Vipshop Holdings Ltd

NYSE:VIPS

Earnings Call Analysis

Vipshop Q2 2024: Steady Margins Amid Revenue Pressure

Vipshop's Q2 2024 saw a slight dip in net revenues to RMB 26.9 billion, down from RMB 27.9 billion last year. Despite this, gross profit rose 2.2% and gross margin improved to 23.6%. Operational efficiency was optimized, lowering expenses by 4.2%. Net income attributable to shareholders fell to RMB 1.9 billion, and diluted ADS dropped to RMB 3.49. The company remains optimistic about long-term growth and prioritizes returning cash to shareholders, with over $200 million in share buybacks in Q2 and a new $1 billion repurchase program. Guidance for Q3 2024 anticipates revenues between RMB 20.5 billion and RMB 21.6 billion, reflecting a 5-10% year-over-year decline.

Overview of Performance

Vipshop Holdings Limited reported a solid profitability for the second quarter of 2024, despite experiencing ongoing pressure on top-line growth. The company's total net revenue was RMB 26.9 billion, slightly down from RMB 27.9 billion a year ago. Despite the revenue decline, the gross profit increased by 2.2% to RMB 6.3 billion, driven by an improvement in gross margin from 22.2% to 23.6%.

Expense Management

The company managed to reduce its total operating expenses by 4.2% to RMB 4.3 billion, lowering the percentage of total net revenues allocated to expenses from 16.1% to 16.0%. Fulfillment expenses saw a marginal decrease, while marketing expenses dropped significantly by 17.0% to RMB 740.7 million. Conversely, technology and content expenses rose by 10.0% to RMB 487.2 million, indicating ongoing investment in these areas.

Profitability

Operating income for Vipshop increased by an impressive 16.5% year-over-year to RMB 2.2 billion, with an operating margin rising to 8.3% from 6.9%. Non-GAAP income from operations also saw growth, increasing by 11.6% to RMB 2.6 billion, with the non-GAAP operating margin improving to 9.5% from 8.2%.

Shareholder Returns

Vipshop remains committed to returning significant cash to its shareholders. During the second quarter, the company utilized over $200 million in its share repurchase program and announced a new share repurchase program of up to $1 billion. Additionally, Vipshop plans to allocate no less than 75% of its full-year non-GAAP net income to share repurchases and dividend distributions.

Future Outlook

Looking ahead to the third quarter of 2024, Vipshop anticipates total net revenue to be between RMB 20.5 billion and RMB 21.6 billion, representing a year-over-year decline of 5% to 10%. This forecast reflects the company's cautious stance given the uncertain macroeconomic environment. Nonetheless, Vipshop continues to focus on strengthening its long-term business fundamentals by investing in merchandising capabilities and maintaining a disciplined approach to operational efficiency.

Customer and Market Dynamics

The company observed a muted consumer sentiment and macroeconomic uncertainty, which affected the growth of its Gross Merchandise Value (GMV). Notably, apparel categories showed better performance compared to non-apparel categories. Active SVIP members increased by 11% year-over-year, accounting for a substantial 47% of online spending, highlighting the resilience of this customer segment.

Strategic Initiatives

Vipshop is focused on delivering value through enhanced merchandising offerings and a commitment to quality control. Initiatives such as time-limited promotions and everyday low-price channels are designed to optimize customer budgets. Moreover, the company continues to refine its approach to customer engagement, including increased quality inspections and tailored services for SVIP members and younger customers.

Earnings Call Transcript 2024-Q2

[Operator]

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

[Jessie Fan, executive]

Thank you, operator. Hello, everyone, and thank you for joining Vipshop's Second Quarter 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 statement in our earnings release and the public filings with the Securities and Exchange Commission, which also applies to this call to the extend any forward-looking statements may be made.

Please note that certain financial measures used on this call such as non-GAAP operating income, non-GAAP net income and non-GAAP net income per ADS are not presented in accordance with U.S. GAAP. Please refer to our earnings release for details relating to the 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 Shen, executive]

Good morning and good evening, everyone. Welcome, and thank you for joining our second quarter 2024 earnings conference call. In the face of multiple headwinds in the external environment, we had a slower momentum in our business. Our team focused on staying agile to respond quickly to external changes and achieving operational excellence.

In the second quarter, sales was under pressure of the hybrid and aim the cautions customer segment, panel category held up relatively well. GMV generated from co-brand and SVIP members showed the resilience for the full quarter. We see this as an indication of the fundamental strength of our business. Customer traction remained mounted reflecting our cautions approaching to marketing spend aimed a challenging backdrop.

