Vipshop - Earnings Call - Q4 2024

Transcript

Operator (participant)

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

Jessie Zheng (Head of Investor Relations)

Thank you, Operator. Hello everyone, and thank you for joining Vipshop's Fourth Quarter and Full Year 2024 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 public filings with the Securities and Exchange Commission, which also applies to this call to the extent that 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 attributable to Vipshop shareholders, 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 (Co-founder, Chairman, and CEO)

Good morning and good evening, everyone. Welcome, and thank you for joining our fourth quarter and full year 2024 earnings conference call. We delivered a set of results well above our expectations in the fourth quarter to finish a challenging year. While consumers still spend cautiously on discretionary categories, our team has proactively made changes to address growth priorities with a focus on retail fundamentals and strong execution. At the category level, we saw some strengths in Apparel, which turned into positive growth in the fourth quarter off a high base.

Our team moved swiftly to include more unique, off-price seasonal offerings that meet customer needs, especially in sportswear and outdoor products. For the full year, Apparel categories were up 2% from the year ago, accounting for 75% of our total GMV, the highest level in our history. That helped us once again close RMB 200 billion in total annual sales. Our non-apparel business also clearly narrowed its loss of sales in the fourth quarter, driven in part by the.

Operator (participant)

Ladies and gentlemen, please remain on the line. Your conference will resume shortly. Ladies and gentlemen, please remain on the line. Your conference will resume shortly. Ladies and gentlemen, please remain on the line. Your conference will resume shortly.

[foreign language]

Jessie Zheng (Head of Investor Relations)

Hi, can you hear me?

Operator (participant)

Yes, please continue.

Jessie Zheng (Head of Investor Relations)

Hello?

Operator (participant)

Please continue, we can hear you. Ladies and gentlemen, please remain on the line. Your conference will resume shortly. Ladies and gentlemen, please remain on the line. Your conference will resume shortly. [foreign language] You are back online. You can continue.

Eric Shen (Co-founder, Chairman, and CEO)

Good morning and good evening, everyone. Welcome, and thank you for joining our Fourth Quarter and Full Year 2024 Earnings Conference Call. We delivered a set of results well above our expectations in the fourth quarter to finish a challenging year. While consumers still spend cautiously in discretionary categories, our team has proactively driven changes to address growth priorities with a focus on retail fundamentals and strong execution. At the category level, we saw some strengths in Apparel, which turned into positive growth in the fourth quarter off a high base.

Our team moved swiftly to include more unique, off-price seasonal offerings that meet customer needs, especially in sportswear and outdoor products. For the full year, Apparel categories were up 2% from a year ago, accounting for 75% of our total GMV, the highest level in our history. That helped us once again close RMB 200 billion in total annual sales. Our non-apparel business also clearly narrowed its loss of sales in the fourth quarter, driven in part by the outperformance in home appliances and digital products as we captured growth opportunities from the government trade-in program.

On the customer front, Super VIP memberships extended its double-digit growth, which is a strong validation of our team's commitment to delivering a differentiated experience. In the fourth quarter, active Super VIP increased by 50% from a year ago and accounted for 51% of our online spending. On an annual basis, we had a total of 8.8 million active SVIP members who contributed 49% of our online spending last year. We are encouraged by this initial improvement after we identified key near-term actions in each area and moved with urgency.

In merchandising, we are getting sharp on brand and product portfolio to stay highly relevant to customer needs. Value is on full display through a series of operational adjustments and targeted incentives that help our customers shop for holidays and seasonal promotions, and we are engaging more with family shoppers with a more balanced assortment of apparel and non-apparel products to drive incremental growth in frequency and multi-category purchases. With these changes, we are better positioned going into 2025.

Importantly, we remain very committed to our long-term strategy in discount retail for brands, and we dedicate our efforts to the long-standing factors that have been successful in driving quality growth. That includes our unique business model, a merchandising approach with no compromise on quality and authenticity, a strong focus on value that includes low price and compelling deals, and the suite of services that highlights reliability. All these are put together through a differentiated strategy. More specifically, with the business highlights, we continue to invest in our merchandising capabilities to become even more reliable destinations for our customers.

