

Mark Wang: Thanks, Eric, and hello everyone. We delivered another quarter of solid financial performance, ending 2023 as the most profitable year in our history. We are very pleased with the progress we have made over the past years in upgrading our platform from all aspects. We are acting faster, pushing forward company priorities and building greater synergies. This has been the foundation for us to regain growth momentum, while achieving impressive profitability. Benefiting from a number of efficiency improvement initiatives, gross margin improved quarter-by-quarter and on an annual basis reached the highest level since 2017. Operating and net profit margin on a non-GAAP basis hit all-time highs, both quarterly and annually.

With such healthy financial conditions, in addition to the existing buyback program, we are pleased to announce the annual cash dividend policy and approximately $250 million cash dividends for the fiscal year of 2023. This reflects our confidence in future growth and earnings, as well as our long-term commitment to delivering returns to shareholders. Looking ahead, we are clear about strategic initiatives, while investing in areas that can better engage with brand partners and customers. We will continue to maintain operating discipline to drive organic and profitable growth. Now moving to our detailed quarterly financial highlights. Before I get started, I would like to clarify that all financial numbers present below are in Renminbi And all the percentage change are year-over-year change, unlike otherwise noted.

Total net revenues for the fourth quarter of 2023 increased by 9.2% year-over-year to RMB34.7 billion from RMB31.8 billion in the prior year period, mainly attributable to the growth in active customers and spending driven by the recovery in consumption of discretionary categories. Gross profit increased by 93% year-over-year to RMB8.2 billion from RMB6.9 billion in the prior year period. Gross margin increased to 23.7% from 21.7% in the prior year period. Total operating expenses increased by 4.8% year-over-year to RMB4.9 billion from RMB4.6 billion in the prior year period. As a percentage of total net revenues, total operating expenses decreased to 14.0% from 14.6% in the prior year period. Fulfillment expenses increased by 17.0% year-over-year to RMB2.5 billion from RMB2.2 billion in the prior year period.

As a percentage of total net revenues, fulfillment expenses were 7.3%, as compared with 6.8% in the prior year period. Marketing expenses decreased by 10.7% year-over-year to RMB843.2 million from RMB944.1 million in the prior year period. As a percentage of total net revenues, marketing expenses decreased to 2.4% from 3.0% in the prior year period. Technology and content expenses increased by 21.5% year-over-year to RMB496.4 million from RMB408.5 million in the prior year period. As a percentage of total net revenues, technology and content expenses was 1.4% as compared with 1.3% in the prior year period. General and administrative expenses decreased by 11.7% 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 2.9% from 3.6% in the prior year period.

Income from operations increased by 46.2% year-over-year to RMB3.7 billion from RMB2.5 billion in the prior year period. Operating margin increased to 10.6% from 7.9% in the prior year period. Non-GAAP income from operations increased by 42.5% year-over-year to RMB4.0 billion from RMB2.8 billion in the prior year period. Non-GAAP operating margins increased to 11.4% from 8.7% in the prior year period. Net income attributable to Vipshop’s shareholders increased by 32.2% year-over-year to RMB3.0 billion from RMB2.2 billion in the prior year period. Net margin attributable to Vipshop’s shareholders increased to 8.5% from 7.0% in the prior year period. Net income attributable to Vipshop’s shareholders per diluted ADS increased to RMB5.35 from RMB3.66 in the prior year period.

Non-GAAP net income attributable to Vipshop’s shareholders increased by 43.4% year-over-year to RMB3.2 billion from RMB2.2 billion in the prior year period. Non-GAAP net margin attributable to Vipshop’s shareholders increased to 9.2% from 7.0% in the prior year period. Non-GAAP net income attributable to Vipshop’s shareholders per diluted ADS increased to RMB5.79 from RMB3.65 in the prior year period. As of December 31, 2023, we had cash and cash equivalents and a restricted cash of RMB26.3 billion and short term investments of RMB2.0 billion. Now, I will briefly walk through the highlights of our full-year results. Total net revenues for the full-year of 2023 increased by 9.4% year-over-year to RMB112.9 billion from RMB103.2 billion in the prior year.