However, active SVIP members increased by 11% from a year ago and accounted for 40% of our online spending. That's encouraging as a hard core customer cohort with the most resilient spending power continues to recognize the unique value of shopping with us, given that we are facing ongoing uncertainties in the near term, we focus on the long-term thinking that positions us for continued growth in the years ahead, even as the patents of spending involving the key factors that did mine, where customer choose to shop have not changed. We are sharpening our focus on enriching merchandising offering, highlighting affordability throughout our assortment while ensure worry-freed experience. Together, these have been the core competence that has helped us navigate difficult times.

Among the business highlights, we are pleased with the steady flow of the quality brand inventory thanks to our merchandising capability from a strong team, our talents across categories, we now adapt more quickly to emerging trends, which is important to driving growth by delivering what customers look for. In the first half, we selected more than 600 well known brands to our platform, including a mix of mass brands, new trendy brands and affordable luxury brands in much richer selections.

Our layered approach to brand portfolio is well suited to meet the ever-changing customer needs across income and age cohorts in different regions. We are also encouraged by the steadily progress in the Made for VIP line of customized products. In the second quarter, GMV from Made for VIP increased more than 140% from a year ago. Our know-how and expertise is a [ panel ] enabled brand partners to customize more differentiated product at great price, which were welcomed by many customers.

We see a meaningfully higher portions of customer repeatedly purchased customized products than they do in the general apparel category and the conventions for Made for VIP has been consistently higher than the average level seen within the same brand and the same category. Beyond that, we continue to focus on delivering value, providing the right blend of great pricing and quality to our customers.

We consistently optimize the ways we work with brand partners to ensure we could generate more savings for our customers. Recently, we launched some new channels, future time limited promotions and everyday low price, these are designed to help our customers make the most of their budget, while also providing reliable resource for brand partners to present their best views.

On the other hand, is enhancing quality control. We have been working hard this year to help customers select a trusted portfolio of brand products by increasing quality inspections throughout our supply chain. In addition, we are adapting and refining our approach to customer engagement. In the second quarter, for SVIP members, we continue with the launch that provides sales and special offering, both online and off-line, we intend to increase the dips of our loyalty program to serve their uniquely. For young customer, we tailored the layout and the design of our homepage, created specialized channels and made a personalized recommendations that cater to our performance.

In the face of the temporary volatile on the top line, we continue to work on the long-term efficiency through process optimization and technology enhancement across business lines, among other things. For example, we continuously upgrade our merchandise platform to further improve the activity of our team when serving brand partners. This has motivated brand partners to invest while generating best ROI on technology, AI capabilities and are increasingly applied to search recommendation and intelligent shopping assistant to provide the customer with [ explanation ] and improve conditions.

We have a fundamentally solid business model that also inherently flexible, but we have much more work to do, and we are on it, so that we can quickly pivot as a customer priority change. As we move ahead, we believe that as long as we stay close to our customers, continue investing in our merchandising capabilities and consistently execute on discount retail and inventory we will be positioned for continued growth over 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, executive]

Okay. Thanks, Eric, and hello, everyone. We delivered another quarter of solid profitability despite ongoing pressure on the top line growth. As we remain responsive to the evolving environment to weather external challenges, we managed to optimize our operational efficiency and achieve healthy margins.

Specifically, consolidated gross margin increased to 23.6% from 22.2% a year ago. Thanks to higher margin category mix from apparel skills and a series of cost-saving matters. Non-GAAP net margin attributable to Vipshop's shareholders remained at a high level at 8.1% reflecting our disciplined approach to managing our business.

In the midst of macro and competition dynamics, our goals are to balance growth with profitability and protect the long-term health of our business. Well, our outlook for the near term has softened. We remain confident in our unique positioning to drive sustainable and profitable growth in the long run.

With that, we are committed to returning significant cash to our shareholders. We accelerated our pace of share buyback with over $200 million having been utilized during the second quarter. In addition, a new share repurchase program of up to $1 billion will be in place after we fully utilize the remaining amount under the existing program. And as we mentioned on our last earnings call, we plan to commit no less than 75% of our full year non-GAAP net income attributable to Vipshop's shareholders through discretionary share repurchase and dividend distributions.

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 percentage terms year-over-year terms, unless otherwise noted.

