Vipshop Holdings Limited (VIPS) Earnings Call Transcript & Summary

Ladies and gentleman, good day, everyone, and welcome to Vipshop Holdings Limited's Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time I'd like to turn the call to Ms. Jessie Zheng, Vipshop's Head of Investor Relations. Please proceed.

Thank you, operator. Hello, everyone, and thank you for joining Vipshop's Fourth Quarter and Full Year 2022 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 statements 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 reconciliations 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 fourth quarter and the full year 2022 earnings conference call. In the fourth quarter, we once again demonstrate strong earnings power amid a choppy backdrop. The top line recovery was impacted by the short-term disruption on economic activities from the surge of COVID-19 infections nationwide. Apparel-related GMV fared better than expected, slightly down year-over-year as we proactively worked out merchandising selection to satisfy seasonal demand. Customer trends continued to recover year-over-year. The desire to spend remain healthy with customer visits clearly picking up and the active Super VIP customers increased by 13%, accounting for 42% of our online spending. Overall we accomplished quality development in 2022, delivering record level net income at RMB 6.8 billion, while navigating through an extremely challenging year. Our business fundamentals has been stronger after we incrementally [indiscernible] our enhancement on merchandising, operations and technologies. On merchandising, we now have an upgraded portfolio of brand and product offering that reinforce the value proposition of our platform. With hundreds of brands at the core of our business, new trendy and the high-end brand and a lot more selections, integration styles bring a new look to our platform. For the full year of 2022, core brands has positive growth on Vipshop with greater contributions to total GMV. Apparel-related GMV outperformed non-apparel categories. The Made for Vipshop customized line developing into the more selective collection that enjoyed higher conventions than general merchandise. Operationally we are more efficient in deploying resources to best support brand partners. Launching innovative channels to build sales momentum and increasing customer engagement in a cost-effective way, that's how we managing to grow the base of quality customer with 6.7 million SVIP members repeatedly shopping with us last year. Technologies become more instrumental in every aspect of our business. For example, our fully upgraded merchant platform enabled brand partners to engage in a more measurable way through data analytics such as offering customers incentive and generating sale lead. Our strong execution in 2022 gives us confidence as we look ahead for the post-pandemic opportunities. We are set to take advantage of our tangible inventories. Our professional buyer team continue to be the great advantage as they work more effectively with brand partners. Though uncertainties will remain follow China's reopening, we did see some recovery in spending on apparel and other discretionary items since the beginning of this year. There is opportunities for us to attract new customers and capture more customer spend. We believe we are now in the healthier position than before to achieve both growth and profitability and continue delivering value to our shareholders. At this point, let me hand over the call to our CFO, David Cui, who will go over our financial results.