Gross profit increased by 19.0% year-over-year to RMB25.7 billion from RMB21.6 billion in the prior year. Gross margin increased to 22.8% from 21.0% in the prior year. Income from operations increased by 46.9% year-over-year to RMB9.1 billion from RMB6.2 billion in the prior year. Operating margin increased to 8.1% from 6.0% in the prior year. Non-GAAP income from operations increased by 43.3% year-over-year to RMB10.6 billion from RMB7.4 billion in the prior year. Non-GAAP operating margin increased to 9.4% from 7.2% in the prior year. Net income attributable to Vipshop’s shareholders increased by 28.9% year-over-year to RMB8.1 billion, from RMB6.3 billion in the prior year. Net margin attributable to Vipshop’s shareholders increased to 7.2% from 6.1% in the prior year.

Net income attributable to Vipshop’s shareholders per diluted ADS increased to RMB14.42 from RMB9.83 in the prior year. Non-GAAP net income attributable to Vipshop’s shareholders increased by 39.1% year-over-year to RMB9.5 billion from RMB6.8 billion in the prior year. Non-GAAP net margin attributable to Vipshop’s shareholders increased to 8.4% from 6.6% in the prior year. Non-GAAP net income attributable to Vipshop’s shareholders per diluted ADS increased to RMB16.90 from RMB10.67 in the prior year. Looking forward to the first quarter of 2024, we expect our total net revenues to be between RMB27.5 billion and RMB28.9 billion, representing a year-over-year increase of approximately 0% to 5%. Please note that this 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.

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Operator: Thank you. [Operator Instructions]. Your first question comes from the line of Alicia Yap from Citigroup. Please go ahead. Your line is open.

Alicia Yap: Hi, can you hear me? Hello?

Jessie Zheng: Yes, we can.

Alicia Yap: Can you hear me okay? Okay. All right. Thank you. Good evening, management. Thanks for taking my questions. Congrats on the really strong results. I have a couple of questions. First is, do you anticipate most of the future growth will come from the higher frequency and higher wallet spend on the existing loyal customer. Given there is some cautiousness on consumer spending in China, are you worry any potential slowdown of the growth if your loyal customer base started to shop more I mean, shop less frequently and spend at a smaller amount. Just wondering if you have any plans, target for new user acquisition strategy? [Foreign Language].

Eric Shen: [Foreign Language]. First, on the loyal customer base, actually, I think our loyal customer group has been quite resilient in terms of spending from the trend that we have observed in the last couple of years, especially for our high value customer that is Super VIP members, their contribution in turn to our total spending has been increasing to 45% in 2023. And for 2024, we continue to expect that SVIP contribution will continue to grow very nicely. In addition to driving the contribution of spending, we have also noticed that their upward trend has been going quite well, upward are driven mostly by frequency and we still think there is a lot of potential in driving the frequency of SVIP members. And we only have a 7.6 million annual active SVIP members and we have a lot more with high potential in terms of spending to be converted into SVIP members.

Actually non-SVIP members, especially those high potential customers had become the most productive channel for us to acquire Super VIP members. And in terms of new customer acquisition, we think we still have a lot of potential. Actually, if you look at our annual active customer base in 2023, it hasn’t lived up to our expectations. We think we can do better this year. We are tapping the potential in many fronts to see whether we how to better leverage our value proposition in branded discount retail to increase customer mind share of Vipshop. We will take a number of initiatives in driving new customer growth. For example in addition to the traditional channels to what we look at some emerging and a new channels that we haven’t been working closely with, and we’ll continue to focus on target marketing, mobile pre-installation and we will also do some branded advertising.

We will just take as many initiatives as possible to see whether we can better drive customer growth. And for general consumption environment, we are actually not very concerned especially for our customer base, for those high value and the super VIP members, because customers come to Vipshop, the average order size is not that high. It ranges from RMB 200 to RMB300. We think that’s an affordable range of price. So we are not too much concerned on that front. We think we — as long as we focus on the branded discount retail, we can do better in terms of driving customer growth and also customer wallet share.

Operator: Thank you. We will take our next question. Please standby. Your next question comes from the line of Eddy Wang from Morgan Stanley. Please go ahead. Your line is open.

Eddy Wang: [Foreign Language]. Thank you, management for taking my question. I have three questions. The first one is that if you look at product sales per order, we find that in the fourth quarter last year actually we see a year-over-year increase. This trend actually is a little bit different from the first three quarter in last year, which we see a decline the trend. So what’s the reason behind that, especially given the overall consumption background is more focused on the consumption downgrade. And my second question is, if you look at the sales and marketing expense in the fourth quarter last year, actually dollar trend is lower than that in the second quarter of last year. This is quite sudden if you look at historical of the company.