Following three years' initial enhancement program, our team has been reshaped, developed new expertise, and mastered how to work in more impactful ways. We brought in over 1,500 new brands last year, including official partnerships with many high-profile global brands. We built deeper relationships with several hundred core brands, secured great in-demand value-for-money offerings throughout the year, and managed our product portfolio on a great level of breadth and depth.

Most recently, our team has started to dive deeper, category by category, to seek opportunities by further expanding the brand supply that we expect customers to truly feel the cherry-picking excitement. Another area of focus has been adding more unique supply to make our differentiated product offering even better and bigger. The Made for VIP line did become a meaningful driver for more than 200 brands who have joined the program last year. We saw persistent strength in sales all year long, benefiting from quality, custom and repeat orders, as well as clearly better conversions compared to the general merchandising within the same brand categories and price range.

With some brands, up to 20% of their sales on our platform came from Made for VIP last year. Turning to customers, they remain largely pressured but were willing to spend when they find the right balance of quality products and compelling prices. Our SVIP customers are clearly more resilient and have a strong response to promotions and subsidies because of the real value we provide for them. In addition, they find it enticing to get even better deals through the provided sales and special offers.

We are happy to see that SVIPs continue to spend much more and more frequently than the regular customers, and the vast majority of them have renewed their memberships with us. Given how fast things are changing, it is all the more important to put technology to work to drive growth and efficiency. We have made relentless efforts to optimize search and recommendations, which starts to incrementally improve customer experience and conversions. In addition, we are using the latest general AI model to help our team work in a more productive way, enabling them to serve brand partners and customers with greater efficiency.

We have made initial attempts and application cases such as shopper guides, marketing contents, customer service, and analysis tools for brand partners. Despite ongoing uncertainty, we are confident in a long-term development of our business, given the continuity of our strategy, the merchandising strengths we are building upon, and the growth initiatives we are taking in merchandise expansion, and deepened engagement with different customer cohorts. Most importantly, we have infused more flexibility into our business to compete and win in an environment where customers are focused on value.

We are confident in our ability to move beyond the current situations and return to sustainable and profitable growth in the long term. At this point, let me hand over the call to our CFO, Mark Wang, to go over our financial results.

Mark Wang (CFO)

Okay. Thanks, Eric. Hello, everyone. In the fourth quarter, we achieved a better balance in our business. We took swift and disciplined actions to reallocate resources and maximize growth while preserving solid profitability. Headline came in better than our guidance, as our team has made every endeavor to seize growth opportunities in both apparel and non-apparel businesses. Leaning into categories where we know customers were trying to get ready for holidays, seasonal, or family needs, gross margin decreased year over year but remained at a decent level of 23%, reflecting our stepped-up investment in customer incentives to drive quality growth.

On a full-year basis, gross margin hit an eight-year high of 23.5%, benefiting from the all-time high contribution from our apparel business. With the improved business scale and consistent execution on operational efficiency, our bottom line held up pretty well in both absolute profit and margin in the quarter. This helped us record over nine billion RMB in full-year non-GAAP net profit attributable to Vipshop shareholders at a solid margin of 8.3%, which was largely comparable to a year ago. As we await consumer discretionary spending to normalize over time, we believe we are on the right track to returning to healthy growth in the foreseeable future.

We continue to move at pace and align our focus around merchandising for categories, value offering, and customer impact. This growth initiative is well supported by the strength in our profit and cash generation capability. Turning to capital allocation, in 2024, we returned a total of approximately $770 million to our shareholders through annual dividends and buyback. For 2025, as we consistently communicated, we will return no less than 75% of our full-year 2024 non-GAAP net income attributable to Vipshop shareholders in a combination of annual dividends and buyback. This reinforces our commitment to shareholder value creation in the long term.

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 RMB, and all the percentage changes are year-over-year changes, unless otherwise noted. Total net revenues for the fourth quarter of 2024 were RMB 33.2 billion, compared with RMB 34.7 billion in the prior year period. Gross profit was RMB 7.6 billion, compared with RMB 8.2 billion in the prior year period. Gross margin was 23.0%, compared with 23.7% in the prior year period. Total operating expenses were RMB 5.1 billion, compared with RMB 4.9 billion in the prior year period.

