Vipshop Holdings Limited (VIPS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, everyone, and welcome to Vipshop Holdings Limited Second Quarter 2021 Earnings Conference Call. At this time, I would like to turn the call to Ms. Jessie Fan, Vipshop's Head of Investor Relations. Please proceed, ma'am.

Thank you, operator. Hello, everyone, and thank you for joining the Vipshop Second Quarter 2021 Earnings Conference Call. With us today are Eric Shen, our co-Founder, Chairman and CEO; and David Cui, 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 and 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 reconciliation of our non-GAAP measures to GAAP measures. With that, I would now like to turn the call over to Mr. Eric Shen.

Good morning, and good evening, everyone. Welcome, and thank you for joining our second quarter 2021 earnings conference call. In the second quarter, we kept up our solid business momentum with core operating metrics continue to trend healthily. Our user base maintained its strong growth driving a continued increase in total GMV. During the quarter, our total number of active users grew by 32% year-over-year to 51.1 million, and our total GMV increased by 25% year-on-year to RMB 48.1 billion. Our most valuable user group showed especially strong growth momentum with cumulative Super VIP membership increase by nearly 50% year-on-year, contributing about the 1/3 of the total GMV in the second quarter of 2021. These encouraging developments was the result of our relentless efforts to calibrate our strategic focus and increase operational synergies. In the second quarter, we continued to robust execute on our merchandising strategy. Our buyer teams successfully collaborated with an increasing number of suppliers and brand partners. As a result, we have not only been able to attract either increasing amount of unique branded merchandise to be sold on our platform, but have been able to do so at Vipshop's favorable discount price. In addition to our traditional deeply discount inventory covering an extensive range of brands, we now also carry a considerable proportion of Made for Vipshop products. These are products especially customized for Vipshop by our brand partners. We are committed to increase the breadth and depth of our merchandising portfolio to offer users a differentiated selection of high-quality merchandise while creating dynamic price advantage for our discount sales. In the second quarter, we successfully institute refinement at an operational level. User experience is one of our clear priority. To this end, we implemented several initiatives, including better matching of merchandising selection to target users and improving overall incentive for our most-valued users. On top of this, we also leverage effective marketing to attract more younger shoppers to our platform. Looking forward to the second half of 2021, we remain committed to execution of our merchandising strategy. We are dedicated to create value for our new and existing customers while also increasing the value we add for our core brand partners, we believe this will solidify our leading position in China's discount retail market. At this point, let me hand over the call to our CFO, David Cui, who will go over our operational and financial results.

