Vipshop - Q1 2024

Transcript

Operator (participant)

Ladies and gentlemen, good day, everyone, and welcome to Vipshop Holdings Limited's First Quarter 2024 Earnings Conference Call. At this time, I would like to turn the call to Ms. Jessie Zhang, Vipshop's Head of Investor Relations. Please proceed.

Jessie Zhang (Head of Investor Relations)

Thank you, operator. Hello, everyone, and thank you for joining Vipshop's First Quarter 2024 Earnings Conference Call. With us today are Eric Shen, 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 public filings with the U.S. 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 US 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 Ya Shen (Chairman and CEO)

Good morning and good evening, everyone. Welcome, and thank you for joining our first quarter 2024 earnings conference call. We had a slow quarter in terms of business momentum, but profit grew much faster than sales. In the face of the shortfall of the top line, we stayed flexible to operate the most effectively while focusing on priorities to enhance long-term strength. In the first quarter, sales growth moderated as the quarter progressed. After a strong start, seasonal demand for spring clothes was softer than expected in March. But for the full quarter, apparel category continued to stand out with double-digit GMV growth year-over-year. Customer spending proved resilient. In the first quarter, active Super VIP members increased by 11% from a year ago and accounted for 45% of our online spending.

That's a healthy indication of the trust, value, and ease of the shopping we've created for them. We came into the year by responding to the change in customer behaviors and continuously refining our approach to navigate a still dynamic environment. All that we do centers upon increasing our appeal to customers beyond our existing base. We expand into what customers like and what makes us different. We provide great value that customers are looking for every day. On merchandise expansion, we continue to see plentiful supply in the industry, and we are happy with our access to quality brand inventory. We are building a wide range assortment based on our broad and deep brand relationships. A steady flow of select national and global brands keeps us up-to-date to provide more treasure hunting deals for our customers.

Our team's merchandising expertise really helps build a better brand portfolio with product mix that has a range of discount levels. We remain dominant in our share of deep discount branded products, even as consumers have to make disciplined buying choice, our customers continue to welcome affordable selections. The Made for Vipshop line further gives us the ability to meet the needs of customers who are more style and price cautious. Through 180 well-known brand partners, we managed to more than double the supply of customized products from a year ago. We are pleased to see that Made for Vipshop products are more preferred by high-quality customers, who tend to place more repeat orders in apparel categories. Across geographies, we see people are closely looking for value. We've got a good chance to grow our share of value spending.

We continue to drive value for our customers beyond the compelling price. In addition to promotion, customers buy our brand offerings because they receive the combination of price, quality, and service. They are, they are conscious of product authenticity, so they rely on our offerings.... They like simplified promotions and seamless returns and exchanges. All these things make it easy in the shopping experience, which lead to great repeat purchase. That's how we different from others. We are also taking initiatives to enhance the loyalty program. In the first quarter, we launched private sales and the special offering for Super VIP members to enjoy additional privileges. It's a good start to building more online and offline connections to our loyal customers. Initial results are encouraging. Within the company, we continue to reinforce our efforts to gain efficiency.

We are working to design better progress and deploying the latest technology in our business. For example, we are applying AI-generated model photos and product videos to optimize our marketing efforts and help brand partners engage with their customers more effectively. With the potential to improve engagement and acquisition, we expect to drive further adoption of this solution over the course of the year. While we are cautious in our near-term outlook, we remain confident in our ability to generate long-term results. Our unique value proposition allow us to service in the best interest of brand partners and grow high-quality customers across age and income cohorts. We believe we have the solid foundations to capture the opportunity we see to grow our business in the years ahead. At this point, let me hand over the call to our CFO, Mark Wang, to go over our financial results.

