Vipshop Holdings Limited (VIPS) Q2 2020 Earnings Call Transcript

Vipshop Holdings Limited (NYSE: VIPS) Q2 2020 earnings call dated Aug. 19, 2020

Corporate Participants:

Jessie Fan — Director of Investor Relations

Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer

Donghao Yang — Chief Financial Officer

Analysts:

Yik Wah Yap — Citigroup — Analyst

Thomas Chong — Jefferies — Analyst

Binnie Wong — HSBC — Analyst

Joyce Ju — Bank of America Merrill Lynch — Analyst

Eddy Wang — Morgan Stanley — Analyst

Han Joon Kim — Macquarie Research — Analyst

Jerry Liu — UBS — Analyst

Veronica Shen — China Renaissance — Analyst

Alex Yao — JPMorgan — Analyst

Hans Chung — KeyBanc Capital Markets — Analyst

Tian Hou — T.H. Capital — Analyst

John Choi — Daiwa Capital Markets — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, everyone, and welcome to Vipshop Holdings Limited’s Second Quarter 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.

Jessie Fan — Director of Investor Relations

Thank you, operator.

Good morning and thank you for joining Vipshop’s second quarter 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 fact 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 Donghao Yang, our CFO.

At this time, I would like to turn the call over to Mr. Eric Shen.

Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer

Good morning and good evening, everyone. Welcome and thank you for joining our second quarter 2020 earnings conference call.

We delivered robust financial and operational results in the second quarter of 2020 due to our solid execution on the merchandising strategy. In the beginning of May, we saw strong recovery in apparel demand and acted quickly to help our suppliers destock their inventories after COVID-19. We ran a successful promotion campaign in June, offering customers the best deals while helping our suppliers monetize their inventory more efficiently.

During the quarter, total active customer grew by 17% year-over-year to 38.8 million from 33.1 million in the prior year period. In addition, our conversion rate and customer stickiness both improved. In the second quarter, conversion rate for our app increased by 10% year-over-year, and repeat customers as a percentage of total active customers increased to 90% from 87% in the prior year period.

Looking into the second half of the year and beyond, we will continue to focus on enhancing the product offerings on our platform, providing our customers with a differentiated experience as compared to other marketplace platforms. We believe we are well positioned to continue to gain share in China’s discount retail market, delivering solid shareholder return over time.

Lastly, today we announced that our CFO, Donghao Yang, will step down from his current position in November. I want to take — I want to take some time to thank Donghao for his years of hard work and contribution to Vipshop. Our Board has appointed Donghao as a new non-executive director effective on the day of the change of his position. We are delighted that he will be — continue to be the part of the Vipshop family as a member of our Board.

Donghao has served us as our CFO since 2011. In the past nine years, he made significant contribution to our transformation from the private held company into the publicly listed company. He has helped the Company build a solid finance team with effective internal control systems since our IPO. On behalf of all of us at Vipshop, I would like to thank Donghao for his leadership, professionalism and strong work ethic. I wish him best of luck with his future endeavors.

We have already started the search process for a new CFO.

Donghao Yang — Chief Financial Officer

Thanks, Eric, and hello, everyone.

As Eric noted, I will be stepping down from the CFO position in November for personal reasons after we report results for the third quarter. I would like to open up by saying that it has truly been an honor to be able to serve as Vipshop’s CFO and grow with the Company in the past nine years. I have made many trusted friends along the way and will always cherish the experience we had together. I would like to thank Eric, Arthur and other colleagues for their support and friendship along this journey. I look forward to continuing to serve the Company in the capacity of a non-executive director of the Board. I trust that the Company is well positioned to further fortify its leading position in China’s discount retail market and have full confidence in Eric, Arthur and the team to continue to deliver outstanding results going forward.

