Vipshop Holdings Limited (VIPS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, everyone, and welcome to Vipshop Holdings Limited's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ms. Jessie Zheng, Vipshop's Head of Investor Relations. Please proceed.

Thank you, operator. Hello, everyone, and thank you for joining Vipshop's Second Quarter 2026 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 statement 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 attributable to Vipshop's shareholders 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 2026 earnings conference call. The second quarter presents a challenging retail environment defined by a customer who is not just value conscious, but highly selective across the multi midyear promotional landscape, shoppers will intensely focus on clear utility and real value, prioritize essentially meet great cautions in discretion categories like apparel reaching on our near-term top line performance in this climate rather than chasing unprofitable -- rather than chasing unprofitable value growth, we stayed true to our core value proposition, delivering a highly creative select or high demand deeply discounted branded products to our loyal customer base. While overall traffic was muted, our SVIP cohort service served as a resilient anchor for our business. During the quarter, active SVIP grew by 8% year-over-year, driving 54% of our online spending, showing that as customers budgets tightened, high-intent shoppers prioritized platform, offering trust, value, quality and service. At a strategic level, our 1P model gives us a different edge by leveraging deep category expertise. We build greater trust with brand partners to the point when they actively adjust the merchandise allocation for our platform. For instance, close collaborations with key partners in fashion apparel has helped the effort against the broad market awareness. This level of brand integration strength our moat and protect our core business. On top of this, our merchandising team has been moving quickly to align our product mix with more selective customers. We have sharpened our accretion along the co-apparel and lifestyle decisions, matching our assortment to [indiscernible] occasions to capture immediately demand. This target approach ensures that we always deliver a clear utility recognized brand and a compelling value. Our opportunities, sourcing strategy adds another layer of inventory flexibility as brand partners manage inventory in a softer market, we serve as a reliable off-price partners locking in unique high-demand inventory at deep discounts. This reinforce our differentiated merchandise pipeline and forced deep brand collaboration. At the same time, we continue to advance the repositioning of our exclusive Made for VIP line to drive stronger customer mind share and loyalty. By raising product spend and align the seasonal launch close with brand partners, we are seeing high quality halo products emerging life in conversion rate and support overall portfolio stability. As we kick off the upcoming season, we are pleased to see that our SVIP membership has hit the 10 million milestone. To continue the momentum, we have launched an integrated campaign pair with full collection and major upgrades to provide sales. At the core of this push, we have refreshed our signature slogan, dress the best for 70% less, which has long reason to deep with our low-yield base. To ensure we keep evolving alongside the modern Chinese shopper, we are refreshing our campaign reach to both younger and mature demographic well reinforced in dealing true across every market cycle that shoppers consistently demand create high-quality fashion at unbeatable price, grounding our mind share in smart value allowing us to double down on our off-price advantage, attract high-value shoppers and drive high-quality growth. Alongside our branding refresh, our customer engagement strategy focused on retention and lifetime value [indiscernible] 70% less, saving power our core per delivering present supplies affordability that converts new shoppers, providing a tailored tiered service model to our SVIP along us to capture greater wallet share over time, making SVIP loyalty as a primary engines of operational stability and profitable growth. Turning to our technology road map. We are deepening AI integration across our business. On the customer side, our AI provides a product suite is driving tangible results. Virtual [indiscernible] is steadily up. Integrate -- intelligent customer service with AI voice interactions and predictive capabilities is lifting conversion rate and AIGC has enabled faster discover. Marketing remains our most impactful [indiscernible] to date. Our upgrade AI marketing agent now enable optimized from placement planning to AIGC creative maturing across the right channels. We see clear room for this integrated approach to further drive acquisitions, efficiency while improving customer quality. Operationally, we are scaling AI beyond individual tools into a unified secured intelligent layer across the business. We are already seeing early wins in supply chains, optimizations and daily operational workflows. Overall, we remain focused on disciplined execution today while building towards our long-term vision, while we continue to navigate near team micro headwind with caution. I have full confidence in our proven model, solid foundations and the team as we sharpened our merchandising elevate the customer experience and scale technology, we are firmly positioned on our pave back to the sustainable growth. Finally, I would like to brief cover Shan Shan Outlets, a key part of our omnichannel discount retail strategy. Since our acquisitions in 2019, we have driven disciplined expansion across emerging in Tier 1, Tier 2 in the key cities. Today, Shan Shan has scaled from 5 to 22 operational outlets mall, becoming China's largest outlet chain by store count and maintain our top-tier position by total GMV. In the first half, Shan Shan Outlets continued its strong scale momentum with over 20% year-over-year growth, capitalizing on the value thinking trend and the unique in-person shopping experience of online -- off-line retail. Looking ahead, we expect its business contributions to the group to increase steadily. At this point, let me hand over the call to our CFO, Mark Wang, to go over our financial results.