Thanks, Eric, and hello, everyone. In the fourth quarter, we did our level best to keep the business on track despite the spike of COVID-19 infections in China. We are pleased that our revenues continue to recover, while another quarter of strong profitability demonstrated the resilience and strength of our business. Gross margin increased by 2 percentage points to 21.7% from a year ago, and actually improved across all categories thanks to enhanced merchandising strategy, stringent cost control as well as dedicated management of business processes. Operating margin achieved an all-time high as we consistently focus on operational discipline. As a result, we had the most profitable quarter in 2 years with non-GAAP net income up by 24% to RMB 2.2 billion and net margin at 7%. That helped us to finish off the full year of 2022 at a record level of profitability. Last year, we generated more than RMB 7.8 billion free cash flow, repurchased a total of USD 952 million of our ADS under our buyback programs. We are committed to delivering value to our shareholders by steadily executing the programs. As we enter the post-pandemic era following China's reopening, we are moving quickly but rationally to seize the opportunities for growth, while allocating our resources where they will provide the best returns over time. At the same time, we maintain our focus on everyday operation to generate synergies and efficiency gains. We are positive on regaining growth momentum while sustaining healthy profitability. Now moving to our detailed quarterly financial highlights. Before I get started, I would like to clarify that our financial numbers presented below are in renminbi and all the percentage changes are year-over-year changes unless otherwise noted. Total net revenues for the fourth quarter of 2022 were RMB 31.8 billion as compared with RMB 34.1 billion in the prior year period, primarily attributable to short-term disruptions on economic activities from the surge of COVID-19 infections nationwide. Gross profit increased by 2.8% year-over-year to RMB 6.9 billion from RMB 6.7 billion in the prior year period. Gross margin increased to 21.7% from 19.7% in the prior year period. Total operating expenses decreased by 6.5% year-over-year to RMB 4.6 billion from RMB 5.0 billion in the prior year period. As a percentage of total net revenue, total operating expenses was 14.6%, which stayed flat as compared with the prior year period. Fulfillment expenses were RMB 2.2 billion, which largely stayed flat as compared with prior year period. As a percentage of total net revenues, fulfillment expenses was 6.8% as compared with 6.4% in the prior year period. Marketing expenses decreased by 17.6% year-over-year to RMB 944.1 million from RMB 1.1 billion in the prior year period. As a percentage of total net revenue, marketing expenses decreased to 3.0% from 3.4% in the prior year period, primarily attributable to more prudent marketing strategy. Technology and content expenses decreased by 7.8% year-over-year to RMB 408.5 million from RMB 443.0 million in the prior year period. As a percentage of total net revenues, technology and content expenses was 1.3%, which stayed flat as compared with the prior year period. General and administrative expenses decreased by 5.2% year-over-year to RMB 1.1 billion as compared with RMB 1.2 billion in the prior year period. As a percentage of total net revenue, general and administrative expenses was 3.6% as compared with 3.5% in the prior year period. Income from operations increased by 37.1% year-over-year to RMB 2.5 billion as compared with RMB 1.8 billion in the prior year period. Operating margin increased to 7.9% from 5.4% in the prior year period. Non-GAAP income from operations increased by 33.6% year-over-year to RMB 2.8 billion from RMB 2.1 billion in the prior year period. Non-GAAP operating income margin increased to 8.7% from 6.1% in the prior year period. Net income attributable to Vipshop's shareholders increased by 57.9% year-over-year to RMB 2.2 billion from RMB 1.4 billion in the prior year period. Net margin attributable to Vipshop's shareholders increased to 7.0% from 4.1% in the prior year period. Net income attributable to Vipshop's shareholders per diluted ADS increased to RMB 3.66 from RMB 2.07 in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders increased by 23.9% year-over-year to RMB 2.2 billion from RMB 1.8 billion in the prior year period. Non-GAAP net margin attributable to Vipshop's shareholders increased to 7.0% from 5.3% in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS increased to RMB 3.65 from RMB 2.64 in the prior year period. As of December 31, 2022, we had cash and cash equivalents and restricted cash of RMB 23.1 billion and short-term investments of RMB 1.6 billion. Now I'd like to briefly walk through the highlights of our full year results. Total net revenues for the full year of 2022 were RMB 103.2 billion as compared with RMB 117.1 billion in the prior year. Gross profit was RMB 21.6 billion as compared with RMB 23.1 billion in the prior year. Gross margin increased to 21.0% from 19.7% in the prior year. Income from operations increased by 11.0% year-over-year to RMB 6.2 billion from RMB 5.6 billion in the prior year. Operating margin increased to 6.0% from 4.8% in the prior year. Non-GAAP income from operations increased by 12.1% year-over-year to RMB 7.4 billion from RMB 6.6 billion in the prior year. Non-GAAP operating income margin increased to 7.2% from 5.6% in the prior year. Net income attributable to Vipshop's shareholders increased by 34.6% year-over-year to RMB 6.3 billion from RMB 4.7 billion in the prior year. Net margin attributable to Vipshop's shareholders increased to 6.1% from 4.0% in the prior year. Net income attributable to Vipshop's shareholders per diluted ADS increased to RMB 9.83 from RMB 6.75 in the prior year. Non-GAAP net income attributable to Vipshop's shareholders increased by 13.7% year-over-year to RMB 6.8 billion from RMB 6.0 billion in the prior year. Non-GAAP net margin attributable to Vipshop's shareholders increased to 6.6% from 5.1% in the prior year. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS increased to RMB 10.67 from RMB 8.67 in the prior year. Looking forward to the first quarter of 2023, we expect our total net revenues to be between RMB 25.2 billion and RMB 26.5 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 Instructions] Our first question comes from Alicia Yap with Citi.

