Vipshop Holdings Ltd

NYSE:VIPS

Earnings Call Analysis

Resilient Growth and Solid Profitability

In 2023, we surpassed RMB 200 billion in annual sales, driven by a 24% year-over-year increase in apparel. Our platform saw active Super VIP members rise by 14%, contributing 46% to online spending. Q4 net revenues grew by 9.2% to RMB 34.7 billion with operating income up by 46.2% to RMB 3.7 billion, lifting the operating margin to 10.6%. Net income to shareholders rose by 32.2%, hitting RMB 3.0 billion and pushing the net margin to 8.5%. We're initiating a USD 250 million cash dividend for 2023 and project Q1 2024 revenues to potentially grow up to 5%.

Vipshop Caps Off 2023 with Record Sales and Robust Profitability

Vipshop, a leading discount retailer, wrapped up 2023 on a strong note, exceeding expectations with apparel driving a 29% year-over-year growth in Q4 Gross Merchandise Value (GMV). The full year saw a 24% increase, helping the company surpass RMB 200 billion in annual sales for the first time. A noteworthy highlight is the performance of high-value customers, particularly Super VIP members, who not only grew by 14% but also contributed to 46% of the online spending.

Strategic Focus and Expansion

The company's steadfast commitment to discount retail for brands, coupled with agile adaptation to market changes, has led to a diversified brand portfolio, introducing over 1,500 new brands in one year. This expansion further solidified its position as the go-to platform for value-conscious apparel shoppers. Vipshop's dedication to authenticity and customer-centric operations distinguish it firmly in the market.

Historical Profitability and Shareholder Return

Significantly, 2023 marked Vipshop's most profitable year, setting all-time highs in both quarterly and annual non-GAAP operating and net profit margins. Complementing its financial success, the company announced an annual cash dividend policy and a plan to distribute approximately USD 250 million in cash dividends for the fiscal year, reflecting confidence in sustained growth and shareholder value.

Financial Performance Highlights

For Q4 2023, Vipshop reported a 9.2% increase in total net revenues year-over-year, rising to RMB 34.7 billion. Gross profit soared by 19.3%, while gross margin improved to 23.7%. The company managed to reduce operating expenses from 14.6% to 14.0% as a percentage of total net revenue. For the entire year, Vipshop's income from operations grew a substantial 46.9%, with net income for shareholders increasing by 28.9%. These figures reflect a robust financial performance despite challenges.

Outlook for Q1 2024

Looking into the first quarter of 2024, Vipshop expects total net revenues to range between RMB 27.5 billion and RMB 28.9 billion, suggesting a cautious year-over-year growth projection of 0% to 5%. This conservative forecast underscores the company's awareness of prevailing market and operational conditions.

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, good day, everyone, and welcome to Vipshop Holdings Limited Fourth Quarter and Full Year 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 Fourth Quarter and Full Year 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 fourth quarter and full year 2023 earnings conference call. We delivered a strong finish to the year of 2023 with a set of results well ahead of expectations. This has been achieved with the successful execution of our merchandising strategy to see the opportunities in value spending amid strong seasonal demand. In the fourth quarter, apparel categories were once again the bigger driver with a 29% growth in GMV year-over-year.For the full year, apparel categories have been consistently outperforming the industry average, up 24% from a year ago. That helped us close RMB 200 billion in total annual sales for the first time in our history. We also gained strong momentum with high-value customers. In the fourth quarter, active Super VIP members increased by 14% from a year ago and accounted for 46% of our online spending. On an annual basis, we had 7.6 million active Super VIP members who purchased 45% on our platform.Our strategy is simple. It's to be laser focused on discount retail for brands. We embrace change and focus on retail fundamentals. We are consistently adept so that customers can find desired brand, seek great value and enjoy wallet-free service with us. That's how we try to gain further mind share when customers feel like shopping for clothing they would come to us first.On merchandising expansion, we did well to enrich and diversify our brand portfolio. Our team brought in over 1,500 new brands last year, covering more trendy and high-end brands. A majority of apparel-related sales came from the several hundred core brands who took advantage of our -- further, the channel like Super VIP -- like Super Brand Day, Super Category Day and Today's Top brands, which all hit record highs in sales last year. New brands also ramped up sales quickly, leveraging our target support from traffic allocations, customer engagement through promotional campaigns.Our merchandising team is more skilled through our Internal Certificate program. They demonstrate the expertise to identify, select and the negotiation for quality brand goods at a deep discount across the wider range of categories. They build strong relationships as they worked closely with brand partners to address their business needs and challenges. We now have a talent pipeline ready for more opportunities to differentiate our product offering.On Made-for-Vipshop brand partners are happy to deepening their collaboration with us after they see meaningful sales contribution. Currently, we have over 150 brand partners in this program that provides a unique supplement to our value offering within trending category and a certain price range. Giving value is top of mind with most everyone right now, being able to deliver affordable experience every day, differentiate us in the market. The key is to better leverage merchandising capability to provide efficient and cost-effective inventory solution for brand partners. This have been and will continue to be the foundation for us to secure increased supply at competitive pricing, especially in unique and customized products.Lastly, we stay true to being customer-centric. We are making shopping easy for customers, taking a simple, clear and direct way to interact with them. Also leveraging the first-party model, we are gaining trust from customers who rely on us to bring them great brands and the real value. We continue to enhance product authenticity through upgrade supply chain management from all aspects. This also differentiates us in an environment where everyone is touting lower pricing. We are happy to see customers coming back and spend more because of trust, value and ease. They will enjoy here. There is still a lot of potential in growing customer wallet share and the loyalty program has been at the heart of it.Last year, Super VIP members renewed at high [ rent ] and they spend a lot more with us with average spending over 8x as much as non-SVIP members. When we look at our business today, we now have a more compelling foundation. We believe our business model is [indiscernible] one that allow us to reinforce the value propositions that are most relevant to our brand partners and customers. We will continue to be pragmatic, efficiency and flexible to fuel the long-term growth.At this point, let me hand over the call to our CFO, Mark Wang, to go over our financial results.

