Vipshop Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 23, 2023

There are 11 speakers on the call.

Operator

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

Speaker 1

Thank you, operator. Hello, everyone, and thank you for joining VIP Shop's Q1 2023 earnings conference call. With us today are Eric Shen, our Co Founder, Chairman and CEO and David Hsui, 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.

Speaker 1

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, 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.

Speaker 1

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.

Speaker 2

Good morning and good evening, everyone. Welcome and thank you for joining our Q1 2023 earnings conference call. We were offered to a strong start into 2023. Our steadily leadership combined with the long term merchandising strategy and the relentless focus on Agility, Execution and the Business Fundamentals allow us To navigate through micro challenges, stay even closer to brand partners and the customers and the capture the opportunities in the post pandemic consumption recovery. During the Q1, We saw good momentum in apparel related categories, which booked double digit GMV growth year over year.

Speaker 2

Our abandoned and the device branded merchandise at greater value, well catered to customer appetite for holiday and seasonal shopping along with a rebound in social activities. Customer trends remain strong. The number of active customers regained the growth year over year And average spending also grew nicely on more frequent purchases. Paid membership growth Proven that even stronger, we ended the Q1 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 the long term capabilities related to merchandise expansion, customer engagement and the service excellence That's true differentiates us.

Speaker 2

On merchandising, we focus on delivering a sense of freshness as customer and attracts to all things new and trendy. On top of industry leading co brands, We continue to expand into more high quality, affordable and premium brands that offer great style at greater value. And we are more holistic about differentiation our merchandise offerings. We continue to optimize the apparel focused 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 the price brand on our platform.

Speaker 2

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 set to expertise to take our merchandising capability to a new level. Customer engagement, especially with our high value cohorts, is driven by a comprehensive set Our goal is to make VIP Shop an enjoyable shopping destination, Not just the shelf to search Obalon. We are digging into the customer insights to provide more inspiration, relevant contents and personalized offerings to our customers. We are creating innovative channel of promotion along the customer lifestyle, productive lifestyle productive life cycles and the trading and the trending categories.

Speaker 2

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 in lottery free returns Exchange as well as efficient and reliable logistics, there is a lot more we can do in terms 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 development as Consumers manages household budgets more carefully. We are reinforced our value for money perception across our quality branded merchandise to keep VIP Shop top of mind with customers.

Speaker 2

With that, we were positioned to grow the base of high value customer and the paid members and also grew engagement levels across customer cohorts. We believe we are in the best shape to achieve quality and consistent growth in both top and bottom line for the long term. Lastly, as starting our earnings release, our CFO, David Cui, will step down from his current position for personal reasons On behavior of the Board of Directors and the management team, I would like to thank Debbie for his contributions and 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.

Speaker 2

His extensive experience in finance and accounting will make him a great addition to our team. At this point, let me hand over the call to David Hsu to go over our financial results. Thanks, Eric,

Speaker 3

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 sales and steadfast at what they do. The past 3 years were full of challenges and uncertainties, Together with our dedicated management team and colleagues, we weathered through the hard time 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 the investment communities for your trust and support along the way.

Speaker 3

Turning to the earnings results. We are pleased to deliver a strong quarter that exceeded our expectations. We achieved pretty good sales effect as our teams responded to the fast changing consumer needs and aggressively secured inventory for the opportunities ahead. And this sets us up in a good position going into the year. Margins remain 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 continued to expand meaningfully year over year.

Speaker 3

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 US1 $1,000,000,000 share repurchase program.

Speaker 3

And today, we announced an increase in the amount of existing share buyback program from US500 $1,000,000,000 to US1 $1,000,000,000 Now moving to our detailed quarterly financial highlights. Before I get started, I would like to clarify that all financial numbers percent below are in renminbi and all the percentage changes are year over year changes unless otherwise noted. Total net revenues for the Q1 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.

Speaker 3

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 revenues, total operating expenses increased 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 revenues, 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.

Speaker 3

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 the total net revenues, 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.

