Vipshop Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 18, 2023

There are 8 speakers on the call.

Operator

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

Speaker 1

Thank you, operator. Hello, everyone, and thank you for joining The IP Shop's 2nd quarter 2023 earnings conference call. With us today are Eric Shen, our Co Founder, Chairman and CEO and Mark Wong, our CFO. Before management begins their prepared remarks, I would like to remind you that 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, but are not limited to, those outlined in our Safe Harbor statements, In our earnings release and public filings with the Securities and Exchange Commission, which also applies to this call to the extent any forward looking statements may be made. Please note that certain financial measures used on this call, such as non GAAP operating income, Non GAAP net income and non GAAP net income per ADS are not presented in accordance with U. S.

Speaker 1

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.

Speaker 2

Good morning and good evening, everyone. Welcome and thank you for joining our Q2 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 the custom lead by the well executed merchandising strategy, which has been the key to drive the growth. The 2nd quarter performance continued to be fueled by Appellog 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, Customers are coming back more and shopping with us more often. Paid membership growth remained robust.

Speaker 2

By the end of the Q2, Active's Super VIP member increased by 23%, Contributing to about 44% of our online spending. We are also pleased with the built out of merchandising capability and the optimizations of business process Throughout our organization, they have helped drive great efficiency, Profitability hit another new record high in the 2nd 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.

Speaker 2

We hope that discount retail for branded products is the one that VIP shops stands for. And when people feel like buying clothes online, VIP Shop is the 1st place to go. With that in mind, We are committed to enhancing our core competence to offer a rich and a diverse Selection of greater value as well as wallet free custom service and experience. Merchandising, we have secured more much more quality supply from Pro Brands. We are constantly adding new brands, more popular products And the range of trendy categories, more high end international brands become available.

Speaker 2

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 through unique and customized of offerings, which have better conversions. And there's a lot more we can do with the Made for VIP Shop line.

Speaker 2

Our buyers 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 customers find what they need on our platform. On service commitment, we keep listening to our customers, analyze and understand The involving 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 custom flows and the top priorities.

Speaker 2

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 efficiency of different channels, engagement with SVIP customers has been Quite encouraging. Penetrations into different cohorts, our spending has improved year over year. As we navigate the external change, we believe that our business model is structurally sound. The discipline and the dedication inherent in our day to day execution allow us To stand firm as a unique player in e commerce.

Speaker 2

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 customs and benefit from deeper custom loyalty and engagement That will result in sustainable revenue and earning 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.

Speaker 3

Okay. Thanks, Eric, and hello, everyone. We are pleased to finish another quarter with strong profitable growth. During the Q2, total net revenue increased by 13.6% year over year and non GAAP net income attributable to Vipshop's Shareholders increased by 15.8%, leading to margin expansions across the board. This set of results was achieved through our enhanced merchandising capability to offer quality products At great value.

Speaker 3

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 3 years, benefiting from much stronger momentum And a greater contribution from apparel and a very healthy category margins. With continuous focus on managing controllable costs and achieving expenses, leverage where we could. Profitability took a meaningful step up and non GAAP net margin attributable to Vipshop's Shareholders hit another record high at 8.6%. In addition, We continue to unlock value for our shareholders with US348.5 million dollars Of our ADS being repurchased during the quarter, we will keep executing the remaining amount of our US1 $1,000,000,000 buyback program from time to time.

Speaker 3

Looking ahead, as Eric mentioned, we are operating in a retail environment Where consumers place value at the top of their list and we see the opportunity to gain customers' money share. Our team is working hard to ensure our operations are ready to deliver on our long term vision. In addition to addressing near term priorities, we are committed to maintaining quality and healthy growth In both top and the 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 change are year over year change, unless otherwise noted.

Speaker 3

Total net revenues for the Q2 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 the spending driven by the recovery in consumption of discretionary categories. Gross profit increased by 23.4 percent year over year to RMB6.2 billion from RMB5.0 billion 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.

Speaker 3

Fulfillment expenses increased by 22.8 percent 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 60.6% 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 RMB 4 RMB43.0 million from RMB411.8 million in the prior year period.

