Vipshop Holdings Limited (NYSE:VIPS) Q4 2023 Earnings Call Transcript

Vipshop Holdings Limited (NYSE:VIPS) Q4 2023 Earnings Call Transcript February 28, 2024

Vipshop Holdings Limited beats earnings expectations. Reported EPS is $5.79, expectations were $0.74. VIPS  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, good day everyone and welcome to Vipshop Holdings Limited’s 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 Zheng: Thank you, operator. Hello, everyone and thank you for joining Vipshop’s 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: 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 RMB200 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 adapt, so that customers can find desired plan, seek great value and enjoy value 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 100 core brands, who took advantage of our further channel, 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 to 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 work 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.

We made for Vipshop brand partners are happy to deepen their collaboration with us after they see meaningful sales contribution. Currently, we have over 150 brand partners in this program. They provide 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 differentiates us in the market. The key is to better leverage merchandising capability to provide efficient and cost effective inventory solution for brand partners. This has 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 customer, taking a simple, clear and direct way to interact with them. Also leveraging the first-party model, we are gaining trust from customer who rely on us to bring them great brands and 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 a dear low 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: Thanks, 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 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 hit 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 $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 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 present below are in Renminbi And all the percentage change are year-over-year change, unlike otherwise noted.

Total net revenues for the fourth quarter of 2023 increased by 9.2% year-over-year to RMB34.7 billion from RMB31.8 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 93% year-over-year to RMB8.2 billion from RMB6.9 billion in the prior year period. Gross margin increased to 23.7% from 21.7% in the prior year period. Total operating expenses increased by 4.8% year-over-year to RMB4.9 billion from RMB4.6 billion in the prior year period. As a percentage of total net revenues, 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 RMB2.5 billion from RMB2.2 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 RMB843.2 million from RMB944.1 million in the prior year period. As a percentage of total net revenues, 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 RMB496.4 million from RMB408.5 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 RMB1.0 billion from RMB1.1 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 RMB3.7 billion from RMB2.5 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 RMB4.0 billion from RMB2.8 billion in the prior year period. Non-GAAP operating margins 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 RMB3.0 billion from RMB2.2 billion in the prior year period. Net margin attributable to Vipshop’s 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 RMB5.35 from RMB3.66 in the prior year period.

Non-GAAP net income attributable to Vipshop’s shareholders increased by 43.4% year-over-year to RMB3.2 billion from RMB2.2 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 RMB5.79 from RMB3.65 in the prior year period. As of December 31, 2023, we had cash and cash equivalents and a restricted cash of RMB26.3 billion and short term investments of RMB2.0 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 RMB112.9 billion from RMB103.2 billion in the prior year.

Gross profit increased by 19.0% year-over-year to RMB25.7 billion from RMB21.6 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 RMB9.1 billion from RMB6.2 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 RMB10.6 billion from RMB7.4 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 RMB8.1 billion, from RMB6.3 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 RMB14.42 from RMB9.83 in the prior year. Non-GAAP net income attributable to Vipshop’s shareholders increased by 39.1% year-over-year to RMB9.5 billion from RMB6.8 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 RMB16.90 from RMB10.67 in the prior year. Looking forward to the first quarter of 2024, we expect our total net revenues to be between RMB27.5 billion and RMB28.9 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.

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Q&A Session

Operator: Thank you. [Operator Instructions]. Your first question comes from the line of Alicia Yap from Citigroup. Please go ahead. Your line is open.

Alicia Yap: Hi, can you hear me? Hello?

Jessie Zheng: Yes, we can.

Alicia Yap: Can you hear me okay? Okay. All right. Thank you. Good evening, management. Thanks for taking my questions. 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, target for new user acquisition strategy? [Foreign Language].

Eric Shen: [Foreign Language]. First, on the loyal customer base, actually, I think our loyal customer group has been quite resilient in terms of spending from the trend that we have observed in the last couple of years, especially for our high value customer 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 upward trend has been going quite well, upward 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 had 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 fronts to see whether we how 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 to what we look at some emerging and a new channels that we haven’t been working closely with, and we’ll continue to focus on target 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 RMB300. 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: Thank you. We will take our next question. Please standby. Your next question comes from the line of Eddy Wang from Morgan Stanley. Please go ahead. Your line is open.

Eddy Wang: [Foreign Language]. Thank you, management for taking my question. I have three 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 three quarter in last year, which we see a decline 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 dollar trend 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 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 three quarters. So just wonder, is there a significant change in terms of the return rates? Or is there any other reason behind that? Thank you.

Eric Shen: [Foreign Language]. 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 downgrade at least as 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.