Thanks, Eric, and hello, everyone. We are pleased to report a strong set of results for the second quarter of 2021. During the quarter, we delivered solid top line growth with total net revenue reaching RMB 29.6 billion, representing a year-over-year increase of 22.8%. We also witnessed a sustainable growth momentum in business development which is evidenced by our number of active customers and total orders growing by 32% and 30% year-over-year, respectively. Non-GAAP net income attributable to Vipshop's shareholders also increased by 11.3% year-over-year to RMB 1.5 billion. In the second quarter of 2021, we repurchased approximately USD 301 million of our ADS in accordance with the USD 500 million share repurchase program we adopted in March earlier this year, showing both our confidence in the robustness of our business model and our dedication to delivering long-term value to our shareholders. Before I get started with detailed quarterly financial highlights, I would like to clarify that all the financial numbers presented below are in RMB and all the percentage changes refer to year-over-year changes unless otherwise noted. Total net revenue for the second quarter of 2021 increased by 22.8% year-over-year to RMB 29.6 billion from RMB 24.1 billion in the same period last year, primarily driven by a large number of total active customers. Growing (sic) [ gross ] profit for second quarter of 2021 increased by 20.6% year-over-year to RMB 6.0 billion from RMB 4.9 billion in the same period last year. Gross margin for the second quarter of 2021 was 20.1% compared with 20.5% for the same period in 2020. Total operating expenses for the second quarter of 2021 were RMB 4.8 billion compared to RMB 3.8 billion in the second quarter 2020. As a percentage of total net revenue, total operating expenses for the second quarter of 2021 were 16.4% compared with 15.8% in the second quarter of last year. Fulfillment expenses for the second quarter of 2021 were RMB 2.1 billion as compared with RMB 1.7 billion in the same period in 2020. As a percentage of total net revenue, fulfillment expenses for the second quarter of 2021 decreased to 6.9% from 7.0% in the second quarter of 2021 -- in the second quarter of 2020. Marketing expenses for the second quarter of 2021 were RMB 1.4 billion as compared with RMB 1.0 billion in the same period of 2020. As a percentage of the total net revenue, marketing expenses for the second quarter of 2021 were 4.8% compared to 4.3% in the second quarter of 2020. The increase was primarily due to higher investment in advertising activities relating to customer acquisition and retention. Technology and content expenses for the second quarter of 2021 were RMB 369.9 million compared to RMB 305.4 million in the same quarter in 2020. As a percentage of total net revenue, technology and content expenses for the second quarter of 2021 decreased to 1.2% from 1.3% in the second quarter of 2020. General and administrative expenses for the second quarter of 2021 were RMB 1.0 billion compared to RMB 804.6 million in the second quarter of last year. As a percentage of total net revenue, general and administrative expenses for the second quarter of 2021 were 3.4% as compared with 3.3% in the same period of 2020. Income from operations for the second quarter of 2021 increased by 18.6% year-over-year to RMB 1.5 billion from RMB 1.2 billion in the second quarter of 2020. Operating margin for the second quarter of 2021 was 5.0% as compared with 5.1% in the same period last year. Non-GAAP income from operations for the second quarter of 2021 which excluded the share-based compensation expenses and amortization of intangible assets resulting from business acquisitions increased by 16.1% year-over-year to RMB 1.7 billion from RMB 1.5 billion in the second quarter of 2020. Non-GAAP operating margin for the second quarter of 2021 was 5.9% as compared with 6.2% in the second quarter of 2020. Net income attributable to Vipshop's shareholders for the second quarter of 2021 was RMB 1.1 billion compared to RMB 1.5 billion in the same period last year. Net margin attributable to Vipshop's shareholders for the second quarter of 2021 was 3.7% as compared with 6.4% in the prior year period. Net income attributable to Vipshop's shareholders per diluted ADS for the second quarter of 2021 decreased to RMB 1.56 from RMB 2.24 in the second quarter of the previous year. Non-GAAP net income attributable to Vipshop's shareholders for the second quarter of 2021 increased by 11.3% year-over-year to RMB 1.5 billion from RMB 1.3 billion in the second quarter of 2020. Please note that non-GAAP net income attributable to Vipshop's shareholders excludes a number of items, the details of which can be found in our earnings release. Non-GAAP net margin attributable to Vipshop's shareholder for the second quarter of 2021 was 5.0% as compared with 5.5% in the same period last year. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS for the second quarter of 2021 increased to RMB 2.10 from RMB 1.92 in the second quarter of 2020. As of June 30, 2021, the company had cash and cash equivalents and restricted cash of RMB 16.5 billion and short-term investments of RMB 3.6 billion. Looking forward to the third quarter of 2021, we expect our total net revenue to be between RMB 24.3 billion and RMB 25.5 billion, representing a year-over-year growth rate of approximately 5% to 10%. Please note that this forecast reflects our current preliminary views of the market and operational conditions, which is subject to change. With that, I would like now to open the call to Q&A.

[Operator Instructions] We have the first question. This is coming from the line of Feitong Zhang from CICC.

This is Feitong from CICC. I have 2 questions. My first question is regarding the competitive landscape. We observed some short video platforms are doing really well this year in their e-commerce business and some brands are exploring [ destocking ] at these channels. How should we think about the competitive landscape of [ the stock ] industry going forward? Any color would be very helpful. The second question is regarding to the third quarter guidance. How should we think about the third quarter guidance? Did we observe any impact from the pandemic in July and August that we factored in our third quarter guidance? Should we expect acceleration in the fourth quarter if the pandemic gets well contained? [Foreign Language]

[Foreign Language]

[Interpreted] Okay. Let me translate the first answer to the first question. In terms of live streaming model, there are a lot of platforms that are selling through live streaming, whether it's branded or it's slow -- in-season, slow-moving, old inventories, I think these platforms are primarily capturing a lot of customers' attention. But no matter what, the most important thing is merchandising whether it's pricing advantages or brand advantages, that's the most important thing for customers. For Vipshop, actually, we do less live streaming, but what we focus most is to creating differentiated value for customers in terms of both brand and merchandise and the pricing advantages. So despite the fact that short video platform has some impact in terms of attracting a lot of time spent from customers but it will have just some limited impact on our own business. In terms of the Q3 guidance, there are a few factors entering Q3. We've seen consumer sentiment is not as strong amidst a weaker macro environment, which was partially related to some natural disaster in certain province and the resurgence of COVID-19 here in the year. And recall that we had a [ test phase ] in the same quarter of last year as we did see some [ strong recovery ] from the end of COVID-19. And also Q3 is traditionally a light season and also light for the apparel industry. But turning to Q4, typically, Q4 is the peak season where apparel ticket sizes tend to be larger, and we will run promotional events as everyone else within the industry. So Q4 should hold up relatively well as long as the COVID-19 pandemic ends at that time.

