Vipshop Holdings Ltd

NYSE:VIPS

Earnings Call Analysis

Vipshop Q3 Earnings Beat Expectations, Gross Margin Hits 3-Year High

Vipshop's momentum continued into Q3, outperforming expectations with both sales and profit growth. GMV in apparel grew 16% YoY and Super VIP members, accounting for 45% of online spending, increased by 17%. Gross margin reached a three-year high of 23.6%, operating margin set a record at 9.1%, and net margin for shareholders stood at 8.1%. The company repurchased $2 billion in shares since April 2021. Looking ahead, the forecast for Q4 net revenue suggests a 0% to 5% YoY growth, amounting to RMB31.8 billion to RMB33.3 billion.

Strategic Momentum and Customer Loyalty Fuels Growth

In the third quarter of 2023, the company witnessed sales and profit growth surpassing expectations, with a notable 16% year-over-year growth in Gross Merchandise Value (GMV) within the apparel category. Notably, Active Super VIP members grew by 17% from the previous year, making up 45% of the online spending in this period, showcasing a robust and growing base of loyal customers. The company has honed in on becoming the premier online shopping destination for apparel, underlined by strategic improvements in merchandise expansion, best value offerings, and wallet-free service, aiming to cater comprehensively to customer needs.

Record Profitability Amidst Expansion

The company achieved record profitability in the third quarter, with the Gross Margin reaching a three-year peak at 23.6% and Non-GAAP operating margin at an all-time high of 9.1%. This improvement was influenced by a favorable category mix and an optimized merchandise portfolio. Furthermore, the Non-GAAP net margin increased to 8.1% from 7.4%, indicating a stronger profitability year-over-year. For the fourth quarter of 2023, the company anticipates revenue growth of 0% to 5%, considering current market and operational conditions.

Future Growth Prospects and Shareholder Value

Looking forward to 2024, the company is positioned for stable and sustainable growth, particularly in its customer base, with plans to incentivize brand partners rather than increase take rates. Although Gross Profit (GP) margin has peaked, there is confidence in the potential for Net Profit (NP) margin expansion. The company also boasts 6.7 million active Super VIP customers, indicative of a solid and dedicated consumer segment. Additionally, the board and management are in consensus on continuing the share buyback program, reflecting confidence in the company's undervalued shares and long-term growth.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, good day, everyone, and welcome to Vipshop Holdings Limited Third Quarter 2023 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 Third Quarter 2023 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 the public filings with the Securities and Exchange Commission, which also applies to this call to the extent any forward-looking statements may be made.Please note that certain financial measures used on this call, such as non-GAAP operating income, non-GAAP net income and non-GAAP net income per ADS, are not presented in accordance with U.S. 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, executive]

Good morning and good evening, everyone. Welcome, and thank you for joining our third quarter 2023 earnings conference call.We continued to see decent momentum throughout the third quarter, with sales and profit growth ahead of expectations, while we accelerate our efforts on strategic priority to capture customer mind share. Among the drivers, apparel categories continued to outperform with over 16% growth in GMV year-over-year. High-value customers increasingly relied on us as they looked for great deals.Active Super VIP member grew 17% from a year ago and accounted for 45% of our online spending in the third quarter. We continued to execute well and drive changes for the long term. We made it clear that we'd like to be the first go-to online shopping destination for apparel. To that end, we are pushing forward with a strategic improvement related to merchandise expansion, best value for money and worry-free service for our customers.Our merchandise team is more skilled at developing a rich and diverse mix of branded products. Up to date, we added several hundred trendy and high-end brands this year and we have a complete system to help new brands grow their business faster by providing the right mix of resource support including traffic, allocation, customer, analytic and channel promotion.Also, as a buyer-based platform that highlights carefully select products, we launched contents like Buyers Must Have, which is tailored for apparel category and customer behaviors on Vipshop to interest different types of users. On Made-for-Vipshop, our team has done a better job of identifying product opportunities, together with brand partners. We now have an enlarged supply of customized offerings with SKUs available for sale, trending up every month.The customized [ features ] perform better in categories like clothing and shoes and bags. This has motivated brand partners to deepen their collaboration of customized products with us. While we are growing our merchandise selection, we are committed to providing our customers with affordability. We are focused on seeking out the best deal for our customer to make sure they get value from -- they get value with Great Everyday Price and also through unique and customized products. And we provide additional saving opportunities through our popular loyalty programs.Lastly, we are improving customer shopping experience that includes overall set of enhanced capabilities from the worry-free quality guarantee, enriched product detail page, integrated customer service, together with brand partners to improve fulfillment efficiency through seamless process management. For example, as part of our Enhanced Quality Assurance Program, we recently reached a strategic collaboration with China Inspect and Certification Globe Group to upgrade our quality control system.With all of these competencies at the core of our business, we are in a better shape to deepen engagement with our customers. Our Super VIP members recognize our big strengths more than the others because of trust, value and ease they've enjoyed at every interaction. Super VIP member has consecutive quarters of double-digit growth. Overall, retention and renewal rates are trending higher. Average spending is also ticking up.As we look ahead, we are confident that our business will stand firm in the face of a still challenging environment. We are encouraged to see a deepening level to trust we established with our brand partners and the customers. And we are uniquely positioned to secure consistent product supply that is aligned with customer performance for value spending. We are confident about being a long-standing player with stable, sustainable growth prospects.At this point, let me hand over the call to our CFO, Mark Wang, to go over our financial results.

