Vipshop Holdings Limited (VIPS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, everyone, and welcome to Vipshop Holdings Limited's Fourth Quarter and Full Year 2020 Earnings Conference Call. At this point, I would like to turn the call to Ms. Jessie Fan, Vipshop's Director of Investor Relations. Please proceed.

Thank you, operator. Hello, everyone, and thank you for joining Vipshop's Fourth Quarter and Full Year 2020 Earnings Conference Call. Before we begin, I will read the safe harbor statement. During this conference call, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations, assumptions, estimates and projections about Vipshop Holdings Limited and its industry. All statements other than statements of historical facts we may make during this call are forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as anticipate, believe, continue, estimate, expect, intend, is or are likely to, may, plan, should, will, aim, potential or other similar expressions. These forward-looking statements speak only as of the date hereof and are subject to change at any time. And we have no obligation to update these forward-looking statements. Joining us on today's call are Eric Shen, our Co-Founder, Chairman and CEO; and David Cui, our CFO. At this time, I would like to turn the call over to Mr. Eric Shen.

Good morning, and good evening, everyone. Welcome, and thank you for joining our fourth quarter and full year 2020 earnings conference call. We finished the year of 2020 with strong financial and operational results in the fourth quarter. During the quarter, our total GMV increased by 25% year-over-year to CNY 59.3 billion from CNY 47.6 billion in the same period last year. Continuing the trend of accelerated growth, specifically, GMV for our core apparel-related categories increased even faster by 28% year-over-year, driven by the robust growth in our numbers of active customers, which increased by 37% year-over-year in the fourth quarter. Our new customers grew fast than total active customers during the quarter, showing that our differentiated offerings procured by our professional merchandising team are becoming more attractive to customers who did not shop with us before. We believe these strong customer acquisition trends are driven by the superior value and the convenient shopping experience we offer our customers as compared to the marketplace platform. The reason we are able to see continued robust growth momentum in our key operational and financial metrics is due to our focus on and expertise in the discount retail industry. We have over a decade of experience in the inventory clearance industry in China and have deep expertise in this field. We offer superior value to consumers looking for deals, particularly in apparel-related categories, while at the same time, helping brands achieve faster inventory turnover, grow their business and reach new customer segments. Looking into 2021 and beyond, we are deeply devoted to continue to execute on our merchandising strategy, aiming to acquire more top brands while increasing our share in the business of our existing brand partners, which will enable us to offer more diversified, desirable product to our customers and attract new customers. In addition, we will continue to enhance our big data capabilities and the technology know-how in order to service a broader customer base, enabling customers from different age group demographics and income levels to shop with us and enjoy our product offering. At this point, let me hand over the call to our CFO, David Cui, so that he may discuss our strategy in more detail and go over our operational and financial results.

