Vipshop Holdings Ltd

NYSE:VIPS

Earnings Call Analysis

Vipshop Reports Declining Revenues with Focus on Long-Term Growth

In the third quarter of 2024, Vipshop's total net revenue dropped to RMB 20.7 billion from RMB 22.8 billion. Gross profit also saw a decline, reaching RMB 5.0 billion, but gross margin slightly improved to 24.0%. Despite facing challenges in discretionary spending, the company reported an 11% year-over-year growth in active SVIP customers, who now account for 49% of online spending. Looking ahead, Vipshop anticipates Q4 revenues between RMB 31.2 billion and RMB 32.9 billion, reflecting a potential decline of 10% to 5%. For 2025, the outlook remains uncertain, but margins are expected to remain stable.

Navigating Challenges with Diligence

In the third quarter of 2024, Vipshop demonstrated resilience amidst adverse market conditions. The company reported total net revenues of RMB 20.7 billion, down 9.2% year-over-year from RMB 22.8 billion. This decline highlights ongoing challenges consumers face as discretionary spending tightens due to economic headwinds. Nevertheless, the outlook reflects careful adjustments in operations, indicating a determination to adapt and succeed.

Strong Member Engagement Despite Challenges

Vipshop recorded solid growth in its Super VIP (SVIP) customer segment, with active SVIP members increasing by 11% year-over-year, contributing approximately 49% of total online spending. This successful engagement suggests that Vipshop's value proposition resonates well with its most loyal customers. The management is focused on maintaining this trend through enhanced customer service and targeted incentives aimed at boosting engagement and spending.

Adjustments to Income Dynamics

The operating income for the third quarter came in at RMB 1.3 billion, slightly lower from RMB 1.5 billion in the prior year, resulting in an operating margin of 6.4%. Meanwhile, net income attributable to Vipshop shareholders dropped to RMB 1 billion from RMB 1.2 billion, marking a net margin decrease from 5.3% to 5.1%. This reflects a mix of reduced revenues and changing consumption patterns, yet the management maintained focus on profitability through disciplined financial management.

A Look at Margins and Performance Improvements

Despite declining revenues, Vipshop achieved a gross margin of 24.0%, slightly up from 23.6% year-over-year, attributed to enhanced sales in higher-margin apparel categories. The operational expenses were optimized, decreasing by 6.1% year-over-year to RMB 3.8 billion. The company continues to identify efficiency opportunities while staying committed to growth through substantial investments in merchandising and customer engagement strategies.

Guidance Amid Challenges

Looking ahead, Vipshop forecasts total net revenues for the fourth quarter to range between RMB 31.2 billion and RMB 32.9 billion, representing a decline of approximately 10% to 5% year-over-year. This cautious outlook takes into account seasonal factors as well as the challenging consumer sentiment, which has yet to experience a meaningful rebound. Management expressed a belief that the current trends may extend into 2025, underlining the uncertainty in predicting significant recovery in GMV (Gross Merchandise Volume).

Commitment to Shareholder Value

Vipshop continues to prioritize shareholder returns with a clear commitment to capital allocation. In the first nine months of 2024, the company repurchased shares amounting to nearly USD 500 million, leaving USD 55.3 million under its existing share buyback program. A new two-year buyback program has been established for up to USD 1 billion, alongside a pledge to allocate at least 75% of full-year non-GAAP net income to share buybacks and dividends to reinforce its commitment to shareholder value.

Technological Innovation for Future Growth

Management emphasized the importance of leveraging technology to enhance customer experience and operational efficiency. Plans are in place to improve search relevance and automate content across platforms, which is expected to drive both growth and efficiency. The commitment to technology as a backbone in retail operations can help sustain Vipshop's market relevance in a highly competitive landscape.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, good day, everyone, and welcome to the Vipshop Holdings Limited Third 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 Third 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, 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 2024 earnings conference call. Our third quarter results largely meet our expectations aimed still caching the customer segment. We moved quickly to adapt our merchandising and operation priorities to external challenges and took concrete measure to find the biggest opportunities for improvement.

Consistent with recent industry trends, third quarter sales decline reflect softer results in our more discretionary categories as consumers are facing growing headwinds, which weigh on their discretionary spend. On the positive note, SVIP membership growth remained strong and at double digits.

In the third quarter, active SVIP customers grew 11% year-over-year results in 49% of our online spending. This reflects that our value proposition is well appreciated by our most valuable customers through the best combination of merchandise, value and service. So today, we remain focused on these long-standing factors that have made us a reliable place to shop and also have been successful in driving top line growth in the past.