Mark Wang (CFO)

Okay, thanks, Eric, and hello, everyone. We are pleased to record another quarter of strong profit growth despite the tepid top-line performance. In the first quarter, our team executed well, moving quickly in response to the dynamic operating environment to drive efficiency gains. As a result, margins all remain very healthy. More specifically, consolidated gross margin increased to 23.7% from 21.4% a year ago, primarily with the help of higher-margin category mix from apparel sales. Non-GAAP net margin attributable to Vipshop's shareholders expanded to another record high of 9.3% from 7.5% a year ago, aided by our ongoing efforts to maintain operating discipline. As consumers remain budget-conscious and value-driven, we are reinforcing our value proposition across our merchandise offering to deliver the affordability that better fits into consumer preference.

We will focus on priorities to capture the growth opportunity we see with brand partners and customers. We believe with solid business fundamentals and a great financial position, we are able to deliver quality growth, good profitability, as well as consistent shareholder return for the long term. Looking to 2025, for the benefit of our shareholders, we plan to commit no less than 75% of our full year 2024 non-GAAP net income attributable to Vipshop's shareholders in discretionary share repurchase and/or dividend distributions. 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 changes are year-over-year changes, unless otherwise noted.

Total net revenues for the first quarter of 2024 increased by 0.4% year-over-year to RMB 27.6 billion, from RMB 27.5 billion in the prior year period. Gross profit increased by 10.9% year-over-year to RMB 6.5 billion, from RMB 5.9 billion in the prior year period. Gross margin increased to 23.7% from 21.4% in the prior year period. Total operating expenses increased by 0.6% year-over-year to RMB 4.09 billion, from RMB 4.06 billion in the prior year period. As a percentage of total net revenues, total operating expenses for the first quarter of 2024 was 14.8%, compared with 14.7% in the prior year period.

Fulfillment expenses increased by 11.3% year-over-year to RMB 2.0 billion, from RMB 1.8 billion in the prior year period. As a percentage of total net revenues, fulfillment expenses was 7.2%, compared with 6.5% in the prior year period. Marketing expenses decreased by 17.4% year-over-year to RMB 690.9 million, from RMB 836.9 million in the prior year period. As a percentage of total net revenues, marketing expenses decreased to 2.5% from 3.0% in the prior year period. Technology and content expenses increased by 22.7% year-over-year to RMB 481.9 million, from RMB 392.8 million in the prior year period.

As a percentage of total net revenues, technology and content expenses was 1.7%, compared with 1.4% in the prior year period. General and administrative expenses decreased by 11.3% year-over-year to RMB 929.1 million, from RMB 1.0 billion in the prior year period. As a percentage of total net revenues, general and administrative expenses decreased to 3.4% from 3.8% in the prior year period. Income from operations increased by 39.0% year-over-year to RMB 2.8 billion, from RMB 2.0 billion in the prior year period. Operating margin increased to 10.0% from 7.2% in the prior year period.

Non-GAAP income from operations increased by 33.4% year-over-year to RMB 3.1 billion, from RMB 2.3 billion in the prior year period. Non-GAAP operating margin increased to 11.1% from 8.3% in the prior year period. Net income attributable to Vipshop shareholders increased by 24.6% year-over-year to RMB 2.3 billion, from RMB 1.9 billion in the prior year period. Net margin attributable to Vipshop shareholders increased to 8.4% from 6.8% in the prior year period. Net income attributable to Vipshop shareholders per diluted ADS increased to RMB 4.18 from RMB 3.16 in the prior year period.

Non-GAAP net income attributable to Vipshop shareholders increased by 24.8% year-over-year to RMB 2.6 billion, from RMB 2.1 billion in the prior year period. Non-GAAP net margin attributable to Vipshop shareholders increased to 9.3% from 7.5% in the prior year period. Non-GAAP net income attributable to Vipshop shareholders per diluted ADS increased to RMB 4.66 from RMB 3.52 in the prior year period. As of March 31, 2024, the company had cash and cash equivalents and restricted cash of RMB 24.6 billion and short-term investments of RMB 2.9 billion.

Looking forward to the second quarter of 2024, we expected our total net revenues to be between RMB 26.5 billion and RMB 27.9 billion, representing a year-over-year decrease of approximately 5% to 0% percent. 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.