Thanks, Eric, and hello, everyone. We are glad to have delivered another quarter with strong financial results. In the fourth quarter of 2020, we delivered accelerated top line growth driven by the strong 37% year-over-year growth in our number of active customers. Importantly, our non-GAAP net income attributable to Vipshop shareholders also demonstrated robust growth in the quarter, increasing by 33% year-over-year to CNY 2.6 billion from CNY 1.9 billion in the prior year period. Additionally, for the trailing 12 months ended December 31, 2020, we generated a robust free cash inflow of CNY 8.3 billion, which increased significantly from CNY 2.5 billion in the prior year period. We are dedicated to offering our customers with desirable merchandise at a big discount on a daily basis, while providing them with superior logistics services and post-sales customer service as compared to marketplace platforms. As a result, our conversion rate in the fourth quarter of 2020 increased by 10% from the same period in the prior year. Going forward, we will continue to enhance our product assortment and balance our top line growth and profitability. We are confident that the healthy customer acquisition and retention trends will continue to drive our growth in the future. By continuously offering value to our customers and providing unparalleled inventory management solutions to our suppliers, we will ultimately generate sustainable long-term value for all of our shareholders. Now moving on to our quarterly financial highlights. Before I get started, I would like to clarify that all the financial numbers presented today are in renminbi amounts and all the percentage changes refer to year-over-year changes unless otherwise noted. Total net revenue for the fourth quarter of 2020 increased by 22.0% year-over-year to CNY 35.8 billion from CNY 29.3 billion in the prior year period, primarily driven by the growth in the number of total active customers. Gross profit for the fourth quarter of 2020 increased by 12.1% year-over-year to CNY 7.8 billion from CNY 7.0 billion in the prior year period. Gross margin for the fourth quarter of 2020 was 21.9% as compared with 23.9% in the prior year period. Total operating expenses for the fourth quarter of 2020 were CNY 5.4 billion as compared with CNY 5.4 billion in the prior year period. As a percentage of the total net revenue, total operating expenses for the fourth quarter of 2020 decreased to 15.2% from 18.3% in the prior year period. Fulfillment expenses for the fourth quarter of 2020 were CNY 2.2 billion as compared with CNY 2.1 billion in the prior year period. As a percentage of total net revenue, fulfillment expenses for the fourth quarter of 2020 decreased to 6.1% from 7.0% in the prior year period, primarily attributable to the change in fulfillment logistics arrangement. Marketing expenses for the fourth quarter of 2020 were CNY 1.7 billion as compared with CNY 944.1 million in the prior year period. As a percentage of the total net revenue, marketing expenses for the fourth quarter of 2020 were 4.8% as compared with 3.2% in the prior year period, primarily attributable to increased investment in customer acquisition. Technology and content expenses for the fourth quarter of 2020 decreased to CNY 272.4 million from CNY 362.2 million in the prior year period. As a percentage of total net revenue, technology and content expenses for the fourth quarter of 2020 decreased to 0.8% from 1.2% in the prior year period. General and administrative expenses for the fourth quarter of 2020 were CNY 1.3 billion as compared with CNY 1.7 billion in the prior year period. As a percentage of total net revenue, general and administrative expenses for the fourth quarter of 2020 decreased to 3.5% from 5.9% in the prior year period. Our net -- our income from operations for the fourth quarter of 2020 increased by 45.9% year-over-year to CNY 2.6 billion from CNY 1.8 billion in the prior year period. Operating margin for the fourth quarter of 2020 increased to 7.2% from 6.1% in the prior year period. Non-GAAP income from operations, which excluded share-based compensation expenses and amortization of intangible assets resulting from business acquisitions increased by 30.2% year-over-year to CNY 2.8 billion from CNY 2.2 billion in the prior year period. Non-GAAP operating income margin for the fourth quarter of 2020 increased to 7.9% from 7.4% in the prior year period. Our net income attributable to Vipshop's shareholders for the fourth quarter of 2020 increased by 67.7% year-over-year to CNY 2.4 billion from CNY 1.5 billion in the prior year period. Net margin attributable to Vipshop's shareholders for the fourth quarter of 2020 increased to 6.8% from 5.0% in the prior year period. Net income attributable to Vipshop's shareholders per diluted ADS for the fourth quarter of 2020 increased to RMB 3.51 from RMB 2.14 in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders for the fourth quarter of 2020, which excluded the share-based compensation expenses, tax effect of share-based compensation expenses, impairment loss of investments, amortization of intangible assets resulting from business acquisitions, tax effect of amortization of intangible assets resulting from business acquisitions, investment gain and revaluation of investments excluding dividends, tax effect of investment gain and revaluation of investments excluding dividends, and share of loss in investment of limited partnerships that are accounted for as equity method investees, increased by 33.4% year-over-year to CNY 2.6 billion from CNY 1.9 billion in the prior year period. Non-GAAP net margin attributable to Vipshop's shareholders for the fourth quarter of 2020 increased to 7.2% from 6.6% in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS for the fourth quarter of 2020 increased to RMB 3.70 from RMB 2.84 in the prior year period. As of December 31, 2020, our company had cash and cash equivalents and restricted cash of CNY 12.8 billion and short-term investment of CNY 7.3 billion for the fourth quarter of 2020. Net cash from operating activities was CNY 7.2 billion. Looking at our business outlook for the first quarter of 2021, we expect our total net revenue to be between RMB 27.2 billion and RMB 28.2 billion, representing a year-over-year growth rate of approximately 45% to 50%. This forecast reflects our current and preliminary view on 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 Eddy Wang of Morgan Stanley.

Congratulations on the very great results. So my question is on the user growth. We have seen very strong user growth to sustain in the fourth quarter, actually accelerate from third quarter. So my question is that except for the efforts you have made in terms of the customer acquisition in the third quarter, any new initiatives you have made in the fourth quarter? Can you give us some examples, especially, I think, on the brand partner side as well as -- you mentioned that on the technology side? So that's my question on the user growth.

Thank you, Eddy. [Foreign Language]

[Foreign Language]

[Interpreted] Eddy, on your question on customer acquisition. Since last year's third quarter, we started to increase our marketing expenses to acquire new customers as well as retain existing customers. So we use various customer acquisition channels, including digital advertising, TV show and reality show endorsement, mobile ring pre-installation and so on. So on those fronts, in terms of marketing expenses, the pace at which we went in 4Q is very similar to what we have done in the third quarter and in previous quarters. We believe that there is lots of opportunities in -- to acquire new customers in this market, particularly as we've readjusted to focus on discount retail. So we will continue to invest into customer acquisition, but we'll use the lifetime value model to evaluate the efficiency and effectiveness of how and where we're spending our marketing dollars. So we will continue to spend, but disciplined spending. On top of marketing, we also are much more focused on merchandising, offering our customers really good products and deep discounts on a daily basis. And on the operational side and the technology side, we're also investing to improve the conversion rate and improve the efficiency at which customers can find products that they like and that are suitable to their taste on our platform. So all around, we believe there is a flywheel effect in everything that we're doing. And as long as all these parts of the business stay intact and we continue to improve on each element, we will continue to acquire customers that will contribute to our long-term growth.

Your next question comes from the line of Alicia Yap of Citigroup.