[Mark Wang, executive]

Thank you, Eric, and hello, everyone. We delivered another quarter of solid financial performance, ending 2023 as the most profitable year in our history. We are very pleased with the progress we have made over the past years in upgrading out our platform from all aspects. We are acting faster, pushing forward company priorities and building greater synergies. This has been the foundation for us to regain growth momentum while achieving impressive profitability.Benefiting from a number of efficiency improvement initiatives, gross margin improved quarter-by-quarter and on an annual basis reached the highest level since 2017. Operating and net profit margin on a non-GAAP basis is all-time highs, both quarterly and annually. With such healthy financial conditions, in addition to the existing buyback program, we are pleased to announce the annual cash dividend policy and approximately USD 250 million cash dividends for the fiscal year of 2023. This reflects our confidence in future growth and earnings as well as our long-term commitment to delivering returns to shareholders. Looking ahead, we are clear about the strategic initiatives while investing in areas that can better engage with brand partners and customers. We will continue to maintain operating discipline to drive organic and profitable growth.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, unlike otherwise noted.Total net revenues for the fourth quarter of 2023 increased by 9.2% year-over-year to RMB 34.7 billion from RMB 31.8 billion in the prior year period, mainly attributable to the growth in active customers and spending driven by the recovery in consumption of discretionary categories.Gross profit increased by 19.3% year-over-year to RMB 8.2 billion from RMB 6.9 billion in the prior year period. Gross margin increased to 23.7% from 21.7% in the prior year period.Total operating sales increased by 4.8% year-over-year to RMB 4.9 billion from RMB 4.6 billion in the prior year period. As a percentage of total net revenue, total operating expenses decreased to 14.0% from 14.6% in the prior year period.Fulfillment expenses increased by 17.0% year-over-year to RMB 2.5 billion from RMB 2.2 billion in the prior year period. As a percentage of total net revenues, fulfillment expenses were 7.3% as compared with 6.8% in the prior year period.Marketing expenses decreased by 10.7% year-over-year to RMB 843.2 million from RMB 944.1 million in the prior year period. As a percentage of total net revenue, marketing expenses decreased to 2.4% from 3.0% in the prior year period.Technology and content expenses increased by 21.5% year-over-year to RMB 496.4 million from RMB 408.5 million in the prior year period. As a percentage of total net revenues, technology and content expenses was 1.4% as compared with 1.3% in the prior year period.General and administrative expenses decreased by 11.7% year-over-year to RMB 1.0 billion from RMB 1.1 billion in the prior year period. As a percentage of total net revenues, general and administrative expenses decreased to 2.9% from 3.6% in the prior year period.Income from operations increased by 46.2% year-over-year to RMB 3.7 billion from RMB 2.5 billion in the prior year period. Operating margin increased to 10.6% from 7.9% in the prior year period.Non-GAAP income from operations increased by 42.5% year-over-year to RMB 4.0 billion from RMB 2.8 billion in the prior year period. Non-GAAP operating margin increased to 11.4% from 8.7% in the prior year period.Net income attributable to Vipshop's shareholders increased by 32.2% year-over-year to RMB 3.0 billion from RMB 2.2 billion in the prior year period. Net margin attributable to Vipshop shareholders increased to 8.5% from 7.0% in the prior year period. Net income attributable to Vipshop's shareholders per diluted ADS increased to RMB 5.35 from RMB 3.66 in the prior year period.Non-GAAP net income attributable to Vipshop's shareholders increased by 43.4% year-over-year to RMB 3.2 billion from RMB 2.2 billion in the prior year period. Non-GAAP net margin attributable to Vipshop's shareholders increased to 9.2% from 7.0% in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS increased to RMB 5.79 from RMB 3.65 in the prior year period.As of December 31, 2023, we had cash and cash equivalents and restricted cash of RMB 26.3 billion and short-term investment of RMB 2.0 billion.Now, I will briefly walk through the highlights of our full year results. Total net revenues for the full year of 2023 increased by 9.4% year-over-year to RMB 112.9 billion from RMB 103.2 billion in the prior year.Gross profit increased by 19.0% year-over-year to RMB 25.7 billion from RMB 21.6 billion in the prior year. Gross margin increased to 22.8% from 21.0% in the prior year.Income from operations increased by 46.9% year-over-year to RMB 9.1 billion from RMB 6.2 billion in the prior year. Operating margin increased to 8.1% from 6.0% in the prior year.Non-GAAP income from operations increased by 43.3% year-over-year to RMB 10.6 billion from RMB 7.4 billion in the prior year. Non-GAAP operating margin increased to 9.4% from 7.2% in the prior year.Net income attributable to Vipshop's shareholders increased by 28.9% year-over-year to RMB 8.1 billion from RMB 6.3 billion in the prior year. Net margin attributable to Vipshop's shareholders increased to 7.2% from 6.1% in the prior year. Net income attributable to Vipshop's shareholders per diluted ADS increased to RMB 14.42 from RMB 9.83 in the prior year.Non-GAAP net income attributable to Vipshop's shareholders increased by 39.1% year-over-year to RMB 9.5 billion from RMB 6.8 billion in the prior year. Non-GAAP net margin attributable to Vipshop's shareholders increased to 8.4% from 6.6% in the prior year. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS increased to RMB 16.90 from RMB 10.67 in the prior year.Looking forward to the first quarter of 2024, we expect our total net revenues to be between RMB 27.5 billion and RMB 28.9 billion, representing a year-over-year increase of approximately 0% 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] Your first question comes from the line of Alicia Yap from Citigroup.