[Mark Wang, executive]

Thanks, Eric. Good morning and good evening, everyone.We are delighted to see that third quarter results exceeded our expectations. Leveraging our elevated customer mind share in apparel categories and value-for-money offering, we delivered satisfactory revenue growth despite the slow season in the third quarter. With continued focus on high-quality growth, profitability remained strong.Gross margin increased by 2 percentage points year-over-year to 23.6%, a record high in 3 years, primarily benefiting from favorable category mix and optimized merchandise portfolio. Non-GAAP operating margin is an all-time high of 9.1%, as we stayed discipline while managing every expense item. Non-GAAP net margin attributable to Vipshop's shareholders maintained at a high level of 8.1%.Meanwhile, we value shareholder interest from long-term perspective. As of the end of third quarter, we have returned a total of approximately USD 2 billion to our shareholders since April 2021. We remain committed to executing our share repurchase program. Going forward, we are positive on long-term growth outlook, supported by the underlying strengths of our unique business model. We believe our enhanced efforts from merchandising to supply chain will help us capture the opportunities presented by consumers increasing needs for value-for-money offerings.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 changes, unless otherwise noted.Total net revenues for the third quarter of 2023 increased by 5.3% year-over-year to RMB 22.8 billion from RMB 21.6 billion in the prior year period, primarily attributable to the growth in active customers and spending driven by the recovery in consumption of discretionary categories. Gross profit increased by 14.9% year-over-year to RMB 5.4 billion from RMB 4.7 billion in the prior year period.Gross margin increased to 23.6% from 21.7% in the prior year period. Total operating expenses increased by 9.6% year-over-year to RMB 4.0 billion from RMB 3.7 billion in the prior year period. As a percentage of total net revenues, total operating expenses was 17.6% as compared with 16.9% in the prior year period. Fulfillment expenses increased by 9.5% year-over-year to RMB 1.6 billion from RMB 1.6 billion in the prior year period. As a percentage of total net revenues, fulfillment expenses was 7.8% as compared with 7.5% in the prior year period.Marketing expenses increased by 17.0% year-over-year to RMB 669.6 million from RMB 572.4 million in the prior year period. As a percentage of total net revenues, marketing expenses was 2.9% as compared with 2.6% in the prior year period.Technology and content expenses increased by 10.3% year-over-year to RMB 435.3 million from RMB 384.8 million in the prior year period. As a percentage of total net revenues, technology and content expenses was 1.9% as compared with 1.8% in the prior year period.General and administrative expenses increased by 5.5% year-over-year to RMB 1.13 billion from RMB 1.07 billion in the prior year period. As a percentage of total net revenues, general and administrative expenses was 5.0%, which stayed flat as compared with that in the prior year period.Income from operations increased by 34.8% year-over-year to RMB 1.5 billion from RMB 1.1 billion in the prior year period. Operating margin increased to 6.7% from 5.3% in the prior year period. Non-GAAP income from operations increased by 33.0% year-over-year to RMB 2.1 billion from RMB 1.6 billion in the prior year period. Non-GAAP operating margin increased to 9.1% from 7.2% in the prior year period.Net income attributable to Vipshop's shareholders was RMB 1.2 billion as compared with RMB 1.7 billion in the prior year period. Net margin attributable to Vipshop's shareholders was 5.3% as compared with 7.8% in the prior year period. Net income attributable to Vipshop's shareholders per diluted ADS was RMB 2.91 as compared with RMB 2.70 in the prior year period.Non-GAAP net income attributable to Vipshop's shareholders increased by 15.5% year-over-year to RMB 1.8 billion from RMB 1.6 billion in the prior year period. Non-GAAP net margin attributable to Vipshop's shareholders increased to 8.1% from 7.4% in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS increased to RMB 3.33 from RMB 2.56 in the prior year period. As of September 30, 2023, we had cash and cash equivalents and restricted cash of RMB 19.6 million and short-term investments of RMB 451.9 million.Looking forward to the fourth quarter of 2023, we expect our total net revenue to be between RMB 31.8 billion and RMB 33.3 billion, representing a year-over-year increase of approximately 0% to 5%. Please note that these forecasts 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] We will now take our first question. First question is from the line of Thomas Chong from Jefferies.