Speaker 3

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 0.6% year over year to RMB1.9 billion from RMB1.1 billion in the prior year period.

Speaker 3

Net margin attributable to VIP Shop's shareholders increased to 6.8% from 4.3% in the prior year period. Net income attributable to VIPShop shareholders for 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 40 5.8% year over year to RMB2.1 billion from RMB1.4 billion in the prior year period. Non GAAP net margin attributable to VIP Shop's shareholders increased to 7.5% from 5.6% in the prior year period. Non GAAP net income attributable to VIP Shop's shareholders per diluted ADS increased to RMB3.52 from RMB2.09 in the prior year period.

Speaker 3

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 Q2 of 2023, we expect our total net revenues to be between RMB 27,000,000,000 and RMB 28,200,000,000, 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 presented at the call, I would like him to say hello to everyone.

Speaker 4

Okay. Thanks, David. Good morning, good evening, everybody, and Mark. I'm very glad to have this opportunity to Attend the Q1 earnings release and meet all of you. By way of short introduction, I have more than 15 years financial management experience.

Speaker 4

Previously, I worked out with the CFO of Benlai Group. Prior to that, I'm the Vice President of Finance in Xiaomi Group. It's my great honor to take CFO in VIP Shop. I would like to take this opportunity to thank David for his great efforts during the past years. And I'm looking forward to working with management and do everything I can to contribute to the future success of our business.

Speaker 4

Thanks.

Speaker 3

Okay. With that, I would like Now I'd like to open the call to Q and

Operator

and wait for your name to be announced. Please standby while we compile the Q and A roster. First question comes from Thomas Chong with Jefferies. Your line is open.

Speaker 5

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 June 18 marketing campaign.

Speaker 5

Can management comment about how you are seeing the industry preparations for this event and our strategies for this year?

Speaker 1

Okay. In terms of the general consumption recovery trend in the past several months. Actually, we do see a very strong recovery after Springfest 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 strong rebound in social activities. And that momentum in April May Well, really well and it continues into quarter to date.

Speaker 1

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. 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 euros than before.

Speaker 1

We still focus on apparel related categories. We are a branded discount retail and we focus on securing A strong flow of branded merchandise and at deep discounts. So we'll be geared up for the campaign as well.

Speaker 5

Thank you.

Operator

Please stand by for the next question. The next question comes from Natalie Wu with Haitong International. Your line is open.

Speaker 6

Hi, good evening. Thanks for taking my question. Just one for the longer term prospect, just curious, Sheng Zhong, I don't know what kind of the expectations do you have post that reopen bonus and the low base effect, let's say beyond next year, what kind of the normalized the growth rate are you anticipating? And also just wondering if the high margin of the first quarter can be signed in the future? Thank you.

Speaker 1

Okay. In terms of long term growth, our target, I think at least for this year, we still have very I hope, because we do benefit from the current environment, especially in branded discount retail 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 may see small fluctuations from quarter to quarter. Remember, we still focus on high quality growth.

Speaker 1

We're not growing just for growth. We look for quality profitable growth. And with the number of measures 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.

Speaker 6

Just curious, post the reopen 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.

Speaker 1

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 spent 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 appearances and try to strengthen our leadership in branded discount retail. We may not grow as rapidly as a lot of people imagine, 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 to landscape is evolving from time to time and we are fully prepared for that.

Operator

Please standby for our next question. The next question comes from Jae Lung Sher with Nomura. Your line is open.

Speaker 7

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 just wonder what is the latest number of quarterly Super VIP members and what was the GMV in 1Q contributed by Super VIP member? In the long run, how many of VIP's active customers may be converted into Super VIP member?

Speaker 7

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 second half? Thank you.

Speaker 3

I'll answer the first question. In Q1 2023, we had Active purchase Super VIP, dollars 6,300,000 which represents 10% increase year over year, who contributed about 40% For total for the revenue. So in response to your question regarding how many Can be converted to Super VIP. We have over 85,000,000 Active customers in annual active customers, I would say, that could be considered For the conversion and also we have exceeded like 200,000,000 Registered customers that we could tackle. So basically also we have among all these active customers, we have Roughly about $15,000,000 we consider high value customers who contributed higher ARPU, right.