[Alicis a Yap, analyst]

Can you hear me? Hello?

[Jessie Fan, executive]

Yes, we can.

[Alicis a Yap, analyst]

Can you hear me? Okay. All right. Congrats on the really strong results. I have a couple of questions. First is, do you anticipate most of the future growth will come from the higher frequency and higher wallet spend on the existing loyal customer, given there is some cautiousness on consumer spending in China? Are you worry any potential slowdown of the growth if your loyal customer base started to shop more -- I mean, shop less frequently and spend at a smaller amount? Just wondering if you have any plans or target for new user acquisition strategy?[Interpreted]

[Eric Shen, executive]

[Interpreted] Okay. First, on the loyal customer base, actually, I think our loyal customer group has been quite resilient in terms of spending from the trend we have observed in the last couple of years, especially for our high-value customers, that is Super VIP members. Their contribution in turn to our total spending has been increasing to 45% in 2023. And for 2024, we continue to expect that SVIP contribution will continue to grow very nicely.In addition to driving the contribution of spending, we have also noticed that their ARPU trend has been going quite well up are driven mostly by frequency, and we still think there is a lot of potential in driving the frequency of SVIP members. And we only have a 7.6 million annual active SVIP members. And we have a lot more with high potential in terms of spending to be converted into SVIP members. Actually, non-SVIP members, especially those high potential customers have become the most productive channel for us to acquire Super VIP members.And in terms of new customer acquisition, we think we still have a lot of potential. Actually, if you look at our annual active customer base in 2023, it hasn't lived up to our expectations. We think we can do better this year. We are tapping the potential in many -- on many fronts to see whether we have to better leverage our value proposition in branded discount retail to increase customer mind share of Vipshop. We will take a number of initiatives in driving new customer growth.For example, in addition to the traditional channels, so we will look at some emerging and new channels that we haven't been working closely with, and we will continue to focus on targeting marketing mobile pre-installation, and we will also do some branded advertising. We will just take as many initiatives as possible to see whether we can better drive customer growth.And for general consumption environment, we are actually not very concerned, especially for our customer base for those high-value and the Super VIP members, because customers come to Vipshop, the average order size is not that high. It ranges from RMB 200 to RMB 300. We think that's an affordable range of price. So we are not too much concerned on that front. We think we -- as long as we focus on the branded discount retail, we can do better in terms of driving customer growth and also customer wallet share.