[Thomas Chong, analyst]

Thanks management for taking my questions. I have 2 questions. My first question is about the latest GMV trend that we are seeing in the month of October and so far in November and also our feedback on Double 11.My second question is about 2024 outlook. Can management comment about how we should think about the outlook next year and also the competitive environment?[Foreign Language]

[Eric Shen, executive]

[Interpreted] Okay. On the first question of the latest GMV performance in recent months, actually, I think entering into Q4, overall performance was a bit muted, especially for apparel categories because of the abnormal weather conditions in October and the seasonal shift for autumn/winter closing seemed to coming later than -- slower than expected. But apparel categories have been picking up very nicely in recent weeks, especially during the Double 11 event. And the overall GMV growth during Double 11 has actually reached double-digit growth, outperforming the industry average quite meaningfully. So, we still have some expectations for the rest of the quarter, but it still depends, especially on the weather conditions. If the winter [ depicting ] colder than expected, we should have much better performance.For the year ahead, 2024, our overall strategy continues to be focusing on achieving stable and healthy growth. I think a lot of the things through the last couple of years, developments have been reached a healthy level, especially for margins, no matter it's gross margin or net profit margin, all are on the healthy track. But we are looking for better growth, especially on the customer front, we are trying different ways to boost our customer growth for the long term. And of course, uncertainty remains, especially as to the consumption environment and a lot of other factors pressure, but we remain focused on the current strategy. And we believe that we will continue to be a very stable and healthy player in the industry for the year ahead.

[Operator]

We will now take our next question. The question is from the line of Ronald Keung from Goldman Sachs.

[Ronald Keung, analyst]

So, I have 2 questions. First is, we see that the gross margin has reached a new high. When should we see kind of -- apparel, I think, is a big quarter in terms of mix, that should have boosted gross margins because of the apparel mix in the quarter. But how should we think about the gross margin upside into, let's say, 2024? What are the levers that we see for gross margin uplift from here with this new high level?And then my second question is on our buyback over the quarter. I think management just reiterated the ongoing buyback plan. But the absolute amount spent during the quarter is quite small compared to, let's say, the second quarter. So, I want to know, is our buyback a function of share price or our cash, which is onshore or offshore? Or is it just an unusual quarter, and we plan to have a pretty balanced buyback schedule throughout each quarter?Let me translate myself. [Foreign Language]

[Eric Shen, executive]

[Interpreted] Okay. On the first question about GP margin expansion, the GP margin expansion in Q3 was primarily driven by the higher margin in apparel category, which had a higher contribution year-over-year. And although our cost-saving initiatives, especially on the customer incentives have been well put in place. It's not that -- the take rate, how much we take from brand partners has actually not changed that much. And instead of increasing the take rate from brand partners, we actually offered a lot of incentives for brand partners to grow their business together with us, so that they can save -- actually save a lot of money. And the GP margin has reached a relatively high level.So, we think there is not that much room for it to improve further in Q4 or for the year ahead because we won't increase the take rate from brand partners. We want to issue that customer coupons as well. We think we find a better and healthier way to grow our business and as well as our customers. But on the other hand, in terms of NP margin, we think we still have some room for further expansion. And especially for Q4, it's typically a peak season for us in terms of margins, especially NP margin. So, we just see a higher NP margin in Q4. And for 2024, we still have some economy of scale and some operating leverage, especially on the marketing expense front. We continue to be prudent and invest only when and where we feel there is a need, and the returns are okay. So, we think NP margin still has some room for expansion, but not as meaningful as we had seen for 2023 versus 2022.

[Mark Wang, executive]

Okay. Ronald, this is Mark. And thanks for your great question regarding the share buyback. I will answer your question, okay? Well, first, we have been steadily executing our buyback programs. As of third quarter, we have utilized around [Technical Difficulty] of our current USD 1 billion share repurchase program. And that is to, see, starting from the second quarter 2021, we have returned a total of about USD 2 billion to our shareholders as of the third quarter 2023. The remaining USD 551 million buyback is being executed.Secondly, we are committed to executing the buyback as a way to show confidence in our long-term growth prospects. And also, we think about providing relatively stable returns for shareholders and investors. The last but not least, we have been doing from time to time with some flexibility, [ we now take those factors ] into account [Technical Difficulty] volatility. So this is regarding the share buyback programs.