[Foreign Language] This is Vicky Wei on behalf of Alicia Yap. And I have 2 questions. First, how would management view the current competition landscape? Will the recent step-up marketing campaigns by e-commerce peers have any impact on Vipshop to step-up on promotional discounts as well? My second question is what is the company plans for this year in terms of new user acquisition? And how will that impact margins trend for 2023?

[Foreign Language]

[Interpreted] Okay. First, to answer your question on competition. Obviously, there is some buzz in the e-commerce industry, especially in the shelf model e-commerce, some peers have launched [ stepped up ] campaigns. But remember, Vipshop remains highly focused on apparel, not standardized items. And that apparel does not only depend on pricing, but also depends on a lot of other factors like styles, sizes, it's a much sophisticated segment. Second, even on standardized items, we are trying to secure unique product supply from top brands with unique styles and SKUs. We are not looking for as many SKUs as possible. We are trying to build a much more selective SKUs. So we were not getting involved in a pricing war. We are trying to grow our business in a healthier way. We are not going to sacrifice profitability by using a lot of subsidies in exchange for customer growth. I think the key point for Vipshop to grow its customers, to grow its business is to reinforce its unique value proposition in discount retail that naturally customers will have a better perception about Vipshop and then will keep in top of mind with customers as well. On on-line streaming, actually, the competition has been already there, but we don't feel any additional pressure on that front. The competitive landscape has largely moderated. And your second question on new user growth strategy. This year, our goal is to achieve quality customer growth. We will definitely take this opportunity after -- during the post-pandemic era to try more proactively to acquire new customers. But at the same time, we'll continue to stick to the LTV model to evaluate the ROIs from different channels to ensure that we are indeed acquiring high-quality customers. So overall, we probably will have to spend a little bit more to acquire customers in absolute amount. But as a percentage of revenue, our marketing expenses should be -- should stay at a very healthy level, as comparable as we had for last year. So this is going to continue for -- so we'll continue to stick to our practice last year in terms of customer acquisition, and it won't have a big drag on our overall profitability.

Our next question comes from Joyce Ju with Bank of America.

Congrats on the solid results. I have 2 questions. The first one is regarding the overall apparel demand we observed year-to-date. Have we observed any trend of pent-up demand or any behavior changes such as consumption upgrade, downgrade or frequency change? Or like whatever trends we observe from the supplier side, like brand side, is there any clear goals of clearing the stocks or like they have a plan of launching new products? Any color would be good. The second question is we have observed this in the fourth quarter, the platform GMV actually grow a little bit faster than our 1P revenue. Is this because of like currently we mentioned, we have like mix change in our marketplace? Is there any specific plan in terms of in our like 3P marketplace? [Foreign Language]

[Foreign Language]

[Interpreted] Okay. Joyce, on your question on the recent consumption trends, apparently, post-pandemic, we did see a faster-than-expected recovery in spending in apparel and other discretionary items. And on the ground, you will see a lot of people feeling more comfortable with moving or traveling around. So they do have strong demand for apparel categories. We've seen positive growth of customer numbers as well as conversion rate. So that's on the consumption side. On the supply side, actually, there is plentiful inventory out there because a lot of brand partners had a very tough year last year, especially a lot of offline stores that were actually locked down due to the COVID impact. So both on the demand side and on the supply side, we've seen a stronger momentum than expected.

Yes. Your second question regarding the GMV and the revenue changes, actually our GMV narrowed down -- our revenue narrowed down by 7%, right, and then GMV is down by 4.6%. So the reason for that is because of the -- towards the year-end, post-pandemic, the exchange and the return items were actually up. So that is the primary reason for that, yes.

Our next question comes from Wei Xiong with UBS.