Turning to our results for the second quarter of 2020. We delivered solid top line growth, coupled with year-over-year improvement in profitability this quarter. Specifically, non-GAAP net income attributable to Vipshop’s shareholders increased by 24.3% year-over-year to RMB1.3 billion from RMB1.1 billion in the prior year period. Our non-GAAP net margin attributable to Vipshop’s shareholders increased to 5.5% from 4.7% in the prior year period despite aggressive reinvestment in coupons and marketing expenses related to this year’s June promotional campaign.

We were able to achieve these solid results because of our focus on optimizing our product assortment and providing our customers with superior customer experience. In the second quarter, GMV contribution from apparel-related categories increased to 69% from 63% in the prior year period, and GMV contribution from our Fengqiang and Kuaiqiang channels reached 50% of our online GMV.

Going forward, we will continue to balance our top line growth and profitability, aiming to grow as fast as possible while keeping our margins at a healthy level. We are confident that as China’s leading discount retailer, we can continue to expand our market share and generate sustainable value creation for all of our stakeholders.

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 percentage changes refer to year-over-year changes unless otherwise noted.

Total net revenue for the second quarter of 2020 increased by 6% year-over-year to RMB24.1 billion from RMB22.7 billion in the prior year period, primarily driven by the growth in the number of total active customers.

Gross profit for the second quarter of 2020 was RMB4.9 billion as compared with RMB5.1 billion in the prior year period. Gross margin was 20.5% as compared with 22.4% in the prior year period, primarily attributable to our strategy to reinvest into discounts and coupons during this year’s June promotional event.

Total operating expenses for the second quarter of 2020 decreased to RMB3.8 billion from RMB4.2 billion in the prior year period. As a percentage of total net revenue, total operating expenses decreased to 15.8% from 18.5% in the prior year period.

Fulfillment expenses for the second quarter of 2020 decreased to RMB1.7 billion from RMB2.2 billion in the prior year period. As a percentage of total net revenue, fulfillment expenses decreased to 7% from 9.7% in the prior year period, primarily attributable to the change in fulfillment logistics arrangement.

Marketing expenses for the second quarter of 2020 were RMB1 billion as compared with RMB877.6 million in the prior year period. As a percentage of total net revenue, marketing expenses were 4.3% as compared with 3.9% in the prior year period.

Technology and content expenses for the second quarter of 2020 decreased to RMB305.4 million from RMB422.3 million in the prior year period. As a percentage of total net revenue, technology and content expenses decreased to 1.3% from 1.9% in the prior year period.

General and administrative expenses for the second quarter of 2020 were RMB804.6 million as compared with RMB706.3 million in the prior year period. As a percentage of total net revenue, general and administrative expenses were 3.3% as compared with 3.1% in the prior year period.

Our income from operations for the second quarter of 2020 increased by 28.4% year-over-year to RMB1.2 billion from RMB965.4 million in the prior year period. Operating margin increased to 5.1% from 4.2% 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 27.1% year-over-year to RMB1.5 billion from RMB1.2 billion in the prior year period. Non-GAAP operating income margin increased to 6.2% from 5.2% in the prior year period.

Our net income attributable to Vipshop’s shareholders for the second quarter of 2020 increased by 88.9% year-over-year to RMB1.5 billion from RMB813.5 million in the prior year period. Net margin attributable to Vipshop’s shareholders increased to 6.4% from 3.6% in the prior year period. Net income attributable to Vipshop’s shareholders per diluted ADS increased to RMB2.24 from RMB1.21 in the prior year period.

Non-GAAP net income attributable to Vipshop’s shareholders, which excluded share-based compensation expenses, 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 partnership that is accounted for as an equity method investee increased by 24.3% to RMB1.3 billion from RMB1.1 billion in the prior year period. Non-GAAP net margin attributable to Vipshop’s shareholders increased to 5.5% from 4.7% in the prior year period. Non-GAAP net income attributable to Vipshop’s shareholders per diluted ADS increased to RMB1.92 from RMB1.58 in the prior year period.