Total net revenues for the second quarter of 2024 or RMB 26.9 billion compared with RMB 27.9 billion in the prior year period. Gross profit increased by 2.2% year-over-year to RMB 6.3 billion, from RMB 6.2 billion in the prior year period. Gross margin increased to 23.6% from 22.2% in the prior year period. Total operating expenses decreased by 4.2% year-over-year to RMB 4.3 billion, from RMB 4.5 billion in the prior year period.

As a percentage of total net revenues, total operating expenses decreased to 16.0% from 16.1% in the prior-year period. Fulfillment expenses decreased by 0.8% year-over-year to RMB 2.16 billion from RMB 2.18 billion in the prior year period. As a percentage of total net revenues, fulfillment expenses was 8.1% compared with 7.8% in the prior-year period.

Marketing expenses decreased by 17.0% year-over-year to RMB 740.7 million from RMB 892.5 million in the prior-year period. As a percentage of total net revenues, marketing expenses decreased to 2.8% from 3.2% in the prior year period. Technology and content expenses increased by 10.0% year-over-year to RMB 487.2 million from RMB 443.0 million in the prior-year period.

As a percentage of total net revenues, technology and the content expenses was 1.8% compared with 1.6% in the prior-year period. General and administrative expenses decreased by 6.5% year-over-year to RMB 900.7 million from RMB 963.1 million in the prior year period.

As a percentage of total net revenues, general and administrative expenses decreased to 3.4% from 3.5% in the prior-year period. Income from operations increased by 16.5% year-over-year to RMB 2.2 billion from RMB 1.9 billion in the prior-year period. Operating margin increased to 8.3% from 6.9% in the prior-year period.

Non-GAAP income from operations increased by 11.6% year-over-year to RMB 2.6 billion from RMB 2.3 billion in the prior year period. Non-GAAP operating margin increased to 9.5% from 8.2% in the prior year period. Net income attributable to Vipshop's shareholders was RMB 1.9 billion compared with RMB 2.1 billion in the prior year period.

Net margin attributable to Vipshop's shareholders was 7.2% compared with 7.5% in the prior year period. Net income attributable to Vipshop's shareholders per diluted ADS was [ RMB 3.49 ] compared with RMB 3.75 in the prior-year period. Non-GAAP net income attributable to Vipshop's shareholders was RMB 2.2 billion compared with RMB 2.4 billion in the prior-year period.

Non-GAAP net margin attributable to Vipshop's shareholders was 8.1% compared with 8.6% in the prior-year period. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS was RMB 3.91 compared with RMB 4.30 in the prior-year period. As of June 30, 2024, the company had cash and cash equivalents and restricted cash of RMB 21.6 billion and short-term investments of RMB 1.9 billion. Looking forward to the third quarter of 2024, we expect our total net revenue to be between RMB 20.5 billion and RMB 21.6 billion, representing a year-over-year decrease of approximately 10% to 5%.

Please note that this forecast reflects our current and preliminary view of the market and operational conditions, which is subject to change. With that, I would now like to open the call to Q&A.

[Operator]

[Operator Instructions] And now we're going to take our first question, and it comes from the line of Thomas Chong from Jefferies.

[Thomas Chong, analyst]

[Foreign Language]

[Interpreted] My first question is about the consumer sentiment in an macro uncertainty. Any color that can be shared about the monthly GMV trend, our expectations for the full year?

And my second question is about the competitive environment. Can management comment about how we should think about the apparel and the standardized category. And how is the GMV growth for these 2 categories are quarter-to-date? And any color about the contribution about the apparel category right now?

[Eric Shen, executive]

[Foreign Language]

[Interpreted]. Okay. In terms of your question on the macro environment, we see that consumption continues to be quite muted due to macro uncertainty. But we don't know whether the consumption momentum is going to be sustainable. And as consumers being quite cautious, discerning and selective we feel that it's quite uncertain going forward.

Quarter-to-date, we see such trend continues. And that's why we see our GMV growth quarter-to-date is pretty comparable to what we have seen in Q2 not too much improvement from the prior quarter.

On the second question in terms of apparel and non-apparel trend, we continue to see apparel outperforming non-apparel categories quarter-to-date, we only see a slight decrease in terms of GMV in apparel categories versus a larger decrease in non-apparel categories. This is pretty large due to heightened industry competition with everybody is looking at price comparison and offering subsidies, which we don't actually follow. We choose not to follow at all cause that, to some extent, makes our standardized items more successful to competition.