Congratulations on the strong quarter. My question is actually related to a little bit the month-over-month 4Q trend and also the first quarter guidance. So did you actually see some slowdown in December after the very strong Singles Day promotion? And as we go into first quarter, how would you describe the situation this year given the stay-in-the-city Chinese New Year period? So did that actually stimulate more spending budget on the clothing? Or did that actually have negative impact on spending willingness given people are not traveling that much and not meeting as many relative as before? So just wondering how is this Chinese New Year given these encouragement to stay-at-the-city changes in terms of the demand? Any differences that you see this year versus the previous year? And any colors in terms of direction that you think this strong first quarter guidance could carry through to the rest of the year?

Thank you, Alicia. [Foreign Language]

[Foreign Language]

[Interpreted] Alicia, on your question regarding the trend that we've seen. Fourth quarter is always a key season for e-commerce, particularly for us as we are predominantly apparel retailer. And we have Singles Day promotional event as well as our anniversary sales event on December 8, both of which we saw solid results and the trend of robust growth lasted into January. As compared to December, January did decelerate a little bit, but mostly due to the weather change as we stepped out of winter. So when you look at January into February, as you mentioned, as a lot of people are staying in their respective cities and not going back to their hometowns during this year's Chinese New Year, we are seeing better business results than we were originally anticipating. Particularly, as compared to previous years, where people were very much spending their time with their families rather than shopping. This year, we're seeing pretty solid results, and we believe that should be the industry-wide trend. Looking ahead, we believe that the structural changes of people shopping more online and more people learning to shop online that was resulted from the COVID-19 pandemic will continue into 2021 and beyond. And therefore, we continue to believe that there's a lot of opportunities for us to continue to grow and gain customers as with the rest of the e-commerce peers into 2021 and beyond.

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

I think my question kind of following on the growth in the apparel market. Basically, we see very strong growth and you've shared your GMV growth for apparel, in particular, was 28%. It seems like this is a lot faster than the overall apparel market. And therefore, I think, are we kind of benefiting from the increased supply of discounted apparel over the past, say, 1 year or 2 years, be it kind of the buildup of inventory, increased demand of brands and clearing the inventory? And so how have we seen that in our market share, say, in discounted apparel? And as this kind of inventory cycle maybe lapse later this year, how do we see -- or how do we tap into the ongoing growth of the business, say, maybe private labels or other drivers?

Thank you, Ronald. [Foreign Language]

[Foreign Language]

[Interpreted] Ronald, we've been in the discount retail business for over a decade, and there has not been a shortage of off-price inventory in the market. Of course, the pandemic did result in a bit of a tailwind. I'm surprised by this since apparel is a very nonstandardized category and there are thousands of apparel brands, and they're constantly making new seasons of products and launching new products. So there will always be inventory or excess inventory in the apparel market as it's almost impossible to predict exactly how much to make for each FTE. And so that's on the existing inventory market. On top of that, we are also more actively investing and looking into made-for-Vipshop products. These products are what our suppliers, especially the top suppliers are making and designing, especially for the Vipshop platform. And so far, the contribution has already reached double digits. And in the future, we will continue to collaborate with more top suppliers and increase the contribution from these made-for-Vipshop products. These products will ensure that we will always have supply and supply that is attractive to our consumer base. Going forward, we will continue to look into enhancing our merchandising capability on both the made-for-Vipshop front as well as the existing off-price market in order to bring the best products to our customers as well as serve more suppliers and help to grow their business.

Your next question comes from the line of Thomas Chong of Jefferies.

Can you comment about the trend in marketing expenses as well as the margin outlook for this year?

Thank you, Thomas. [Foreign Language]

[Foreign Language]

[Interpreted] Thomas, on your question on user growth and the marketing expenses as well as how it leads to the margin outlook in 2021 and beyond. As we continue to grow more customers and gain customers and accelerating customer growth, we are spending a little more on marketing into the second half of 2020. And we believe that trend should be similar in 2021 and beyond. However, that is given that there is an approximately 300 million potential customers that will be interested in discount retail and could become Vipshop's customers. So from that perspective, we believe that there's still a lot of opportunity in the market. And we're still very small as compared to the potential opportunity in this market. So growth will be our top priority. However, we have always been very focused on the balance between our top line growth as well as our margin profile. Our bottom line will continue to be very solid. As we've mentioned previously, we are maintaining our non-GAAP net margin at a mid- single-digit range, and we'll try to grow top line as fast as possible on top of that. So going forward, we will continue to balance the 2 but strive to grow users, grow healthy users that could contribute to our long-term growth sustainability.

Your next question comes from the line of Joyce Ju of Bank of America.

[Foreign Language] Yes. I will translate my question. Basically, I'm asking for the strategic focus for the management team for this year. Back to 2019, the company has been focused on the merchandising strategy and also the efficiency improvement. And for the last year, the focus was on the recovery from the COVID. Just want to know for this year what's the new driver or any new initiatives we should expect?

[Foreign Language]