As of June 30, 2020, our Company had cash and cash equivalents and restricted cash of RMB8.1 billion and short-term investments of RMB5.9 billion. From the second quarter of 2020, net cash from operating activities was RMB5.1 billion.

Looking at our business outlook for the third quarter of 2020, we expect our total net revenue to be between RMB20.6 billion and RMB21.6 billion, representing a year-over-year growth rate of approximately 5% to 10%. These forecasts reflect 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.

Questions and Answers:

Operator

[Operator Instructions] We have the first question coming from Alicia Yap from Citigroup. Please go ahead.

Yik Wah Yap — Citigroup — Analyst

Hi, good evening, Eric, Donghao, Jessie. Thanks for taking my question. And thank you, Donghao, for your service and best wishes to you. So my question is related to the sell-through rate. So I think, remember, in the past management noted that the sell-through rate for most of the flash sales merchandise is about 50%. So, wonder if there has been any change on the sell-through rate now, any different by the product category. Can you also remind as to rough percentage of the merchandise that are currently stored or utilize our warehouse versus those that you have to ship back to the suppliers after the sales end. Thank you.

Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

So, Alicia, we no longer actually track the sell-through rate as closely given that we are largely connected with the inventory systems of the — of our suppliers, and our logistics model has changed from before the fast-in, fast-out to JIT and JITX, so the just-in-time model and the single supplier order, shipping directly from the supplier warehouse to the end consumer model, and therefore, except for the products and we purchase outright, we no longer have the concept of the sell-through rates. And regarding your question on fast-in-fast-out, that’s a very small percentage because the majority of our products are now in JIT and JITX.

Yik Wah Yap — Citigroup — Analyst

Okay. Thank you.

Operator

Thank you. We have the next question coming from the line of Thomas Chong from Jefferies. Please go ahead.

Thomas Chong — Jefferies — Analyst

Hi, good evening. Thanks, management for taking my questions. I have a question about the business trend in the month of July and updates. Can you comment about how the GMV is trending and our expectations in terms of the user and GMV in the second half? We noticed that in Q2, the quarterly net add is quite solid. Just want to see how we should think about the second half outlook. And then a very quick question is about the competitive landscape and our thoughts on live-streaming online shopping. Thank you.

Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

So, Thomas, after COVID-19 impact, we still saw quite positive trends in July and August, given that more people are moving online to make their purchases as opposed to before. Therefore, we’ve seen quite positive trends. But the third quarter is traditionally a light season without promotional events, and it’s also a light season for the apparel category. We have higher and better expectations for the fourth quarter, where apparel ticket sizes are much larger and ticket sizes as well as the promotional events in the fourth quarter that we will run as well as industry-wide promotional events gain market share. So we are quite positive about the second half outlook.

[Foreign Speech]

So, Thomas, regarding your second question on competition who are doing some live streaming. After the COVID-19 outbreak, there is a lot more inventory in the market as compared to before and a lot of brands are looking to expand channels, including brands that didn’t work with us but are now working with us. So the key is which channel can monetize the inventory for events more efficiently, and therefore we will also be executing on our merchandising strategy to gain share.

And regarding your question on live streaming, we’ve tried live streaming e-commerce for about four months now. We’ve seen some positive trends. We are still in the early stage to explore this concept and we’ll continue to explore different formats. For example, short videos and live streaming.

Thomas Chong — Jefferies — Analyst

Thank you.

Operator

Thank you. We have the next question coming from the line of Binnie Wong from HSBC. Please go ahead.

Binnie Wong — HSBC — Analyst

Hi. Good evening, management. And hi, Donghao, so sorry to see you go. It has been a great pleasure to work with you for all these years. So the question here is that if we look at the gross margin, it seems to be slightly lower on a Y-on-Y basis, about 2 bps — 2 points lower. Just wondering any category mix change. And then, if you look at the marketing cost ratio, it still should be quite high since basically — higher since 3Q ’18 at around like 4% or so. So how do we see the full year sales and marketing cost ratio should trend? And then if we can understand better in terms of sales and marketing, how much of that is related more as to user acquisition, how much of it related to couponing, that would be great. Thank you.