Speaker 3

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.

Speaker 3

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 Value Shop's shareholder Her diluted ADS increased to RMB3.75 from RMB1.97 in the prior year period. Non GAAP net income attributable to VIP Shop's shareholder increased by 50.8 percent year over year to RMB2.4 billion from RMB1.6 billion in the prior year period.

Speaker 3

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 Q3 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 note This forecast reflects our current and preliminary view of the market and operational conditions, which is subject to change.

Speaker 3

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

Operator

Thank Our first question comes from the line of Thomas Chong from Jefferies. Please ask your question, Thomas.

Speaker 2

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.

Speaker 2

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.

Speaker 1

Okay. In terms of GMV trend, as we enter into To the Q3, 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 revenue growth because as you know, Q3 is typically a slow season for apparel and some apparel Has lower ticket size while entering into Q4 when people are going for winter clothes, which are typically higher ticket size And that presents a better opportunity for us to grow the GMV better because of the strength in apparel categories. And for the longer term, we are very confident about the consistent and sustainable GMV growth Because nowadays we don't have the COVID and everything is in normal operation and we are pretty confident about our merchandising capability to grow the GMV for the longer term.

Speaker 1

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, LP margin, NP margin and it's a long term capability that we And keep the order margins on a very healthy level.

Operator

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

Speaker 4

Hi, good evening Eric, Mark and Jesse. I have two questions. First, can management share with us the reason What improved gross margin this quarter? I mean, usually during the promotional period, gross margins Tends to trend a little bit lower, but this quarter is actually exceptionally good. So could this improved margins be sustainable that This is a new gross margin level going forward.

Speaker 4

And then second question is the consumption pattern. Specifically, within your apparel, what type of like fashions 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 caters towards apparel that is have a big How or actually more on the sports wear or any color you can share within the apparel category will be appreciated. Thank you.

Speaker 1

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 Participating in the industry wide subsidy campaigns, we don't want to waste some money Delivering unnecessary coupons 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 For the longer term, we wouldn't expect big swings from quarter to quarter, no matter whether we have promotional Big promotions 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, etcetera.

Speaker 1

So given such active social activities, we did see Very good momentum within apparel categories and we actually see broad based strength across different categories including womenswear, men's We're a kidwear, underwear resecture and for mix and match purposes, Consumers also spend a lot on shoes and bags, which are also growing very well. Of course, for deep discount products, we think consumers More susceptible to these product offerings because they now place value on the top of their list And they make a very rational decisions and they look for value for money products. And if we look at More details within the apparel categories. As I mentioned, the fashion sportswear, a trend which started a couple of years has been growing very well. And for Williams Squire, we do see a very diverse Our trend for different styles, designs and some of the designer brands are growing very well And of course, some are not that popular.

Speaker 1

So basically, I think we are seeing very good momentum in the carrier categories.

Operator

Thank you. Our next question comes from the line of Natalie Wu from Haitong Tong International, please ask your question, Natalie.

Speaker 4

Hi. Thank you for taking my question. I have one regarding the future growth prospects. So for the 0% to 5% year net growth Guidance of the 3rd quarter, is this mainly affected by macro or competition or simply the basic effect? If the latter is it safe to say this number could indicate a similar normalized growth rate Entering into 2024, you will shift your strategy to

Speaker 1

Okay. In terms of the guidance for Q3, The 0% to 5% revenue growth is primarily because of the slow momentum In relatively slow season for apparel categories and now we are pretty strong in apparel and When we enter into Q3, we will have a slower 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 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 very free services And a lot of customers appreciate our service.

Speaker 1

And This is a part of our initiative to actually to provide excellent services to customers for the long term to gain their 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 not that meaningful in the Q3. So we probably don't have an easy comp to compare. For the longer term, of course, We are looking at very much healthier growth rate. We still want to leverage our Value proposition in discount retail for branded products and to grow our business.

Speaker 1

And already in this quarter, we are starting to prudently Opportunity to grow more customers. So we are confident that we can grow better

Operator

Thank you. Our next question comes from Eddie Huang from Morgan Stanley. Please ask your question, Eddie.