Operator (participant)

Thank you, dear participants. If you wish to ask a question, please press star one one on your telephone keypad and wait for your name to be announced. To withdraw a question, please press star one one again. If you are bilingual, please ask your question in both languages. Thank you so much for your consideration. Please stand by. We'll compile the Q&A roster. This will take a few moments. Now we're going to take our first question. It comes from the line of Alicia Yap from Citigroup. Your line is open. Please ask your question.

Alicia Yap (Equity Research Analyst)

Hi. Good morning. Good evening, management. Thanks for taking my questions. I have a question regarding the guidance. So just curious in terms of what's, you know, the drivers and factors that you have been factor into your latest second quarter revenue guidance. Is that related to the demand has been a little bit sluggish or you actually factor in a higher return rate? So any color you can provide in terms of how you see the second quarter, trends and demand would be helpful. Thank you.

Jessie Zhang (Head of Investor Relations)

Alicia, the one that you asked when we gave guidance

[Foreign langiage]

Eric Ya Shen (Chairman and CEO)

[Foreign language]

Jessie Zhang (Head of Investor Relations)

Okay, for the Q2 guidance, we actually have factored a number of considerations. First, we had a, you know, extended winter and also early summer, which actually shortened the window for apparel sales, for spring clothing. And the apparel sales, you know, it really depends on the right timing, especially during the seasonal shift. And second, you know, we still have a very dynamic industry, so we focus on stabilizing our core business to maintain solid profitability. We have not invested in large-scale subsidies and marketing spend to acquire our customers very aggressively.

This has resulted in some loss of sales from customers who swing among different platforms. Lastly, the return rate you mentioned, yes, it's been up. It's primarily because of the higher contribution from our SVIP members who are still growing very nicely. It also ties to customer, you know, behavior who are used to who likes to, you know, return and exchange when they shop among different e-commerce platforms.

Alicia Yap (Equity Research Analyst)

Okay, thank you so much.

Operator (participant)

Thank you. Dear participants, as a reminder, if you wish to ask a question over the phone, please press star one one on your telephone keypad and wait for your name to be announced. Now we will take our next question. The question comes from the line of Ronald Keung from Goldman Sachs. Your line is open. Please ask your question.

Ronald Keung (Analyst)

[Foreign language]

Thank you, management for taking my question. My first question is wanna ask, have we seen, the, was the first quarter kind of softness mainly due to March?

And then as we guide this, 0 to -5, are we basing this on April trends, or are we expecting it's a base issue mostly for May and June, particularly the shopping festival, our June 16 festival into compared with last year? Second is on shareholder return. We've bought back around $11.9 million worth of shares in the first quarter. But then, the announcement says we're committed to up to $500 million by the end of this year. Does that imply a significant step up in the share buybacks in the remaining three quarters? Thank you.

Eric Ya Shen (Chairman and CEO)

[Foreign language]

Jessie Zhang (Head of Investor Relations)

On your first question, actually, quarter to date, sales momentum has been softer than expected, and we are doing our best to try to adjust the business and try to execute right. And given a lengthened, extended promotional season, it started from, this year it start from on May 20th, it's going to last for one month, and it's quite different from the situation we faced last year. So we try to remain cautious about the sales momentum going forward, any ups and downs. So, we will be try to be conservative in terms of the outlook, and also we will continue to be quite disciplined in our operation.

Mark Wang (CFO)

Okay. Thanks for your question. For the second question regarding the shareholders returns, okay? Let me answer you in this way, okay?

We are committed to a long-term shareholder return policy, and we'll continue to use the combination of buyback and the dividend to provide shareholders with relatively stable and the consistent annual returns. We have returned over $2.2 billion to shareholders since April 2021 in the form of buyback and dividends. For 2024, we have adopted an annual dividend policy and announced $250 million dividend. In addition, we are steadily buying back shares and are committed to repurchasing approximately $500 million by December 31, 2024. This implies that we will almost utilize the remaining amount of the existing $1 billion two-year buyback program by year-end.