Donghao Yang — Chief Financial Officer

Okay. Well, thanks, Binnie. Yeah, you’re right. I mean, I’ve been with the Company for nine years, and I really love this Company. But I think it’s certainly the right time for me to move on. But as I will be stepping down as the CFO of the Company, I think — at the same time, I will be appointed as a new Non-Executive Board Director and in that capacity, and I will still be doing my best to try to contribute to the prosperity and growth in Vipshop. So no need to worry about that.

So, back to your question about the business. So gross margin, yes, you’re right. On year-over-year basis, our gross margin for Q2 was like about 2 percentage point lower than Q2 last year, and the reason behind that is because if you look at our operating expenses, total operating expenses as a percent of revenue, it was down by 2.7% compared to Q2 last year. So our strategy is to try to grow the Company as fast as possible while maintaining a healthy margin level.

So while we are — so now that we are able to save costs and drive down the operating expenses as a percent of revenue, we want to use some of that savings to reinvest in the top line growth of the Company. So one of the things that we did was to offer more coupons, rebate and discounts to our customers to drive, first, top line growth, and second, new customer and total customer growth. So if you look at our customer growth in the past — Q2 this year, it was like 70% year-over-year, which was quite impressive.

And marketing — yes, you’re right. And marketing expenses as a percent of revenue went up slightly in Q2 partly because in Q1 due to the coronavirus pandemic crisis, we made a decision not to spend too much on marketing. But in early May, we saw the market was quickly recovering, the demand was coming back very fast. So we decided, all right, it’s clearly the time for us to spend on marketing again to drive traffic, customer growth and eventually top line growth. And for this whole year, we do not expect the marketing expenses as a percent of revenue to be significantly higher than last year. It will probably be slightly higher, but not significantly higher. Again, so the — overall strategy is to grow as fast as possible while maintaining a healthy margin level.

Jessie Fan — Director of Investor Relations

And, as for the last bit, our marketing expenses are all on customer acquisition whereas the coupons and the discounts are accounted for in our gross margin. So it’s separate.

Binnie Wong — HSBC — Analyst

And thank you. Thank you, Donghao and Jessie. So, is that the reason also why gross margin has been trending down a bit, because that we have also been giving out more coupons? Or is it by any regions or category mix?

Donghao Yang — Chief Financial Officer

Or what? I’m sorry, Binnie?

Binnie Wong — HSBC — Analyst

Sorry. Hi, Donghao. Sorry. I was just thinking that, is that also the gross margin trending down like around 2 percentage points lower than last year. Is it also because of like the coupons or is it because of category mix change?

Donghao Yang — Chief Financial Officer

What change? Oh, category change. All right. Okay. So through this past Q1, I think the main reason for the decline of our gross margin was a change in our category remix. But for Q2, I think it was mostly because of our reinvestment efforts to provide more coupons and discounts to our customers.

Operator

Thank you, sir. We have the next question from the line of Joyce Ju from Bank of America. Please go ahead.

Joyce Ju — Bank of America Merrill Lynch — Analyst

Thanks, management. Congrats on the solid result this quarter. And Donghao, thanks for all your — like answers and help. Yes, my question is actually regarding the user growth and also the sales and marketing. For the user growth this quarter, we have seen — the user growth actually reaccelerate from the 1Q and the growth rates, it’s actually similar to the second half last year. Just want to — just make sure the Company will continue to [Indecipherable] expect a user growth like similar to this quarter’s growth rate. But we know this quarter we have like big promotions, and industry-wide, the user growth seems like all pretty strong. Should we expect seasonality in user growth as well or we believe that will be more consistent?

And the second question is, we’re currently active in — yeah, Vipshop doing a lot of like branding — branding marketing like advertising on like Hunan TV or like sponsor a lot of TV shows. May we have a breakdown for our sales and marketing, like what percentage of them are actually doing the branding, what percentage of them is actually using [Indecipherable]? Yeah. Thanks a lot.

Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

So, Joyce, regarding your question on the — on the customer growth, we actually started to invest in marketing again towards the end of April because before April, due to the pandemic we were quite cautious about investing into marketing. And after the situation has calmed in late April and early May, we started to invest heavily into both TV show endorsement as well as digital advertising because people were staying home a lot and watching TV on the iPad. We’ve been quite positive results from the TV ratio endorsements as well. We actually saw pretty solid results in terms of both new customer acquisitions as well as spending money in reactivating what we call old, old customers, so people who shopped with us a long time ago but haven’t really shopped with us in the line. And we’re seeing positive trends in both. In the back half, we will continue to invest into marketing and we expect the customer growth trends to be positive going forward as well.

[Foreign Speech]

Joyce, regarding your second question on the — on the division between targeted advertising and branding, if we were spending $3, then $2 of them will be spent on digital advertising, so, very targeted, and then about $1 will be spent in terms of branding. The branding result show up slower, not as immediate, but we do — we do see that that reminds a lot of new customers to download our app as well as old customers to revisit our platform. So we are actually quite happy with the distribution between the marketing budget right now.

Operator

Thank you. We have the next question coming from the line of Eddy Wang from Morgan Stanley. Please go ahead.

Eddy Wang — Morgan Stanley — Analyst

Hi, management. Thank you for taking my question and best wish to Donghao. So my question is about the brand inventory level. So, as I think you mentioned last time that you expected the inventory issue of brands will sustain through the end of this year. But if you look at the June and July, apparel demand in China is actually quite strong and we all understand that a lot of platform, including us, we are actually doing quite aggressive promotion during the June and July [Phonetic] period. So just want to understand that your view on the inventory issue for the end of this year. Is there any change to view or you still kind of hold this view? Thank you.

Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

Eddy, we are still seeing high inventory levels in the market. There’re lot of brands that are coming to us to monetize on their assets inventory. So we believe that this trend will continue into the second half of this year and into next year. For example, before we did not clear inventory that’s over two years for our suppliers. But now that we’ve opened a inventory clearance channel on our platform to help our suppliers clear the older inventory as well. So we do believe that there’s plenty of inventory in the market for us to clear in the coming years.

Operator

Thank you. So we move to the next question. The next question comes from Han Joon Kim from Macquarie. Please go ahead.

Han Joon Kim — Macquarie Research — Analyst

Great. Thank you for the chance to ask the question. Can management just kind of help us understand perhaps the TAM for our business. And this is asked within the context of recognizing that if we — within discounting retailing, I think our VIP.com kind of tends to focus a little bit more on premium mass segmentation. Our kind of Shan Shan initiative move will focus a little bit higher than that and VIPmaxx a little bit lower than that, but the bulk of what I think investors or shareholders of VIP kind of get to see and monitor is really the premium mass segment — or the — yeah, the premium mass segment effectively. So just — as we grow our user base, I don’t know how you guys think about what the right number, long-term, might be for you guys in terms of active user base. Thank you.

Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

So Han Joon, we are a discount retailer and a lot of customers actually do like to buy things on discounts. And therefore, we believe that our customer base can be very wide. On a large picture, we believe that our addressable market can be as high as 300 million customers.

Donghao Yang — Chief Financial Officer

Yeah. And to add to that, we are not just any discount retailer. We are a discount retailer for brands. So this is what’s unique about our business model. So we sell plenty of products at deep discounts to our customers. The TAM of the — for our business, we believe, is very, very high. But it’s hard to imagine why anyone just wouldn’t like to have a brand product at deep discount. So we think that the TAM is — it’s going to be really big.

And also, if you look at the largest discount retailer in the world, TJX, for the North American market, the total population is over like 300 million, like one-fourth of the population size of China. But they do like $40 billion of sales a year. And Vipshop this year, we only do like one-third, like around one-third of that. So the growth potential for our business model and for Vipshop I think is so huge.