As a percentage of total net revenues, total operating expenses was 15.2%, compared with 14.0% in the prior year period. Fulfillment expenses decreased by 2.5% year-over-year to RMB 2.46 billion from RMB 2.53 billion in the prior year period. As a percentage of total net revenues, fulfillment expenses were 7.4%, compared with 7.3% in the prior year period. Marketing expenses increased by 10.3% year-over-year to RMB 930.3 million from RMB 843.2 million in the prior year period. As a percentage of total net revenues, marketing expenses was 2.8%, compared with 2.4% in the prior year period.

Technology and accounting expenses decreased by 5.5% year-over-year to RMB 469.2 million from RMB 496.4 million in the prior year period. As a percentage of total net revenues, technology and accounting expenses was 1.4%, which stayed flat as compared with that in the prior year period. General and administrative expenses increased by 20.0% year-over-year to RMB 1.2 billion from RMB 1.0 billion in the prior year period. As a percentage of total net revenues, general and administrative expenses were 3.6%, compared with 2.9% in the prior year period. Income from operations was RMB 2.9 billion, compared with RMB 3.7 billion in the prior year period.

Operating margin was 8.6%, compared with 10.6% in the prior year period. Non-GAAP income from operations was RMB 3.4 billion, compared with RMB 4.0 billion in the prior year period. Non-GAAP operating margins were 10.2%, compared with 11.4% in the prior year period. Net income attributable to Vipshop shareholders was RMB 2.4 billion, compared with RMB 3.0 billion in the prior year period. Net margin attributable to Vipshop shareholders was 7.4%, compared with 8.5% in the prior year period.

Net income attributable to Vipshop shareholders per diluted ADS was RMB 4.69, compared with RMB 5.35 in the prior year period. Non-GAAP net income attributable to Vipshop shareholders was RMB 3.0 billion, compared with RMB 3.2 billion in the prior year period. Non-GAAP net margin attributable to Vipshop shareholders was 9.0%, compared with 9.2% in the prior year period. Non-GAAP net income attributable to Vipshop shareholders per diluted ADS was RMB 5.70, compared with RMB 5.79 in the prior year period. As of December 31, 2024, we had cash and cash equivalents and a restricted cash of RMB 27.0 billion and short-term investments of RMB 1.9 billion.

Now, I will briefly walk through the highlights of our full-year results. Total net revenues were RMB 100.8 billion, compared with RMB 112.9 billion in the prior year. Gross profit was RMB 25.5 billion, compared with RMB 25.7 billion in the prior year. Gross margin increased to 23.5% from 22.8% in the prior year. Income from operations increased by 0.8% year-over-year to RMB 9.2 billion from RMB 9.1 billion in the prior year. Operating margin increased to 8.5% from 8.1% in the prior year. Non-GAAP income from operations increased by 0.9% year-over-year to RMB 10.7 billion from RMB 10.6 billion in the prior year. Non-GAAP operating margin increased to 9.9% from 9.4% in the prior year.

Net income attributable to Vipshop shareholders was RMB 7.7 billion, compared with RMB 8.1 billion in the prior year. Net margin attributable to Vipshop shareholders was 7.1%, compared with 7.2% in the prior year. Net income attributable to Vipshop shareholders per diluted ADS was RMB 14.35, compared with RMB 14.42 in the prior year. Non-GAAP net income attributable to Vipshop shareholders was RMB 9.0 billion, compared with RMB 9.5 billion in the prior year. Non-GAAP net margin attributable to Vipshop shareholders was 8.3%, compared with 8.4% in the prior year.

Non-GAAP net income attributable to Vipshop shareholders per diluted ADS was RMB 16.75, compared with RMB 16.90 in the prior year. Looking forward to the first quarter of 2025, we expect our total net revenues to be between RMB 26.3 billion and RMB 27.6 billion, representing a year-over-year decrease of approximately 5% to 0%. 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. We will now begin the question and answer session. To ask a question, please press star 11 on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please repeat your question in English right after. Please stand by while we compile the Q&A roster. We will now take our first question from the line of Thomas Chong from Jefferies. Please ask your question, Thomas.