Thanks, Eric, and hello, everyone. In the second quarter, our top line came in at the lower end of our guided range, reflecting broad-based softening in consumer sentiment. Despite ongoing pressure, we maintained disciplined execution, which provides strong visibility into our operational trajectory, enabling us to preserve operating profitability and margin health. As noted in our earnings release, our non-GAAP net income was temporarily impacted by a onetime withholding tax adjustment, which I will elaborate on shortly. Adjusting for this nonrecurring item, our underlying non-GAAP net profit remains solid with RMB 2.0 billion with a net margin of 7.9%, demonstrating our underlying profitability and the core cash generation remains fully intact. As Eric mentioned, quality, sustainable growth remains our core priority. While macro headwinds [indiscernible], we continue to focus on strengthening our competitive modes and strategically reinvesting to fortify our fundamentals for profitable and long-term expansion. During the first half, we distributed approximately USD 400 million to shareholders through a combination of cash dividends and share repurchase, reflecting the anticipated utilization of our existing authorization. The Board of Directors has approved a new USD 1 billion share repurchase following. This reinforces our firm commitment to returning no less than 75% of our full year 2025 non-GAAP net income to shareholders, supported by solid [indiscernible] and a resilient underlying cash generation. We remain fully confident in our capacity to achieve this capital return target. In addition to unlock the value of our high-quality assets and optimize capital efficiency, we successfully launched 2 public [indiscernible] backed by 3 mature changeouts properties. A consumer infrastructure REIT and the commercial REIT. This not only includes the quality of our outlet portfolio and the market valuation, but also created a capital recycling loop that allows us to invest the proceeds from [indiscernible] directly into disciplined expansion. We believe this model maintains our financial flexibility, while supporting the sustainable growth of our online business, driving asset revaluation and creating sustainable value for our shareholders. Now moving to our detailed quarterly financial highlights. Before I get started, I would like to clarify that all financial numbers presented below in RMB and all percentage teams a year-over-year change, unless otherwise noted. Total net revenues for the second quarter of 2026 RMB 24.7 billion compared with RMB 25.8 billion, in the prior year period. Gross profit was RMB 5.8 billion compared with RMB 6.1 billion in the prior year period. Gross margin was 23.3% compared with 23.5% in the prior year period. Total operating expenses decreased by 2.4% year-over-year to RMB 4.5 billion from RMB 4.6 billion in the prior year period. As a percentage of total net revenue, total operating expenses were 18.0% compared with 17.7% in the prior year period. Fulfillment expenses were RMB 2.14 billion compared with RMB 2.11 billion in the prior year period. As a percentage of total net revenues, fulfillment expenses were 8.7% compared with 8.2% in the prior year period. Marketing expenses were RMB 760.3 million compared with RMB 715.9 million in the prior year period. As a percentage of total net revenues, marketing expenses were 3.1% compared with 2.8% in the prior year period. Technology and content expenses for RMB 486.2 million compared with RMB 442.0 million in the prior year period. As a percentage of total net revenues, technology and content expenses were 2.0% compared with 1.7% in the prior year period. . General and administrative expenses decreased by 17.5% year-over-year to RMB 1.1 billion, compared with RMB 1.3 billion in the prior year period, primarily due to higher share-based compensation expenses for Shan Shan Outlets reported in the prior year period. As a percentage of total net revenues, general and administrative expenses decreased to 4.3% from 5.0% in the prior year period. Income from operations was RMB 1.5 billion compared with RMB 1.7 billion in the prior year period. Operating margin was 6.2% compared with 6.6% in the prior year period. Non-GAAP income from operations was RMB 2.0 billion compared with RMB 2.4 billion in the prior year period. Non-GAAP operating margin was 8.1% compared with 9.3% in the prior year period. Income tax expenses were RMB 3.3 billion compared with RMB 407.2 million in the prior year period. The increase was primarily driven by 2 items: The first one is the income tax of RMB 1.63 billion relating to the one-off investment gains recognized by Shan Shan Commercial Group. The original holder of the underlying assets on the issuance of commercial REIT and the second one is accrued withholding tax expenses of RMB 1.56 billion, reflecting the holding tax treatments of historical dividend distributions from Mainland China to Hong Kong regarding applicable policies and tax duty benefits. . Excluding the tax impact of this discrete and nonoperating items, the company's normalized the effective category for the second quarter of 2026 remained stable year-over-year. Here, I would like to emphasize that our company has always operated and continues to operate in full compliance with applicable tax laws and regulatory deadlines. The withholding tax adjustment reflect adjustments of historical dividends, distributions and expected to be titled in the third quarter. Going forward, the company will continue to accrue dividend withholding tax at [indiscernible] rate for onshore earnings allocated for offshore repatriation. This will increase the cost of direct onshore to offshore equity remittance. With cash repatriation as 12 in our broader capital structure 2P. Net income attributable to Vipshop's shareholders increased by 189.1% year-over-year to RMB 4.3 billion from RMB 1.5 billion in the prior year period. primarily due to a one-off investment gain of RMB 5.79 billion from the listing of a commercial REIT. Net margin attributable to Vipshop's shareholders increased to 17.4% from 5.8% in the prior year period. Net income attributable to Vipshop's shareholders per diluted ADS increased to RMB 8.82 from RMB 2.91 in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders was RMB 392.2 million compared with RMB 2.1 billion in the prior year period. Non-GAAP net margin attributable to Vipshop's shareholders was 1.6% compared with 8.0% in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS was RMB 0.80 compared with RMB 4.06 in the prior year period. As of June 30, 2026, the company has cash and the cash equivalents and the restricted cash of RMB 29.9 billion and short-term investments of RMB 3.6 billion. Looking forward to the third quarter of 2026, we expect our total net revenues to be between RMB 20.3 billion and RMB 21.4 billion, representing a year-over-year decrease of approximately 5% to 0%. 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] The first question will come from the line of Thomas Chong of Jefferies.