I would like to add on something, what Eric just mentioned. Number one is that remember last Q3, we had a booming business post COVID-19. So we had a larger base for this year, so that's why we had a softer guidance for Q3 this year. So that's number one. Number two is that we should notice that our active customer base actually grew year-over-year 32%. So that does provide a foundation for us to grow our future business, and that's also a strong indicator that our business is healthy and then that should help with our future growth.

We have the next question. This is coming from the line of Eddy Wang from Morgan Stanley.

[Foreign Language] I have 2 questions. First is regarding the -- can you give us the breakdown of -- by month in the second quarter because we remember that in May, during the first quarter earnings call, you mentioned that your guidance for the second quarter actually has been a little bit conservative. So we all expect that you will have a quite strong growth. But in June, actually, it seems like that the sales situation is relatively weaker than expected. So can you give us more color on that? And the second question is, can -- also give us some color about how the apparel demand actually in July and so far in August, because if you look at the [ MPS ] -- the retail sales of apparel, which show a certain weakness for the apparel demand. So I'm not sure whether or not this also impact our guidance for the third quarter.

[Foreign Language]

[Interpreted] Okay. In terms of the trend we have seen in June, as you mentioned, our guidance of 20% to 25%. Actually, in June, we've already seen slower sales due to the longer promotional event for the whole e-commerce space. In the past, the e-commerce space tend to hold 1 or 2, 3-day promotional event, but this has become a month-long promotional event, and it's becoming less and less attractive to customers. And back in June, we tried to deliver some coupons to customers to encourage their spend, but it does -- it did not do very well. So we actually had some control over all marketing spend. And entering into the first 1.5 months in the third quarter, we did see some weakness in the tariff category. It is not as strong as we had anticipated, but it's also not as bad as you probably have imagined. We think that is primarily due to the resurgence of the COVID-19 here in the year, and we are seeing the trend moving slower than before. But at the same time, we also see branded merchandise. Merchandise, actually, they have very good inventory because the off-line stores are not very -- not a very good place to stay because of the COVID-19. So actually, they have increased the inventory online for -- so we have to see a few -- a couple of months to see how this turns out.

We have the next question from Ronald Keung from Goldman Sachs.

So I have 2 questions that I'll translate to Mandarin. The first question is on how -- also in our third quarter revenue guidance of 5% to 10%. Just want to know how that user growth and ARPU is kind of put within this forecast. Just want to see whether our user growth remains quite strong or maintaining the trends in the second quarter. And would that imply kind of ARPU will decline further on a year-on-year basis? And how do we see that into the fourth quarter as what we talk about as a peak season? And then my second would be on marketing spending that we spent around 30 -- 37% more in marketing spend in the quarter. You mentioned about some control during June in couponing, but this is still quite an increase. And so are we expecting more spending as we head into the second half? And how should we think of sales and marketing as a percentage of revenue, which is one of the metrics which has been around 4.8% of revenues in the second quarter? [Foreign Language]

[Foreign Language]

I take on the second question regarding the marketing expenses. So with respect to marketing expenses, this is probably the area that we have more discretion, and the marketing expenses, we split it between new user acquisition and existing user retention. So we have more discretion in terms of how we allocated the spending. And then as you can see, in the second quarter, we grow our active customer base by 32%. And we would expect that we will continue to grow our customer base. And in terms of the strategy, we will be carefully evaluate how to execute in terms of the marketing strategies. And the objective for us is to maintain our marketing expenditure at a stable level, not to -- in terms of the percentage of revenue, we expected that number should remain stable. We would try to improve our efficiencies in terms of how we spend that dollar.

[Interpreted] Okay. Back to your question about trends. As you may have noticed, our ARPU for the second quarter decreased by 7% year-over-year, but for Q3 and Q4, we don't expect similar deceleration within the growth -- the decline will be much moderated. We have spent a lot of time in reacting -- in reactivating our old customers as well as attracting new customers. But recall in the second quarter of last year, we actually stopped spending money on attracting new customers. So when entering into this year, we saw an increasing number of new customers and who may need some time to ramp up their spending, which is due after impacting the overall ARPU. But we think the general trend for ARPU going ahead will be stabilized. We are confident because we've seen very strong growth in Super VIP memberships, grew about 50% year-over-year in the second quarter, and we found that they have been very loyal and spending much more than average customer. Actually, Super VIP members spend almost 10x an average customer. So as long as we can grow our Super VIP members, we are confident that the ARPU will improve over time.

We have the next question. This is coming from the line of Thomas Chong from Jefferies.

I'll ask questions on behalf of Thomas Chong. So I have 2 questions. The first question is about could management share some colors about the outlook for the second half of the year and also 2022, including the revenues and the gross profit margin and net profit margin? And then my second question is we mentioned about attracting young users. Do we have any updates about the initiations -- the user acquisition? [Foreign Language]