In the second half, we plan to continuing to stabilize our competitive strategies with the apparel category, especially we're going to continue to grow our SVIP customers and improve their frequency and average ticket size. And on the other hand, we're making a series of adjustments as to standardize the item. So we're trying to narrow its loss and we try to bring this business segment back to flattish list.

We plan to leverage our SVIP members to increase the apparel category purchases as well as increase the intention from non-SVIP customers as well.

[Operator]

And the question comes from the line of Alicia Yap from Citi.

[Alicis a Yap, analyst]

[Foreign Language]

[Interpreted] I have 2 questions. First is that just wondering if management can share some of the operating metrics for the for VIP, the customized products in terms of the number of SKU under these customer products and how much of that is actually contributing to this quarter GMV?

And also the ASP and the margin is higher than nonlife product. And then the second question is just wondering because I know that the SVIP members should be remaining very sticky and resilient. I just wonder, if management has also observed any change of their behavior recently. For example, are this SVIP member also looking to more lower ASP, those value for money products or they are actually buying slightly less frequent than before?

[Eric Shen, executive]

[Foreign Language]

[Interpreted] In terms of customized products, actually is part of our unique offerings on our platform within apparel category, so we have over 40% unique offerings, including customized products, exclusive access to brand inventory and discounted products like those SKUs with 70% of retail price. So it's a combination of the great merchandise, the great prices that we offer to our customers. And going forward, we will continue to deepen our differentiated product offerings to avoid direct competition with our peers.

On the second question regarding SVIP customer traction, actually, we have a very solid foundation on the SVIP customers, whose average ticket price remained quality [ table ]. But we do see their shopping frequency has been slightly less than before roughly about 2% to 3% as compared to the time they reach the shop on our platform. We think these frequency of our enter pressure is quite manageable. We don't see a very significant change in the behavior of SVIP customers. And we do see a lot of potential of growing our SVIP customer base in the coming quarters, especially leveraging our service capabilities, leveraging their trust on our platform because we will focus on brand quality branded offerings instead of -- and stay away from cheap knockoff.

So that's why we are confident that we will continue to grow the base of SVIP customers as well SVI [ ARPU ]. But nextly, with higher SVIP contribution, we will see regionally tick up a little bit, but mathematically, is very attractive. We do have a very attractive returns in terms of our [ LTP ] because in terms of us, where they spend much more as compared to non-SVIP customers.

[Operator]

And the next question comes from the line of Andre Chang from JPMorgan.

[Andre Chang, analyst]

[Foreign Language]

[Interpreted] My first question is about margin and the investments. Judging from this 5% to 10% year-on-year decline over third quarter revenue, does that mean the company will remain highly disciplined investment of marketing user acquisition.

So the third quarter second half margin will remain supported considering there's like normalization of margin in the second quarter versus the previous few quarters? How should we think about the margin trend in the third quarter and the second half?

And my second question is about the operating cash flow. Despite a very decent profit, we see operating cash outflow in the second quarter, which is rare. Can management highlight what's the reason behind it?

[Eric Shen, executive]

[Foreign Language]

[Interpreted] First, let me translate Eric's comments in terms of a question on investments. We continue to proactively acquire customers and we have, to some extent, to relax our threshold as to LTV in terms of customer acquisition. So we are prudently investing in new channels, but we continue to be quite disciplined. We continue to evaluate the effectiveness and the efficiency of customer acquisition from different perspectives after we haven't found the very good channel for us to acquire customers. So we will remain disciplined in terms of marketing spend for the second half.

Margin-wise, on the GP margin side, [ ROE ] we are confident that it's going to remain quite stable. And because our brand partners are under a lot of pressure nowadays, they have to bid for -- in additional dollar for traffic and for return of goods et cetera. But our philosophy of working with brand partners is always to create a win-win situation. So we are not going to increase our take rate for brand partners. We don't want to create additional burden for them. So GP margin will remain quite stable.

And on the expense side, we do foresee a little bit higher fulfillment expenses with the return still going slightly higher. So we probably don't see too much operating leverage from our fulfillment. Overall, we believe that in the second half, we will continue with our prudent investments. So margins and the net profit in absolute dollar amount will be quite manageable as compared to last year, although net profit may not be as good as the second half of last year, it should be quite comparable.

[Mark Wang, executive]

For the second question regarding the operating cash flow, let me answer your question. The net cash from operating activities for the second quarter decreased primarily due to the following reasons. The first one is the revenue decline year-over-year, and the second reason is this year, [ 61A ] promotion, I mean the shopping festival started in the middle of May.