We are pushing them forward in a deeper way, being more relevant in merchandising portfolio highlighting even more value throughout our assortment and the increasing customer engagements through our worry-free service. This area has been critically important to ensure we continue to differentiate our experience from others.

Among the business highlights, we continue to emphasize merchandising capabilities. We believe it's the most impactful way to drive long-term growth. Our team demonstrates that they have the skill set to respond to change in customer behaviors and translate it into business results. Merchandising is a better shape. In the third quarter, we built assortments more relevant to customer lifestyle and trend-right category. We leaned into categories with still resilient demand, and we create a better mix of our apparel and the non-apparel products for family shoppers. As a result, we did see strength in categories like sports and outdoor goods and homewear despite the broad-based -- basis weakness.

As we enter the promotional season, we feel good about the size and deep of our supply. We are pleased with the strong inflow of quality brand supply, especially within the deep discount inventory through much more unique product offerings. Some of our long-time brand partners achieved record sales with us through our major promotion channels like super Super Brand Day and Super Category Day. Many more brands recognized us as a partner of choice, giving the generally lower cost to serve and higher sales efficiency as well as a growing base of our hard core customers. Within our merchandising, we are also encouraged by the momentum building in our Made for VIP line for customer line products.

In the third quarter, we worked with about 200 brand partners, adding some renowned global brands in womenswear and footwear to the line. Sales from these customized product, extend its solid growth from previous quarters. We see brand partners increasingly embraced Made for VIP, which have proven to be efficient to attract more quality customers and repeat orders. More than half of the Made for VIP sales came from SVIP and other high-value customers. And the majority of their customers actually came back from more purchase in the broader apparel categories.

Turning to customers. We see spending behaviors that are still showing signs of being stretched. Against that backdrop, our team quickly adjusted to focus on providing really good value for them. We prioritized everyday low price and time-limited offers, highlight compelling deal for our SVIP members and provide target incentive for family shoppers who trend to spend on high-frequency categories. Our team is working hard to find more ways to deliver more value for our customers. We also see some early results after we upgrade SVIP privileges like provide sales and special offers, which have carried on for a few quarters. Through both online access and ground events, they are clearly reinforce the trust and loyalty of SVIP members. We are planning these events to stay better aligned with customer interest and problems to best meet their multiple needs.

As it's related to strengthening our business for the future, we continue to experiment and deploy technology in the wide range of user base. One focus is to improve the relevancy and accurate search and recommendations so that customers of the different intent are more likely to browse and shop across categories. The other is to leverage AI capabilities to automize contents all kinds to help customers find and buy what they are looking for. We do see opportunities for technology to become an important driver of both growth and efficiency.

Recently, we started to see some marginal strength of customer -- a marginal strength our customer demand. People have shown more willing needs to spend and our customers continue to shop around the holidays and the seasonal momentum. While we are doing our best to get back to growth with customer spending yet to fully recover in the discrete portfolio. We are laser focused on the long-term strategy that are pivotal to our long-lasting success that has always been a firm positioned in discount retail for brands to bring in the best of brand partners and to create great value for customers.

We are driving necessary change in the more aggressive way so that we have all the right building blocks to compete and win. And through it all, we remain delighted on if -- we remain diligent on execute the retail fundamentals our customers expect from us and respond to their consumption shift in the timely manner. This request specialize and elaborate efforts in merchandise standout strengths we are continuing to build on. We believe this will help us increase the apparel of our platform and ensure an engaging experience that keeps Vipshop top of mind in the very dynamic market.

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. In the third quarter, we maintained disciplined financial management throughout the organization and delivered solid profitability against a weak top line performance. Gross margin of 24.0% was driven by a small benefit from the increased contribution from the higher-margin apparel categories as well as other revenues on a year-over-year basis.

This was more than [ offset ] by the deleveraging impact of lower revenue and continued investment in our team. As a result, on the bottom line, non-GAAP net margin attributable to Vipshop's shareholders came in at 6.3%, which was lower year-over-year but within our expected range. Thanks to our team's meticulous efforts to identify efficiency opportunities.

Looking at the still challenging environment. We are laser focused on our long-term road map to bring the business back into positive territory. We continue to invest in our merchandising capabilities, delve deeper category by category, to add quality and value that best satisfy customer needs, while reallocating resource to maximize impact on customer mind share and engagement. And we're always capable of moving these initiatives with a clear picture of their financial implications. We believe we are more integrated in operations now to create a better balance of our focus on sales and profitability.