Furthermore, looking to 2025, for the benefit of our shareholders, we plan to commit no less than 75% of our full year 2024 non-GAAP net income attributable to Vipshop shareholders in discretionary share repurchase and/or dividend distributions. All I mentioned above regarding the history records and the future planning, shows our determination and insistence to return value to our shareholder in a long-term, stable, and consistent way. Hope this answer your question. Thank you.

Ronald Keung (Analyst)

Thank you, Shen Zong and Mark.

Operator (participant)

Thank you. Now we will take our next question. And the next question comes from the line of Eddy Wang from Morgan Stanley. Your line is open. Please ask your question.

Eddy Wang (Analyst)

[Foreign language]

Ah, thank you for taking my question. So my first question is about the competition, ah, as the Shen Zong mentioned that you know, we have see a more intensive competition from ah, you know peers, especially in terms of the subsidy they granted.

So, I understand in the short term, we may stick to our current strategy, but if you take a relatively long term view, will we also follow suit this term, you know, the more aggressive like the subsidy strategy or we will continue to stick to our current strategy. And second is the user side, we record a year-over-year decline for the user in the first quarter of this year. So just want to hear your view on your user growth, you know, the strategy in this year and in the longer term. And the third one is about the AOV. So we see that AOV in this quarter actually increase on a year-over-year basis.

So is this because of the, you know, proportion of the SVIP, you know, the users coming up, so their AOV is higher or any other reasons actually leads to a higher AOV in this quarter? Thank you.

Eric Ya Shen (Chairman and CEO)

[Foreign language]

Jessie Zhang (Head of Investor Relations)

So on the first question on competition, actually our strategy has been and will continue to be laser focused on branded discount retail. There are many e-commerce platforms nowadays, but each has its unique value proposition and our uniqueness lies in our ability, capability to serve in the best interest of brand partners and to deliver better value to our customers. That's why we have so many loyal customers on our platform who has seldom leave us. And we will continue to broaden and deepen our relationships with more brand partners to bring in a steady flow of the right merchandise offerings to deliver value to our customers who are looking at brand quality, and the product authenticity, et cetera.

In terms of subsidy, we, we wouldn't want to follow our industry peers to blindly investing in large-scale subsidies. Of course, we will be prudently, be prudently aggressive in customer acquisition, but we will continue to focus on acquiring high-quality customers. On, on your second question, in terms of the marketing spend, in Q1, we, we had a slight decline in active customers. That's because we have very strict requirements on LTV. As long as it's higher than a, a certain level, we would stop, you know, investing in marketing spend.

We realized that in the face of competition and especially in price competition, there are some customers who are more driven by subsidy or more price sensitive, they actually have to run to other platforms. But on the other hand, SVIP, the core customer base has been quite resilient. They're still growing at double digit in terms of customer base, and their ARPU is still, you know, going up faster than the average customer. Having said that, entering into Q2, we will be a little bit more aggressive in terms of acquiring customers. After all, we want to bring in more new customers to our platform, but only those who are high quality.

So we will cautiously relax our, you know, our restrictions in terms of our LTV to make sure we continue to acquire customers in a effective and efficient way. And lastly, on the GMV per customer, the trend, actually, if you really look at the ARPU trend, that's more representative of the customer momentum. SVIP members are still gaining very good traction. As I mentioned earlier, ARPU, their ARPU are growing faster than the average customers.

And, you know, it demonstrated that as long as we serve in the best interest of our SVIP members, providing them with the right merchandise offerings, as well as the best-in-class services, they will continue to shop with us, and they will shop more and come more. So in the future, we will continue to drive the expansion of our SVIP customer base. We believe that our core customer cohort are a very strong foundation for us to maintain quality growth as well as good profitability.

Operator (participant)

Excuse me, Eddy, do you have any further questions?

Mark Wang (CFO)

No. Thank you.

Operator (participant)

Thank you. Dear speakers, there are no further questions for today. I would now like to hand the conference over to your speaker, Jessie Zhang, for any closing remarks.

Jessie Zhang (Head of Investor Relations)

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 (participant)

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.