Operator

Thank you. We have the next question coming from Jerry Liu from UBS. Please go ahead.

Jerry Liu — UBS — Analyst

Hi. Thank you, management. And Donghao, all the best in the future. I would like to go back to some of the earlier questions about competition. And my main question is, if we look at June, roughly maybe June, July, May as well, when demand has started to recover. In this period, what does competition look like? Were there any areas that surprised to be more positive or more negatively, particularly promotions during the 6/18 shopping festival? Was that more intense or expected or less intense than you thought? And given all that, what should we expect for 11/11 shopping festival this year? Thank you.

Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

So Jerry, regarding competition, we always see competition everywhere. It’s always been quite fierce in the e-commerce space and there’s always more players entering. But we do believe that the market is big enough and continues to grow. And therefore, the key is to — for the platforms to execute on their strategy and gain share and gain customers from their strategy and execution. So from that perspective, it’s not just May, June, July, but rather that for the rest of this year and beyond, we expect different platforms to continue to find different ways to sell more products and gain more customers. And we, of course, will continue to actively work with our suppliers to monetize — help them monetize their inventory and execute on their merchandising strategy.

Operator

Thank you. We have the next question coming from the line of Veronica Shen from China Renaissance. Please go ahead.

Veronica Shen — China Renaissance — Analyst

Hi, management. Thanks for taking the question. And all the best to Donghao. Well, my question is regarding the ticket size, the order size. Since we have lowered the free shopping — free shipping threshold for more than half a year, how should we anticipate the order size going forward? Will it stabilize at a certain level or if we will have down a trend pressure? Thanks.

Jessie Fan — Director of Investor Relations

I’m sorry. Are you talking about the RMB88 free shipping?

Veronica Shen — China Renaissance — Analyst

Yeah, yeah, yeah. I’m thinking about the order size since we have lowered the free shipping threshold to RMB88 from RMB288. So I’m thinking about how should we anticipate the order size going forward.

Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

Veronica, after we announced the lower free shipping threshold to RMB88, ticket size came down slightly, but also customers are buying more frequently. In the first quarter, the ARPU and ticket size trends were clouded by the COVID-19 impact. But since the second quarter, we have seen healthy trends as we’ve acquired a lot of new customers as well as reactivated a lot of, what we call, old-old customers. They shop less frequently and buy less than very loyal existing customers. And therefore, it dragged down the average ARPU. But in the second half, we believe that we can continue to increase these customers’ shopping frequency and increase ARPU over time as well.

Operator

Thank you. We have the next question coming from the line of Alex Yao. Please go ahead.

Alex Yao — JPMorgan — Analyst

Thank you, management, for taking my question. And Donghao, best wishes to your next journey. I have a question regarding the user growth trends. What drove the 17% year-on-year growth of active customers? And what was your user acquisition strategy into second half? What are the financial investment that you need to prepare for the new user growth in second half? Thank you.

Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

So Alex, regarding user acquisition, in the second half we will continue to increase marketing expenses as compared to the first half. In the second quarter, we’ve only actually invested into marketing expenses in May and June and did not invest in April. We still see very positive user growth trends. And therefore, we do expect that the second half trend should be better than what we see right now given that our new customers actually decreased year-over-year in April.

Operator

Thank you. We have the next question coming from the line Hans Chung from KeyBanc Capital Markets. Please go ahead.

Hans Chung — KeyBanc Capital Markets — Analyst

Good evening. Thank you for taking my question. And best wishes to Donghao. So my first question would be just — I wanted to follow up on the gross margin. So obviously, we have some promotion and coupons stuff this quarter — in the second quarter. And then I just wonder how should we think about the second half, especially the fourth quarter? Should we think about the promotion activity will be even stronger than second quarter? And then, second question will be a broader question about the longer-term outlook. So can management share your view on medium-term growth outlook for the, let’s say, two to three years? Are we able to get back to the double-digit CAGR while continue maintain a stable margin or even greater margin profile? And to achieve that, what kind of strategy we need to do? And then, just hope to hear some thoughts from the management team. Thank you.