[Foreign Language] I have 2 questions regarding the margin side. First is on the net margin. So looking at 2023, how much room can we further optimize our expenses and costs? Do we expect that the net margin in 2023 can continue to improve year-on-year? And are we becoming more confident on the long-term net margin target? And my second question is on the gross margin. How should we think about the trends in the first quarter as well as 2023? And how does management think about the opportunity to further improve the gross margin longer term?

Yes. I will combine the 2 questions together. Our objective for both net margin and gross margin is to remain stable over the year. There could be room for us to improve the net margin because of the leverage volume for procurement costs, there might be room over there. So for -- in terms of the gross margin, our aim is to remain stable.

Our next question comes from Thomas Chong with Jefferies.

Could you please provide some updates on the business development, GMV and the consumer sentiment in recent months? How do we see the monthly trend? And what's our outlook for the full year 2023? [Foreign Language]

[Foreign Language]

[Interpreted] Overall, we are pretty optimistic about the outlook for this year in terms of growth. After the spring festival, actually, a lot of people are coming back, and we've seen a stronger momentum than expected in terms of their spending on apparel and other categories. And this momentum is going to continue into the second quarter, which we expect to have a stronger recovery, partially because of a low base last year. Especially, if you remember, last year, from March to May, we had a lot of problems such as supply chain disruption, lockdowns and the Shanghai incident. So a lot of drag downs for the same period of -- for the second quarter of last year. And for the second half, for Q3 and Q4, with the COVID thing cleared way, we think the momentum should continue into the second half, and we are quite optimistic about our growth outlook.

Our next question comes from Natalie Wu with HTI.

My question is related with standing power or AOV of the existing users. Just wondering post the pandemic reopen, is there any chance that can be observed regarding that kind of operating metrics? And also, the second question is regarding the active paying customers. I think that the number of the active paying customers should return to positive growth in the first quarter, if that is true. I'm just wondering if there are target of your active paying customer growth this year. [Foreign Language]

[Foreign Language]

[Interpreted] On customer trend, we're seeing apparently customers are becoming more active than before because of the lifting of the COVID restrictions, and they have become more comfortable with moving around or traveling around. So we've seen they shop a lot more than before. But the order size, average order size remains quite stable. And yes, we are seeing that customer -- active customer members are going to book positive growth in the first quarter. And it will continue to grow in the second quarter because of the low base for the second quarter of last year, which we had a 17% decline in customer numbers because of the COVID impact. And for the full year, we are pretty positive on the customer trend we will achieve quality customer growth.

[Operator Instructions] Our next question comes from Tian Hou with TH Data Capital.

[Foreign Language] Okay. So in the last 3 years, the top line growth may be due to the COVID, really didn't grow that much. So the margin actually went up a lot. So I assume the margin, the room to be improved is limited going forward. So under this condition, the top line growth becomes critical. So can Mr. Shen share some details or your thoughts about how to improve the top line growth in 2023? What's the strategy?

[Foreign Language]

[Interpreted] Okay. On the margin side, we think there is limited room for us to improve gross margin because we don't increase the take rates from brand partners in the past year. And we also were very restrained about providing unnecessary subsidies. So gross margin would remain -- would be stable for the future. And on the net margin side, we think there is still some room for us to improve the cost structure and increase the efficiency gains. So there is still opportunity for us to improve net profit margin. But the most important thing is, of course, how to grow the customers and the GMV. And that should provide the most upside for any margin expansion. So we will focus on dedicated management of our business operations. When you look at quality growth of our customer base, we will continue to increase repeat orders from existing customers and add quality new customers and expand our Super VIPs to improve upon average order size. And also we want to improve our customer stickiness through innovative use cases, channels and also improve conversion to serve personalization. So there are a lot of ways to increase our business -- to build our business momentum, and we are pretty confident that we can achieve a quality growth this year.

Due to time constraint, that concludes today's question-and-answer session. At this time, I will turn the conference back to Jessie for any closing remarks.

Thank you for taking the time to join us today. If you have any questions or follow-ups, please don't hesitate to contact our IR team. We look forward to speaking with you next quarter.

Thank you. This concludes the conference. You may now disconnect. Everyone, have a great day.

Have a great day. Bye. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]