[Operator]

Next question is from the line of Alicia Yap from Citigroup.

[Yik Wah Yap, analyst]

Very quickly, I wanted to ask as we enter 2024 with demand for apparel and the discretionary spend likely to experiment the normalizing growth, so what are VIP's strategies or plans to enhance your growth outlook or your user purchasing frequency? What could be the normalized growth percentage for next year? And does management think the consumption sentiment will be improving from this year's level?

[Eric Shen, executive]

[Interpreted] On the 2024 growth outlook, we are pretty confident that we can achieve stable and sustainable growth for the long term. We are still a very small player in China's e-commerce industry and with a limited number of active customers. So, we still have a lot of potential to grow our customer base. We are very confident about that. On the one hand, we continue to test new customers and improve the retention of existing customers and especially grow our SVIP members. And in addition to our marketing spend, we think merchandising portfolio is a more important factor to help us grow faster.We continue to expand our merchandising portfolio, including unique offerings made for Vipshop's customized offerings as well as buyout offerings. We will continue to leverage the combination of these product offerings to add value to our customers. And speaking of customer base, we still have the 100 million annual active customers. So, we think as long as we can continue to upgrade our platform to focus on apparel categories, should be better and unique and the only one in the vertical this kind of retail segment. And as we continue to enhance our customer experience and services, we will grow our customer base from the current level very meaningfully.

[Operator]

[Operator Instructions] We'll now take our next question. This is from the line of Jialong Shi from Nomura.

[Jialong Shi, analyst]

I will first ask my questions in Chinese, then I will translate them myself. [Foreign Language]So, I just asked 3 questions to the management. The first question is a follow-up question on the buyback. Just wonder if we should expect the company, VIPS, to continue to top up the buyback program when we carry a USD 500 million plus million buyback authorization fully utilized. And also just wonder if management can provide some rough ideas, what is the size of buyback company may consider or company Board may consider on an annual basis?The second question is a follow-up on the management's earlier remark on the gross margin. So, I just wonder if VIPS will be able to maintain the current 23% to 24% gross margin stable going forward?And the third question is about the number of Super VIP members. Just wonder what is the growth, the EBITDA growth of the Super VIP member in this quarter and also the revenue contribution from Super VIP member in Q3?

[Eric Shen, executive]

[Interpreted] Okay. First, on the buyback, we still have $500 million left in our existing buyback program, and we will continue to execute that. The Board is very supportive of the current buyback plan. And the [ new practice as seen ] in the past is that we are close to fully utilizing the buyback -- the current buyback program. We will ask the Board for the approval of the next buyback program. As the Board and the management has reached a consensus on the buyback, especially given the share price is still deeply undervalued, we will continue to approve new buybacks as soon as we finish that or even during the process.As to how we are going to execute the buyback program, it's too much detail. You just have to remember that we will be executing the buyback program from time to time and on a continuous basis. On the GP margin, we have reached a 3-year high of over 23%. But as we mentioned earlier, there is not so much room for us to further expand our GP margins because we are not going to increase the take rate for brand partners. Instead, we are going to incentivize them to grow their business faster with Vipshop. So, there is not too much room for us to improve gross margin. But for the next year, the gross margin will be maintaining at similar level as compared to 2023, especially in the quarters with relatively good gross margins. And I've also mentioned that on NP margins, we still have a good chance of expanding that because of the economy of scale and operating leverage. We are pretty confident on that.On SVIP, we currently have 6.7 million active SVIP customers, accounting for 45% of our online spending. And they have maintained double-digit growth for several quarters so far, and all the operating metrics for SVIP members are outperforming, including ARPU, frequency, et cetera. So, we will continue to focus our efforts on maintaining the SVIP customer base, and elevating their loyalty and trust with our platform so that they can spend much more for the longer term.

[Mark Wang, executive]

Okay. This is Mark. Jialong, I will give some supplement comments regarding your question for the share buyback. And we would like to create and return value to our shareholders, and we have confidence in our long-term growth prospects. Therefore, we will execute the share buyback program from time to time, and we do not have accurate target volume or amount for the share buyback every quarter. But I think one thing is that we have USD 1 billion share buyback program lasting for 2 years, okay? I think that can give you a concept regarding your question, okay? That's all. Yes.

[Operator]

Due to time constraints, that concludes today's question-and-answer session. At this time, I will turn the conference back to Jessie for any closing remarks.

[Jialong Shi, analyst]

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

[Operator]

Thank you. That does conclude the conference for today. Thank you for participating, and you may now disconnect.[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]