Turning to capital allocation. Our priorities have remained consistent. In addition to prudently invest in our own business and projects that meet our strategic and financial criteria, we look to support our shareholder return and build on our track record of consistency. In the first 9 months of 2024, we have repurchased a total of nearly USD 500 million with USD 55.3 million left in the existing USD 1 billion share repurchase program. Also, we have a new 2-year buyback program of up to USD 1 billion in place. And as a reminder, for 2025, we plan commit no less than 75% of our full year non-GAAP net income attributable to Vipshop shareholders through discretionary share repurchase and the 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 change year-over-year unless otherwise noted. Total net revenue for the third quarter of 2024, for RMB 20.7 billion compared with RMB 22.8 billion in the prior year period. Gross profit was RMB 5.0 billion compared with RMB 5.4 billion in the prior year period. Gross margin increased to 24.0% from 23.6% in the prior year period. Total operating expenses decreased by 6.1% year-over-year to RMB 3.8 billion from RMB 4.0 billion, in the prior year period.

As a percentage of total net revenues, total operating expenses was 18.2% compared with 17.6% in the prior year period. Fulfillment expenses decreased by 2.0% year-over-year to RMB 1.7 billion from RMB 1.8 billion in the prior year period. As a percentage of total net revenues, fulfillment expenses was 8.4% compared with 7.8% in the prior year period. Marketing expenses decreased by 7.7% year-over-year to RMB 617.8 million from RMB 669.6 million in the prior year period. As a percentage of total net revenues, marketing expenses were 3.0% and compared with 2.9% in the prior year period.

Technology and content expenses increased by 4.3% year-over-year to RMB 454.2 million from RMB 435.3 million in the prior year period. As a percentage of total net revenues, technology and accounting expenses was 2.2% compared with 1.9% in the prior year period. General and administrative expenses decreased by 15.3% year-over-year to RMB 957.8 million from RMB 1.1 billion in the prior year period. As a percentage of total net revenues, general and administrative expenses decreased to 4.6% from 5.0% in the prior year period. Income from operations was RMB 1.3 billion compared with RMB 1.5 billion in the prior year period. Operating margin was 6.4% compared with 6.7% in the prior year period. Non-GAAP income from operations was RMB 1.7 billion compared with RMB 2.1 billion in the prior year period.

Non-GAAP operating margin was 8.2% compared with 9.1% in the prior year period. Net income attributable to Vipshop shareholders was RMB 1.0 billion compared with RMB 1.2 billion in the prior year period. Net margin attributable to Vipshop shareholders was 5.1% compared with 5.3% in the prior year period. Net income attributable to Vipshop's shareholders per diluted ADS was RMB 1.97 compared with RMB 2.19 in the prior year period.

Non-GAAP net income attributable to Vipshop shareholders was RMB 1.3 billion compared with RMB 1.8 billion in the prior year period. Non-GAAP net margin attributable to Vipshop shareholders was 6.3% compared with 8.1% in the prior year period. Non-GAAP net income attributable to VIP shareholders per diluted ADM was RMB 2.47 compared with RMB 3.33 in the prior year period. As of September 30, 2024, the company had cash and cash equivalents and the restricted cash of RMB 22.5 billion and short-term investments of RMB 1.6 billion.

Looking forward to the fourth quarter of 2024, we expected our total net revenues to be between RMB 31.2 billion and RMB 32.9 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] The questions come from the line of Thomas Chong from Jefferies.

[Thomas Chong, analyst]

[Foreign Language] My question is about the recent consumer sentiment after recent government supportive measures. Can management share about the monthly GMV trend in Q4 as well as our expectation on 2025 outlook from the perspective of GMV and margin. Given our solid margin profile seen in Q3, in particular, 24% of the GP margin, how should we think about the outlook in 2025? And when should we expect our GMV back to positive year-on-year growth trends?

[Eric Shen, executive]

[Foreign Language]

[Jessie Fan, executive]

[Interpreted] Okay. First of all, the recent business trends quarter-to-date, I think we have been into the quarter for over 50 days. And October was really good, but that was apparently because of the much earlier Double 11 promotion, which leads to some front load of consumption. And if we add October and November to date, we are still within the guidance.

In terms of consumer sentiment, of course, the government sponsored the trading programs launched towards the end of September do give us some boost to our certain categories in electronics and home appliances. But since we are primarily focused on apparel categories, we are not very key beneficiary of such programs. And overall sentiment may have bottomed out following the recent stimulus package, but still, it's a rather rational environment to us. We are still seeing -- customers are still showing signs of being stretched. They are making trade-offs in family budgets, looking for value, focusing on essentials and delaying purchases until the mid of moment.