Speaker 5

Thank you, management, for taking my question. My question Also regarding the return rate, can you share with us the trend of the return rate in Q1, Q2 and Q3 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 shall we expect that this fulfillment rate fulfillment expense ratio

Speaker 1

Okay. In terms of the gap between revenue and GMV, Actually, we have seen return rate has starting to trend up from the Q1 and in the Q2 is going up quite So we expect that Q3 would maintain a similar level as Q2 and the Q4. It's hard to tell, potentially it could be higher, but it should not be much higher Because we have started to take some initiatives to bring the return rates To a more normalized level. But having said that, the gap between our revenue and the 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 And the return rate, we have mentioned Earlier, one of the reasons is that consumer many consumers as VIPs, They love to shop on our platform. They enjoy trying on and if they are not satisfied, they would just Our return on exchange leverage through our worry free services.

Speaker 1

And another reason is that Potentially consumers are more cautious, they are spending nowadays because they manage their household budget more carefully. And in terms of fulfillment expense, our return rate is part of the reason That fulfillment may trended higher in the Q2, but The cost associated with returns or exchanges are mostly delivery costs So it's just a part of the model, the business model we have built in. It's For the full year or for the longer term, we think fulfillment expense ratio is still manageable. It's not going to be extremely high. Probably in some lower season It's 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 JPMorgan. Please ask your

Speaker 6

I have a question for shareholder return and share buyback. I noticed that the company has bought back USD 350,000,000 round of ADS this quarter. First is a current Program of US1 $1,000,000,000 over 2 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.

Speaker 6

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.

Speaker 1

Okay. Actually, we don't have a specific philosophy or rules as To the buyback program, we just buy back when the share price is much deeper Underappreciated as compared to fair value. So we don't have specific pace. We are just very committed.

Speaker 3

Okay. This is Mark. Thanks for your question. Yes. We would like to return value to our shareholders.

Speaker 3

So we have been steadily executing our buyback programs. And as of the Q2, we have utilized around USD435 1,000,000 of our current US1 $1,000,000,000 share repurchase program. And that means starting from Q2 2021, we have returned a total of about US2 $1,000,000,000 To our shareholders as of the Q2 of 2023, I think we will continue to execute this program And yes, so another thing that just mentioned by Eric that we will also Focused on the share price and also our Enterprise values, okay. If we believe that the share price if we believe the market cap is really below the value and then we will to 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,

Speaker 7

I have two questions. The first one is a follow-up question on this return rate. So just wondering how How is Vipps 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 increasing return rate since this year, Other than this consumers cautiousness, Just wondering whether or not the competition may have also played a role in this increasing return rate for the power category. My second question is about the Super VIP member.

Speaker 7

Just wonder what is the latest number of Quarterly SuperVie IT members, how much of your GMV in second quarter was contributed by SuperVie IT? Thank you.

Speaker 1

In terms of return rates as to the The IP shop 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 cart is a put any product 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 or vouchers So we are running on a very different business model and typically our The return rate is 2 to 3 percentage points higher than our peers according to our estimate. Whether it's industry wide phenomenon as to return rate trending up, We are still doing some research because we don't have the food that cater from the all the industry players.

Speaker 1

We just have some of 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 Consumer's wallet is shrinking. So we don't have a conclusion on that, It's our best estimate that probably they are becoming more rational.

Speaker 1

And as to the competition, We don't think it's behind the return rate, because typically consumers Hey, for all the items they put in the shopping cart and then they decide whether to keep one return Whether to keep them all or to return 1 or 2. So they've already made their decision to shop on our platform And they just need to consider whether to keep all the order items or they need to return some of 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 SBIP, we As of June 30, we have a total of 6,700,000 active VIP members who contributed to 44% of our online spending. If in terms of GMV, that should be A little bit higher.

Speaker 1

Again, SVIPs have a little much higher return rate than non SVIP Members because they love VIP shop, 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 It's very reassuring for their customer experience. So that's one of the reasons why the return rate is

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 Jesse for any closing remarks.

Speaker 1

Thank you for taking the time to join us today.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

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