[Operator]

Your next question comes from the line of Eddy Wang from Morgan Stanley.

[Eddy Wang, analyst]

[Interpreted] I have 3 questions. The first one is that if you look at product sales per order, we find that in the fourth quarter last year, actually we see a year-over-year increase. This trend actually is a little bit different from the first 3 quarters in last year, which we see a decline in the trend. So what's the reason behind that, especially given the overall consumption background is more focused on the consumption downgrade?And my second question is, if you look at the sales and marketing expense in the fourth quarter last year, actually in absolute dollar term is lower than that in the second quarter of last year. This is quite sudden if you look at historical of the company. So I'm wondering what's our -- the expectation for sales and marketing spending in 2024?And the last question is, if you look at the growth gap between GMV and the revenue, in fourth quarter, actually, the gap is widening if you compare with the first 3 quarters. So I just wonder, is there a significant change in terms of the return rates? Or is there any other reason behind that?

[Eric Shen, executive]

[Interpreted] Okay. On your question about average order size, actually, average order size has been relatively stable. And in Q4, we did see a slight increase on a year-over-year basis, primarily because we sold more winter clothing, which have higher ticket size, especially when a lot of people in cold weather they would buy a higher ticket size down jackets, et cetera. So that's the primary reason behind the increase in average order size. And this also reflects that actually on our platform, there is not very significant sign that we have so-called consumption downgrades, at least, the loyal and highly engaged customers with our platform, we have seen their average ticket size relatively stable or quite resilient and ARPU has been growing very nicely. So that's how we benefit from the very resilient consumption trend among our customer cohorts.In terms of sales and marketing expense, in Q4, because we had -- we did much better than expected in terms of sales. That brought the sales and marketing expense ratio down a little bit. And actually, for this line, our sales and marketing spend will be -- continue to be relatively stable. Of course, we want to spend prudently, especially to acquire more high-quality customers in 2024, but we will continue to look at the effectiveness and the efficiency of customer acquisition from a number of perspectives, including LTV, ROI, payback period, et cetera.So sales and marketing expense ratio will continue to be very manageable and we will continue to spend in a rational way to spend on those channels who can provide the best ROI. So basically, we don't worry too much about the sales and marketing spend and it's going to be very limited as a percentage of total revenue.On return rates, for the last year, return rates have been growing on a year-over-year basis. We think we did see a 3 percentage point to 4 percentage point growth in return rates. But we have mentioned this before, return and exchange services, it is a part of our value proposition to provide the best-in-class services to our customers and is building in our profitability model, it hasn't been impacting our profitability levels for the past several quarters.And the return rates are trending a little bit higher because a number of factors. One is apparel contribution. In the last couple of years, we have seen apparel contribution growing our platform and apparel, as you know, they naturally have higher return rates. And second, our return and exchange has become a standardized practice within the industry. And a lot of customers are taking Vipshop as a fitting room. And the more they try, actually, the more likely they will buy. So it's not only us. And as far as we know, the return rate within the industry is actually growing. That's the reality.And lastly, although we don't have accurate information about that, it's just our guess, we think that consumers are becoming more cautious and selective in terms of their spending. They want to spend money only on those essential pieces that they need. So that might be one of the reasons that return rate is going higher.

[Operator]

We will take our next question. Your next question comes from the line of Ronald Keung from Goldman Sachs.

[Ronald Keung, analyst]

[Interpreted] I have 2 questions. One is, I want to hear how our trends have been for the first quarter so far, January and February as a whole? And how do we see demand tracking since Chinese New Year? And how should we think about the gap between GMV and revenue for 2024 compared with the big gap in 2023?Second is shareholder return. I've seen USD 1 billion free cash flow. We haven't done too much buybacks in the past 2 quarters. Now we have a USD 250 million of regular dividends. So what is the plan for, let's say, the remaining free cash flow? Is there any room for further shareholder return?