So we haven't seen a very meaningful recovery in consumer sentiment as compared to prior quarters. And lastly, on 2025 outlook, we do believe that it's -- we think it's pretty unpredictable. We were going to plan our business cautiously. It depends on a number of factors, whether macro is going to have better recovery, whether consumer confidence is going to pick up. And there are a lot of uncertainties. But so we think probably the trend we are seeing in Q4 would be brought forward into a part of 2025. But we are doing our best to get back to growth, especially in terms of GMV as compared to a small decline for GMV in 2024.

And on margins, I think there not too much to worry about. We are focused on growing profit dollars. I think in terms of absolute dollar amount and or also on the margin side, we should be able to maintain relatively stable levels. And on cost and expenses, we are going to be -- continue to be very disciplined. And there could be some changes to certain cost and expenses structure, but it should be not a big swing from what we have done for 2024. That's all.

[Operator]

The question's come from the line of Alicia Yap from Citigroup.

[Alicis a Yap, analyst]

[Foreign Language] So my question is just to follow up on overall the Singles Day performance and also the 4Q guidance. So just wondering, during the Singles Day period that 30-plus days, is that you're actually able to achieve a positive growth during the Singles Day period? And then in terms of your guidance, is that conservative because you wanted -- not too sure about how the December trends. So that's why you're providing that 5%, 10% decline because the visibility in December are not sure. And then also on the return rate. So if you can compare the return rate for Singles Day versus last year's Singles Day and versus this year June 18?

[Eric Shen, executive]

[Foreign Language]

[Jessie Fan, executive]

[Interpreted] Okay. First of all, as to Double 11 performance, I think most of the platforms that are comparing it on a full cycle basis. Basically, we did 28 days of promotions as compared to roughly 20 days last year. And on this full cycle basis, we are doing very well. We are also doing very well with GMV over 20% growth for sure. And also customer and revenue metrics are exceeding our expectations. But if we look at it on an apple-to-apple basis, just comparing the 20 days of the promotional campaigns.

Actually, it's just in line with our expectations. We think Q4 is still a challenging quarter, and we give our guidance on a relatively conservative basis. And one factor is also -- is about whether. We do have a very high base on -- of -- especially in last Q4, we had actually extended a period of [ cold ] wins, which benefited our business unexpectedly. So this year, apparently is not going to be as cold as last year. And so we [ based ] this net quite -- this weather factor into our guidance -- Q4 guidance as well. That's why we think Q4 is going to be a little bit challenging.

And lastly, on return rate because we have a very stable return policy and also services for like 5 to 6 years. And our return rate has been driven in our case, mostly structural factors like apparel contribution and SVIP contribution, et cetera. So basically, a return rate during the Double 11 is actually are trending in line with our expectations, just adding 2 percentage points in terms of return rate not like in the case of other platforms who had a sudden change in their return policy, which lead to extremely high return rate.

[Operator]

The question's come from the line of Ronald Keung from Goldman Sachs.

[Ronald Keung, analyst]

[Foreign Language] Just 2 questions. One is your gross margins reached record high in the third quarter. Last year, fourth quarter gross margins were even higher. Just how should we think about the apparel mix, which usually is good for gross margin and the outlook for gross margins for 4Q.

Second is your profit decline was wider than operating profit and seemingly a 30% increase in tax expenses. Is that related to our transfer of cash onshore to offshore to financial returns? How should we think about this income line outlook?

[Eric Shen, executive]

[Foreign Language]

[Jessie Fan, executive]

[Interpreted] So in terms of our GP margin outlook, I think for Q3 we had 24%, which was driven by a small benefit from apparel contribution and also higher other revenue. But looking into Q4, as you know, we continue to invest to grow. So especially given the current competitive environment, if we see an opportunity to invest a portion of our current profit margin to gain sustainable growth in dollars, we would do that.

So for GP margin in Q4, we expect it to be marginally lower than Q3, but it should be well within the range of 23%.

[Mark Wang, executive]

Okay. Okay. And regarding the first question, you talked about the gross margin, let me give you some supplementary comments. For the third quarter, the gross margin expansion was primarily driven by the following reasons. The first one is the higher-margin apparel categories, which had a higher contribution year-over-year. The second one is we have many cost-saving initiatives to improve gross margin, including optimized merchandising portfolio, well-managed customer incentive and so on.

The third is higher contribution from higher-margin other revenues. That because the other revenues, we also booked some of the like Shan Shan Outlets revenue, which is recognized as net revenue approach. That means we recognized net -- recognize rental income for Shan Shan Outlet income. So that means the gross margin is higher, which was booked in the other revenues, okay?