Thomas Chong (Regional Head of Internet & Media)

Hi, good evening. Thanks, management, for taking my questions, and congratulations on a very solid set of results. My first question is about our Q1 revenue guidance. Can management comment about our year-to-date performance so far? Are we actually seeing we are more towards the low end or the high end of the guidance? And can management also comment about the recent consumer sentiment? That's my first question.

My second question is about the 2025 outlook. Yes, I think it is a bit early right now, but it would be great if management can comment about how we should think about the revenue and the margin trend throughout the rest of the year. Thank you. [foreign language]

Jessie Zheng (Head of Investor Relations)

Okay, as for Q1 revenue guidance in terms of the year-to-date trend, because of the different timing of the Spring Festival, it is not that ideal to look at a single month in January or February. If we look at January plus February today, I think that actually our business is on track within our guidance. When we assess consumer sentiment, we believe it is actually slightly better than expected, although still we observe it takes time to be fully back on the recovery trend. But apparently we think it is marginally better than prior quarters.

Since it's still early into the quarter and we have upcoming, you know, promotions in March when we started to sell spring apparel, and until then we may have a clear picture of how the quarter is going to end, whether it's lower or higher end of the guidance. For sure, we are on track for now. As for the full year of 2025, we think everything should get back to the positive trajectory. That's what we hope, whether it's GMV or revenue. Last year we did not that so well. GMV is just always slightly off. Because of the return rate, there is still some gap between GMV and the revenue.

So revenue is slightly down, but we believe this year we will make every endeavor to bring the business back in terms of every operating metric. Of course, we are going to pursue a high quality and growth strategy as we have done consistently. We will massively try to make efforts to maximize our growth opportunities in terms of customer and the revenue under the condition that we will maintain a solid profitability. As well, we have an opportunity to invest a portion of our profit into growth opportunities. We will do that, but overall, we will try to make sure we will maintain solid profitability and maximize our growth.

Thomas Chong (Regional Head of Internet & Media)

[foreign language]

Operator (participant)

Thank you. We will now take our next question from the line of Alicia Yap from Citigroup. Please ask your question, Alicia.

Alicia Yap (Analyst)

Okay, thank you. [foreign language] So two quick questions. First is that regarding your 4Q outperformance, just wanted to know a little bit more the drivers. So is that mainly because of your effective marketing promotion or is that also benefiting from some improvement of the macro environment? And then second question is in your 4Q GMV, how much of that is actually benefiting or related to the trade-in benefits? Thank you.

[foreign language]

Jessie Zheng (Head of Investor Relations)

To our first question on Q4, it turns out to be well ahead of expectations due to a couple of factors. First, I think it helps a little bit because we start to see consumers became a bit more active from the end of November into December when we see normalized weather conditions that helped our winter clothing sales. Also on consumer sentiment, it was not as bad as we had thought. It turned slightly better than prior quarters. And of course we did a lot of proactive actions in terms of the merchandising portfolio and more in-demand value for money product offerings.

And also we did some decent promotions in the subsidies targeting our high-value customers, which brought in additional growth opportunities. And to your second question on the on the related category benefiting from the trade-in program, it did help a little bit because we managed to narrow the loss of sales in our non-apparel business. But in terms of the absolute GMV, it's still not that meaningful. It's around $300 million-$400 million in terms of incremental GMV from home appliances and the digital products in Q4.

Alicia Yap (Analyst)

Okay, thank you.

Operator (participant)

Thank you. Next we'll take question from the line of Wei Xiong from UBS. Please ask your question, Wei.

Wei Xiong (Analyst)

[foreign language] Thank you management for taking my question. First I want to ask about the gross margin trend in 2025. Are we seeing further room to improve year on year on the base of the very good result of full year 24? If there is, what are the drivers behind? And also just to follow up on the net profit margin for 2025, given that we are trying to pursue the goal of GMV and revenue turning positive as soon as possible, are we expecting stable net margin year on year? Or are we seeing further room to improve? And also what's our latest judgment on the long-term sustainable net margin level for the company? Thank you.