[Eric Shen, executive]

[Interpreted] Okay. First, on your Q1 guidance, actually quarter to date, we have seen a business -- have seen decent business momentum. In January, actually benefiting from a very favorable weather because at that time, it was still quite cold. So our business performance was really quite well, quite good. And we continue to see a recovery following the spring festival. Until recently, we've seen that our sales have been ramping up relatively slower than expected because of the unexpected weather conditions, sometimes very cold and which actually delay to some extent, the seasonal shift to spring apparel. But overall, we think Q1 will continue to be another quarter of relatively stable growth.And in terms of the revenue and GMV growth gap, for this year, we continue to expect a slightly higher return rate because of the still higher apparel contribution as well as SVIP contribution. The return rate is not going to be significantly higher as we saw in -- as we saw for 2023, we expect at most it's going to be 1 percentage point to 1.5 percentage points higher, which means that there is a chance that we can narrow the revenue and the GMV growth gap to some extent.

[Mark Wang, executive]

Okay. For second question, let me answer your question. And thanks for your question regarding the cash dividends and also the share buyback programs. And actually, we have been focusing on long-term capital policy and the combination of the annual dividend and buyback reflects our confidence in long-term growth and profitability as well as our long-term commitment to create value to our shareholders.Regarding the total amount of the dividend, we considered multiple factors, such as working capital for business development, CapEx, profitability and cash flow. The dividend amount will be reviewed and determined annually. Well, as to buyback, we have repurchased a total of nearly USD 2 billion from April 2021 to the end of 2023. The existing USD 1 billion buyback program, which is effective through March 2025 has been utilized USD 452 million as of December 31, 2023, and the remaining parts will be executed from time to time, taking into account factors such as price, valuation and marketing fluctuations. So therefore, the cash dividends and the share buyback, I think that's the 2 ways we would like to provide return to our shareholders. And these 2 ways or 2 regimes will implement parallel.

[Operator]

We will take our next question. Your next question comes from the line of Andre Chang from JPMorgan.

[Andre Chang, analyst]

[Interpreted] I have 3 questions for the management. First is we talk about, we will focus more on the user growth this year. Can you elaborate more about where are the area that we can find new users to acquire?Second, we also talk about further improvement on the ARPU. So with the rebounding spending from our loyal user last year, which was easy, what are the drivers for our user to spend more on our platform into 2024?And lastly, we talk about, say, the share buyback will change on the market condition, valuation. It seems that with our cash flow continue to be strong, cash balance increased by the end of last year versus the end of 2022. Does that mean that it's not necessary or we will use our strong cash flow to return to the shareholder? How do we think about that?

[Eric Shen, executive]

[Interpreted] So on your first question on new customer acquisition. In last year, actually, we are -- we invested a lot of channels to acquire new customers to drive the organic growth in new customers, such as targeted marketing on a number of platforms like Douyin, [ Toutiao ], Tencent, as well as mobile pre-installation. This year, we would like to do better in terms of adding new channels, especially to elevate the company brand image through a more brand advertising, especially targeting those customers who are not familiar with Vipshop or who have heard of Vipshop, but have never used. Basically, we want to leverage our branding to increase customer mind share of Vipshop as the best place to shop for apparel, including some emerging and younger channels like Xiaohongshu, Bilibili et cetera, what we think there is still quite a lot of potential there.For the new customers that we have acquired to our platform, we have actually seen the retention is pretty good, which means that the customers we acquired are relatively higher quality. So we think our current -- our customer acquisition strategy doesn't work relatively well. In terms of ARPU growth, last year, we did benefit from favorable weather conditions in some of the season. But we also think that customers have become increasingly recognized the value proposition of Vipshop as a discount platform for branded products and especially through our best-in-class services, you find this is a great place to shop for apparel, especially for women. They tend to not only shop for themselves, but also shop for the whole family, including children, parents, et cetera. They also stopped not only apparel, but also other categories like standardized items.We have seen increasing cross-category purchases among our customers. And this year, we are also in addition to driving the growth of apparel categories. We also want to build a stronger platform for standardized items, so that we can increase the cross-sell opportunities for our high-value customers, especially Super VIP members.

[Mark Wang, executive]

Okay. Regarding the third question for share buyback, I think the track records, which we has already showed our insistence to return value to our shareholders, okay? And for the buyback program, we will definitely evaluate the share price and also whether the market is in fluctuations, okay? For example, in the future, the share price is lower than our expectations, lower than our normal value, okay? So we will -- definitely will do the share buyback continuously from time to time. But that depends on the price and also depends on the other factors.So I think the cash dividends regime is a way to give you a more predictable share value buyback to the shareholders, okay? So in the future, we will have the annual cash dividend policy. And of course, we will evaluate our cash position and also our profitability and also our CapEx, et cetera, to make sure to determine how much money we will distribute to our shareholders. So I think the cash dividend policy is a way to complement our return to our shareholders' policy. Thank you.

[Operator]

Thank you. Due to time constraints, that 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 disconnect.[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]