So I’m wondering what’s the expectation for sales and marketing spending in 2024? And the last question is, if you look at the growth gap between GMV and the revenue in fourth quarter, actually the gap is widening if you compare with the first three quarters. So just wonder, is there a significant change in terms of the return rates? Or is there any other reason behind that? Thank you.

Eric Shen: [Foreign Language]. Okay. On your question about average order size, actually average order size has been relatively stable. And in Q4, we did see a slight increase on a year-over-year basis, primarily because we sold more winter clothing, which have higher ticket size, especially when a lot of people in cold weather, they would buy a higher ticket size, down jackets et cetera. So that’s the primary reason behind the increase in average order size. And this also reflects that actually on our platform, there is not very significant sign that we have so called consumption downgrade at least as loyal and highly engaged customers with our platform, we have seen their average ticket size relatively stable or quite resilient and ARPU has been growing very nicely.

So that’s how we benefit from the very resilient consumption trend among our customer cohorts. In terms of sales and marketing expense, in Q4 because we had — we did much better than expected in terms of sales, that brought the sales and marketing spends ratio down a little bit. And actually for this line, our sales and marketing spend will be continued to be relatively stable. Of course, we want to spend prudently, especially to acquire more high quality customers in 2024. But we will continue to look at the effectiveness and the efficiency of customer acquisition from a number of factors including LTV, ROI, payback period etcetera. So sales and marketing expense ratio will continue to be very manageable and we will continue to spend in a rational way to spend on those channels who can provide the best ROI.

So basically, we don’t worry too much about our sales and marketing spend and it’s going to be very limited as a percentage of total revenue. Return rates, for the last year, return rates have been growing on a year-over-year basis. We think we did see a 3 to 4 percentage point growth in return rates. But now we have mentioned this before, our return and exchange services is a part of our value proposition to provide the best-in-class services to our customers and they’re building in our profitability model, it hasn’t been impacting our profitability levels for the past several quarters. And the return rates are trending a little bit higher because a number of factors. One is apparel contribution. In the last couple of years, so we have seen apparel contribution growing on our platform and apparel as you know, they naturally have higher return rates.

And second, our return and exchange has become a standardized practice within the industry and a lot of customers are taking Vipshop as a fitting room and the more they try them actually the more likely they will buy. So it’s not only us, as far as we know, the return rate within the industry is actually growing. That’s the reality. And lastly although we don’t have accurate information about that, it’s just our guess. We think that consumers are becoming more cautious and selective in terms of their spending. They want to spend money only on those essential pieces that they need. So that might be one of the reasons that return rate is going higher.

Operator: Thank you. We will take our next question. Your next question comes from the line of Ronald Keung from Goldman Sachs. Please go ahead. Your line is open.

Ronald Keung: Thank you, Shen, Mark and team. I have two questions. [Foreign Language]. Thank you, management. I have two questions. One is, I want to hear how our trends have been for the first quarter so far January and February as a whole? And how do we see demand tracking since Chinese New Year? And how should we think about the gap between GMV and revenue for 2024 compared with the big gap in 2023? Second is shareholder return. I’ve seen a $1 billion free cash flow. We haven’t done too much buybacks in the past two quarters. Now we have a $250 million of regular dividend. So what is the plan for let’s say the remaining free cash flow? Is there any room for further shareholder return? Thank you.

Eric Shen: [Foreign Language]. Okay. First on your — on Q1 guidance, actually quarter-to-date we have seen business momentum in January actually benefiting from a very favorable weather, because at that time it was still quite cold. So our business performance was really quite well or quite good. And we continue to see recovery following the Spring festival. And recently, we’ve seen that our sales had been ramping up relatively slower than expected, because of the unexpected weather conditions, sometimes very cold and which actually delay to some extent the seasonal shift to spring apparel. But overall, we think Q1 will continue to be another quarter of relatively stable growth. And in terms of the revenue and GMV growth gap, for this year we continue to expect a slightly higher return rate because of the still higher apparel contribution as well as SVIP contribution.