So which means we need to pay the related cost and expenses to our suppliers in June instead of July. And the third reason is the state and administration of taxation at our case the implementation of fully digitalized [indiscernible] system this year and which means the recipient of [indiscernible] earlier a little bit earlier. So in this connection, we pay our suppliers a little bit faster than that in last year. So these are the 3 main reasons for the operating cash flows change.

[Operator]

And the next question comes from the line of Ronald Keung from Goldman Sachs.

[Ronald Keung, analyst]

[Foreign Language]

[Interpreted] 2 questions. One is, I see that the GMV and revenue has a gap. So is that the return rate had gone up. When I see the order volume that has gone down, while our GMV has been flat. So thinking about these relationships, it's fair to say people are still buying a bit more despite the macro environment to get the free delivery and then return more of the items.

Is that some of the dynamics that we're seeing? Second is I see the technology and content cost has gone up versus the muted revenue. So where are we investing in technology? Do we see some room to streamline or cut some of these costs given the sort of headwinds on the revenue side?

[Eric Shen, executive]

[Foreign Language]

[Interpreted] In terms of your question on GMV and the revenue gap, it's a result of the return rate. The return rate actually is trending a little bit higher, but has moderated a lot from the growth of last year is translated into impact on revenue.

Last year, we had a 2% impact on revenue from return rate of 3% versus 2% for this year, the return rate has been managed relatively well and have started to stabilize on our platform.

In terms of average order size versus the total number of orders, we actually don't see too much change with average order size as consumers are still sticking to the brands they prefer. So they don't intentionally buy cheaper. They're just buying a slightly flat as compared to before because they're becoming more selective and a little bit discerning, especially when we want to choose when and where to shop. So we don't see too much change in terms of consumer behavior, especially the VIP customers.

And the second question regarding technology and content investments. Since last year, we had made meaningful investments in large models, including talent, service, et cetera. We will continue to invest on this front because we believe technology enhancement is very important to driving long-term value, especially given our large sale of customers and the data, we do see a lot of room for improvement.

We believe our prudent investment in technology and content will be value accretive over the long term as a percentage of total revenue, technology and content is going to be a little bit higher but not too much, and it's totally manageable.

[Operator]

Now we're going to take our last question for today. And the question comes from the line of Jialong Shi from Nomura.

[Jialong Shi, analyst]

[Foreign Language]

[Interpreted] I have 2 questions. One question is about our hearsay from our industry checks. We heard from some China check that some major Chinese e-commerce platforms, tier to help loosen the requirement on low prices for certain categories, including apparel category. So just wonder if VIPS has seen any changes in the operating environment. And if there is a loosening on low prices by competitors, what are the possible impact on VIPS second half outlook?

And my second question is a follow-up. And I just wonder what is the percentage of sales and the gross profit generated by the standardized items? And also what is the latest quarterly number of SVIP customers and their contribution to the online GMV.

[Eric Shen, executive]

[Foreign Language]

[Interpreted] In terms of your first question on the low price strategy. We continue to see low price competition going on within the industry. There are a lot of promotion subsidies, and we will continue to see that momentum going forward. But for Vipshop, we continue to focus on quality brand merchandise, and we try to offer our customers with good product to grade factors. We are not chasing for our business scale. We focus on delivering value to our customers and we'll continue with that strategy.

And in addition, on the quality side, we will be focused on building a trusted portfolio of brands to our customers, actually starting from this year, we trend up quite a lot on merchants or brand partners with low-quality product offerings. So we only focus on those quality brands and focus on quality products.

On the second question regarding our GP margin for apparel and non-apparel. Apparel carry a little bit higher GP margin than non-apparel category. But to the bottom line, actually, because standardized items are much lower return rates. So they had pretty good contribution flowing into the bottom line. In the second half, we'll try to bring the business of standardized items back to growth track so that they can have a positive impact on the [indiscernible] margin as well.

Lastly on SVIP customer base, we have 7.4 million active Super VIP customers by the end of second quarter, they accounted for roughly 47% of our online spending.

[Operator]

Due to time constraints, this concludes today's Q&A session. At this time, I will turn the conference back to Jessie for any closing remarks.

[Jessie Fan, executive]

Thank you for taking the time to join us today. If you have any questions, please don't hesitate to contact our IR team. We look forward to speaking with you next quarter.

[Operator]

This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.