Speaker 3

So this could be targeted for the conversion.

Speaker 1

Just to adding to David's point in terms of the SVIP, we are going to continue to spend 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 across 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 spend our customer base with reasonable spending.

Speaker 1

We have found out scientific ways 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 personalized offerings to increase the conversion rate of our customer purchases. And in terms of merchandising offerings, we can be quite flexible 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

Please standby for the next question. The next question comes from Wei Sheng with UBS. Your line is open.

Speaker 8

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.

Speaker 8

So how should we think about the marketing expense trend in the Q2 as well as the marketing expense ratio for the full year? Thank you.

Speaker 1

Okay. So in terms of competition, how we are going to compete In this environment, actually we're still focused on what we are really good at. We focus on apparel related categories. We actually prioritize on traffic and resource allocation to popular brands and to encourage them to grow faster than our platforms and 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, really thirsty for And we have very strict requirements in terms of pricing with brand partners.

Speaker 1

We want to make sure Our product selection will cater to consumer demand needs in terms of product selection as well as our pricing. In addition, we actually work very closely with some of our Corvette Brands to customize high quality product offerings for our customers. We will continue to further differentiate our merchandising offerings 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.

Speaker 1

And so there are certain merits that a live streaming or other players cannot meet customer demands. We understand there is going to be a lot of competition and even price wars ahead. 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 selections. In terms of marketing expense, you don't have to worry too much about that. We are quite optimistic in terms of our marketing spend.

Speaker 1

Aurora is going to be quite manageable In Q1, I think marketing expense as total as a percentage of total revenue is 3%. It's not going to jump to 4% or 5%. It's only going To be very incremental increase on the basis of 3%, probably a 10% increase to 3.3% at most.

Speaker 8

Thank you. Very clear. Thank you, management.

Operator

Please stand by for the next question. Please standby for the next question. Our next question comes from Andre Cheng with JPMorgan. Your line is open.

Speaker 9

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 are driving the revenue growth acceleration in this quarter?

Speaker 9

2, 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.

Speaker 1

Yes. In terms of category, overall apparel categories are doing much better at double digit generally growth in Q1 than non apparel categories. We did see broad based recurring in sub Categories like a women's wear, men's wear, sportswear, cheap wear and shoes and bags, because people are going out often and they need to the mix and match. In terms of geographic recovery, actually recovery is being across different tiers of cities more or less with Tier 1 cities slightly outperforming, but not much as understandably they were also At least the most about 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.

Speaker 1

It's actually due to Higher contribution from apparel categories in Q1 and apparel categories yearly carry relatively higher return or rejection rates. But remember return and exchange is key to Achieving excellency in service and the customer experience. Over time, this will elevate the trust and the loyalty of our customers and then translate into better customer revenue growth. And we because 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.

Speaker 1

And regarding NP, we don't actually Any change in terms of its contribution in the last several quarters?

Operator

Please stand by for the next question.

Speaker 6

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

Speaker 1

Okay. In terms of consumption trend, I think we haven't seen very clear downgrade 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 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.

Speaker 1

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.

Operator

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

Speaker 6

Thank you.

Speaker 10

The first question I wanted to ask is, obviously, we're seeing cumulative higher margin positive growth in channel contributed to that user growth or what is the key acquisition channel that the most growth? The second question is regarding dividend. Obviously, we've seen the management of the company announce the new buyback plan, but I want to just get the latest thoughts behind the topic of dividend. Thank you so much.

Speaker 1

In terms of customer acquisition strategy, actually we continue with our Different channels, including targeted marketing, which includes pre installations, app store installation, 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 sponsorships. 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 equity so that they can be converted sooner or later.

Speaker 1

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 into 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 are continuing 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. Excellent. 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 Jesse for any closing remarks.

Speaker 1

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.

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