But return rate is not going to be significantly higher as we saw in — as we saw for 2023. We expect at most is going to be 1 percentage points to 1.5 percentage points higher, which means that there is a chance that we can narrow the revenue and the GMV growth gap to some extent.

Mark Wang: Okay. For second question, let me answer your question. And thanks for your question regarding the cash dividends and also the share buyback programs. And actually, we have been focusing on long-term capital policy and the combination of the annual dividend and buyback reflects our confidence in long-term growth and profitability, as well as our long-term commitment to create value to our shareholders. Regarding the total amount of the dividend, we considered multiple factors such as working capital for business development, CapEx, profitability and cash flow. The dividend amount will be reviewed and determined annually. Well, as to buyback, we have repurchased a total of nearly $2 billion from April 2021 to the end of 2023.

The existing $1 billion buyback program, which is effective through March 2025, has been utilized $452 million as of December 31, 2023, and the remaining parts will be executed from time-to-time, taking into account factors such as price, valuation and the marketing fluctuations. So therefore, the cash dividends and the share buyback, I think that’s the two ways we would like to provide return to our shareholders. And these two ways or two regimes will implement parallel. Yes. Thank you.

Operator: Thank you. We will take our next question. Your next question comes from the line of Andre Chang from JPMorgan. Please go ahead. Your line is open.

Andre Chang: [Foreign Language]. Hi. I have three questions for the management. First is, we talk about the note, we will focus more on the user growth this year. Can you elaborate more about where are the area that we can find new user to acquire? Second, we also talk about further improvement on the ARPU. So with no rebounding spending from our loyal users last year, which was easy, what are the drivers for our user to spend more on our platform into 2024? And lastly, we talked about say the share buyback will changes on the market condition, valuation. It seems that we saw our cash flow continue to be strong, cash balance increased by the end of last year versus end of 2022. Does that mean that it’s not necessary or we will use our strong cash flow to return to the shareholder? How do you think about that? Thank you.

Eric Shen: [Foreign Language]. So on your first question on new customer acquisition, in the last year actually we — our — we invested a lot of channels to acquire new customers to drive the organic growth in new customers, such as targeted marketing, a number of platforms like Douyin, [indiscernible], Tencent as well as mobile pre-installation. This year we would like to do better in terms of adding new channels, especially to elevate the company brand image through more brand advertising, especially targeting those customers who are not familiar with Vipshop or who have heard of Vipshop, but have never used. Basically, we want to leverage branding to increase customer mind share of Vipshop as a better place to shop for apparel, including some emerging and younger channels like XiaoHongShu, BiliBili, et cetera.

What we think there is still quite a lot of potential there. For the new customers that we have acquired to our platform, we have actually seen the retention is pretty good, which means that the customers we acquired are relatively higher quality. So we think our current customer acquisition strategy does work relatively well. In terms of ARPU growth, last year, we did benefit from favorable weather conditions in some of the seasons. But we also think that customers have become increasingly recognized as a value proposition of Vipshop as a discount platform for branded products and especially through our best-in-class services, you find this is a great place to shop for apparel, especially for women. They tend to not only shop for themselves, but also shop for the whole family, including children, parents, et cetera.

They also shop not only apparel, but also other categories like standardized items. We have seen increasing cross category purchases among our customers. And this year, we are also in addition to driving the growth of apparel categories, we also want to build a stronger platform for standardized items, so that we can increase the cross sell opportunities for our high value customers, especially Super VIP members.

Mark Wang: Okay. Regarding the third question for share buyback, I think the track records, which we has already show our insistence to return value to our shareholders, okay? And for the buyback program, we will definitely evaluate the share price and also whether the market is in fluctuations, okay. For example, in the future, the share price is lower than our expectation, lower than our normal value, okay? So we will definitely will do the share buyback continuously from time-to-time. But that depends on the price and also depends on the other factors. So I think the cash dividends regime is a way to give you a more predictable share value back to the shareholders, okay? So in the future, we will have the annual cash dividends policy.

And of course, we will evaluate our cash position and also our profitability and also our CapEx, et cetera, to make sure to determine how much money we will distribute to our shareholders. So I think the cash dividend policy is a way to complement our return to our shareholders policy. Thank you.

Operator: Thank you. Due to time constraint, that concludes today’s Q&A 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 have any questions, 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.