My question is about the consumer sentiment. Can management comment about how we are seeing the sentiment so far? And on that front, can you comment about the monthly revenue trend that we are seeing since April 2. Given that we are already like a 2 months in the quarter, are we actually seeing our revenue hitting the low end or the high end of the guidance? And finally, can management comment about the second half outlook.

[Foreign Language]

[Interpreted] Okay. In terms of the general consumer sentiment, we find consumers are not particularly in [indiscernible] they are actually not buying into everything. They are very value seeking, and they're very budget-conscious, and they're very selective. So as we enter into Q3, across our sector, we continue to observe pressure quarter-to-date from July to August. So we do see some recovery in terms of sales momentum, but it's only slightly better. It's far from being good. So that's why we think that for the second half and for the full year, we may see a similar consumer sentiment as we have seen in the first half. That will bring our total revenue for the full year to be slightly negative from last year.

Our next question will come from the line of Alicia Yap of Citigroup.

[Foreign Language] I have a question on the operating income. We noticed that it seems that there is -- the operating margin seems to be declining on a year-over-year trend. How should we be thinking about the gross margins, operating expenses and also operating margin trends for the third quarter and the fourth quarter?

[Foreign Language]

[Interpreted] On margins, in terms of operating margin, we do see a slight decline year-over-year for Q2. That's primarily because we see certain level of deleverage from fulfillment expenses, which is increasing proportionately as [ returns ] are still going up. Actually, when we look at our GP margin, it's flattish, and it's even growing, which implies that we have a strong management on managing the gross margin and the gross profit. In addition, we do see certain operating deleverage from fixed cost and expenses as the revenue scale become smaller due to macro pressure. But overall, we expect operating margin will continue to be quite resilient given our structure cost and expense discipline. So for the second half for Q3 and Q4, we are pretty confident in managing the structure health of our business. And as you look externally, you see a lot of industry players actually investing in unprofitable subsidies. That's not what we are going to do. Our focus remains steady, partly on maintaining a healthy level of profitability and margin. So we do expect our margins, especially the NP margins will remain relatively stable for the second half