我们准备那个25年的整体的毛利啊，那么我们理论上也不再提升，就是说因为我们最近还在琢磨着要，比如说尽量释放给更多那个好的合作伙伴，给他们更好的条件，或者有些，比如说我们会适当让点扣点，或者做一些销售的对赌。那么如果做成了，我们会释放一些红利给他们。所以说我们其实觉得在毛利方面我们不再增加，那么尽量有可能会适当做一些让利，那么来换一些业绩的增长。那么但是呢，我们在总体的净利把握上面，我们认为说净利率啊，那么应该是跟去年持平吧。那么我们认为也有把握做得到。那么包括那个就全年25年的净利额是不是能增加更多，其实取决于我的业绩增长。那么如果业绩增长的比较多，那可能我们的别的费用就摊下来比较多，不摊下来就那个我们讲的能有更多盈利。所以总体来讲呢，就是说我们基本能争取就是我们说的25年的净利率跟去年持平吧。

Jessie Zheng (Head of Investor Relations)

In terms of the margin trend, GP margin, I remember we hit an eight-year high GP margin of 23.5% in 2024. So we actually think that's a very good level, and we can afford to invest a portion of the gross profit, for example to our brand partners to incentivize them to bringing more merchandising and a more deep discount inventory so that we can grow together.

We are thinking about, you know, prudently reviewing the take rate levels with brand partners and allow them to have more opportunity for growing the business on our platform instead of just maintaining a fixed you know GP margin for the platform, and turning to NP margin, we have a pretty good command of managing the cost and the expense items, so we think in terms of the NP margin, we are pretty confident we can achieve a flattish level as compared to you know the past two years.

And in terms of the profit dollars, we try to grow our profit dollars as much as we can. If we can you know grow into a better scale and apparently we will that will take a lot of pressure on operating deleverage and then we can achieve a greater NP margin as well as a much better profit dollar level. So in terms of the margin profile, we have no concern on that actually. We have pretty good amount of the both GP margin and NP margin.

Wei Xiong (Analyst)

Very clear. Thank you, management.

Operator (participant)

Thank you. Next question comes from the line of Jialong Shi from Nomura. Please go ahead, Jialong.

Jialong Shi (Head of China Internet Equity Research)

[foreign language] So I have two questions, and first question is about generative AI. So AI has become a popular trend these days. So just wondering if there are any areas in this business where AI may help either improve profitability or reduce the cost. Just wonder if management can provide some colors, and the second question is wondering what is the trend for ARPU and the shopping frequency of Super VIP members thank you

[foreign language]

Jessie Zheng (Head of Investor Relations)

In terms of the AI application actually internally we are moving at very fast to invest into AI applications including personalization Q&A generation and product recommendation et cetera on a number of application cases specifically actually we are deploying a DeepSeek internally as well the immediate focus is of course to try to find opportunities to improve productivity as well as efficiency for example on customer service we are trying to see whether DeepSeek can be integrated in our.

A self-developed model to improve the analysis and the reasoning of the many dialogues that are taking place on customer service every day. We're trying to find if there is any area of improvement and to brand partners. We're also launching new analytical tools to try to help them optimize their merchandising portfolio to promote their sales campaigns to see whether what kind of actions they should take to maximize business opportunities on our platform. So although we are not rolling out any AI application publicly, but we are deploying AI and the latest gen AI models into our internal business cases on a broad basis.

And on the customer front, we are also trying to see whether we can leverage the latest digital AI model to improve the generation of Q&A. And we are constantly upgrading the model and try to make our recommendation to customers even better and more precisely and more to their needs. So we are using AI applications in our internal business cases and we are tracking the developments and we look to leverage AI on a constant basis to find opportunities to drive both growth and efficiency into the.

Second question on SVIP customer last year in terms of annual ARPU, we did see a slight decline, but that's more of a diluted you know impact from 16% increase in the annual active Super VIP customers. And it normally takes some time for a new SVIP member to ramp up his spending. And if we look at the hardcore two-year customer cohort of our SVIP customer base, actually the ARPU remains very resilient. Only see a slight drop in terms of annual ARPU. So we think that the overall SVIP customer base is still very healthy and we look to expand the SVIP membership continuously and protect the overall health of the consumer group.

Operator (participant)

All right, thank you. Due to time constraints, that concludes today's question and answer session. At this time, I'll turn the conference back to Jessie for any closing remarks.

Jessie Zheng (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)

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.