So that is main 3 reasons for the gross revenue higher than before. And for your second question, that's a very good question. Just regarding the effective tax rate, non-GAAP expenses. Jessie mentioned that we distribute some of the dividends from the entities in the China Mainland, to the entities in Hong Kong. The reason is that we need to do the share buyback, as we mentioned before, Okay. This quarter, we remit around RMB 3.5 billion. So that means we have -- we have RMB 175 million withholding income tax expenses. Okay. So exclude the factor, I mean, withholding income tax expenses, the ETR would have been around 17% to 18%. I think for the long term, exclude the withholding income tax impact, the EPR could be still around 17% to 18%.

[Operator]

The question's come from the line of Roger Duan from Barclays.

[Lianxiu Duan, analyst]

[Foreign Language] I'm going to translate myself. I have 2 questions. First, for third quarter, can management share in terms of different product categories do we see any difference in terms of performance because it looks like apparels have grown in terms of GMV contribution in third quarter? And my second question is on SVIP users. Can management share whether we have seen any changes in consumer behavior during the quarter in terms of shopping frequency or average bucket size?

[Eric Shen, executive]

[Foreign Language]

[Jessie Fan, executive]

[Interpreted] Okay. First, on Q3, category-wise, we see apparel have a small decline in terms of GMV, while standardized items had a bigger decline, but it's not worsening as compared to prior quarters. And still it's because of the competitive competition on price advantage by other platforms. And with that, we are making series of adjustments and especially we are giving out some limited and targeted incentives. For example, for family of shoppers to increase their chance of doing shopping across different categories, especially in daily essentials.

And we are seeing some early results from that, and we hope that we would gradually narrow the loss from standardized items. And on SVIP, we are seeing a very solid momentum. We had 7.5 million active Super VIP customers in Q3, which accounted for roughly 49% of our online spending. In terms of customer base, that was 11% growth year-over-year.

And apparently, new SVIP customers for the quarter, it takes time for them to ramp up their frequency and therefore, ARPU. So they have, to some extent, a dilutive effect on the whole SVIP base. But if we look at the same cohort, for example, the 2-year SVIP customers, we see their performance are actually relatively stable, but we do see a small decline in ARPU but that was primarily driven by frequency -- less frequency and average ticket size remained gradually stable. Apart from that, we actually don't see any additional loss of consumer health as to SVIP customers.

[Operator]

The question's come from the line of Jialong Shi from Nomura.

[Jialong Shi, analyst]

[Foreign Language] I have 2 follow-up questions. The first question is about the decline in the ARPU for SVIP member, just trying to get more color from management. What were the possible reason for the decline in the ARPU for -- or average spending for SVIP member? The second question is about the trading subsidies funded by the government.

Just wondering if any of the VIPS business benefited or will likely be benefited from this trading subsidy scheme?

[Eric Shen, executive]

[Foreign Language]

[Jessie Fan, executive]

[Interpreted] So for SVIP customers, we do realize that they have a small decline in frequency even for the same cohort of customers. We are making a lot of efforts to increase engagement with SVIP customers. For example, we are planning to lower the bar for SVIP customers in terms of membership privileges, for renewal and for new customers who first -- who become SVIP member for the first time.

And we are also planning to cover the additional 5% of discount to more brands and merchants. We are launching a lot of online and also ground events such as private sales and special offers to reinforce the trust and loyalty from our SVIP customers. And I think the essence of this SVIP enhancement program is intended to, one, is to increase their retention and also repeat orders.

And second is to find more opportunities for cross-category purchases, especially for family shoppers because most -- a majority -- most of the SVIP customers actually do have very strong trust and loyalty in Vipshop. And if we provide a great combination of product, value and service, they wouldn't hesitate to shop with us more often. And that's for SVIP customers.

And for trading programs for our offline outlets, actually, we -- the primary business is still on apparel category. So we barely benefit from the trading program. And for online, business, we expect there should be a couple -- a few million -- a few hundred million ranging from RMB 400 million to RMB 500 million additional sales from trading programs. This is not meaningful enough to drive our GMV or revenue. It could be that our platform is still more recognized by customers as a great place to shop for apparel and accessories instead of electronics and home appliances.

Having said that, we are moving -- we are trying to cooperate with the government departments to see whether they would be willing to extend the trading programs to other categories. Of course, it hasn't expanded to apparel categories for now, but we do see the opportunities if the trading program extend to additional categories, we should be benefiting from that.

[Operator]

Due to the time constraint, this concludes today's Q&A session. At this time, I'll turn the call 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 all for participating. You may now disconnect your lines.