Donghao Yang — Chief Financial Officer

All right. Well, thanks for the question. Well, as we said earlier, our overall strategy is to grow our business as fast as possible while maintaining healthy margin level. So — well, we do not provide any guidance for our Q3, Q4, for gross margin, but what I can tell you is as we continue to be able to save our operating expenses such as fulfillment costs, we will be able — we’ll be having room to provide more discount coupons to drive top line growth and customer user growth. So that is our strategy.

And two to three years’ forecast — well, of course, we will be doing our best to drive our top line growth as fast as possible, and obviously we will be very happy to see if we can have like double-digit growth, as you mentioned. But again, we do not provide guidance for top line growth beyond the next quarter. But we will do our best to achieve the fastest possible top line growth.

Operator

Thank you. We have our next question coming from the line of Tian Hou from T.H. Capital. Please go ahead.

Tian Hou — T.H. Capital — Analyst

Yes. Good evening, management, and best wishes to Donghao. So the question is on the product category mixture. So, we started just focusing on apparels. So I wonder what’s the current product mixture and going forward what are some other categories that management wants to adding more weight to the product portfolio. So that’s the number one question. Number two is regarding our technology and content expense. I see that item as a percentage of revenue is coming down. I wonder going forward, how this line is going to look like. Thank you.

Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

So regarding your first question, Tian, our core capability lies in the wearable apparel related categories which contribute to over 70% of our GMV, and that’s where our expertise is, especially in the merchandising side. Therefore we will continue to expand our market share and grow our share in these core categories. We are not looking to enter any new categories aggressively at the moment as we believe there is plenty of market share to gain and plenty to grow in the apparel category.

[Foreign Speech]

Regarding technology expenses, we expect it to be rather stable going forward as we have a very mature setup already and we are investing incrementally a little more into personalization. But if technology expenses increases in the future, it will not be meaningful. It will be a very slight increase.

Operator

Thank you. We have the next one coming from the line of John Choi from Daiwa. Please go ahead.

John Choi — Daiwa Capital Markets — Analyst

Thank you very much for taking my question. And all the best wishes for you, Donghao. My first question is just quickly on your new user acquisition. I think can you kind of, management, give us color about the — kind of the breakdown between lower tier cities? And also, if you could share with us some metrics for the past, I would say, couple of quarters of the user — spending behavior of these new users including the old users that you mentioned, are you seeing a nice gradual increase of the average spending? And my second question is a just quick follow-up. I think on the prepared remarks, you guys mentioned that Fengqiang and Kuaiqiang are now 50% of your overall GMV. Now, as this continues to grow, how will this impact our gross margin? Thank you.

Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

So, our new customers come from across the board. But lately, we have noticed that slightly more come from tier 4, tier 5 and tier 6 cities, and these customers are also younger on average; a lot of post-90s and post-2000s.

[Foreign Speech]

Regarding the ARPU trends for new customers, it’s always been the case that when new customers first come in, they will not spend a lot. But as they become more active and stickier to the platform, their ticket sizes and their shopping frequency will also improve. So we continue to see these healthy trends.

[Foreign Speech]

And the last question, to answer your question regarding Fengqiang and Kuaiqiang, these channels will not impact our gross margins. We plan our gross margin as a whole and Fengqiang and Kuaiqiang are not especially a margin drag as compared to other platforms.

Donghao Yang — Chief Financial Officer

Yeah. Just to add to that, Fengqiang and Kuaiqiang, the prices are really cheap, but our take rate will not — aren’t very much different from other channels. So it won’t be a cumulative — it won’t be a drag on our gross margin.

Operator

Thank you. I would now like to hand the conference back to our host for take-home remarks.

Donghao Yang — Chief Financial Officer

Thank you, all, for taking the time to join us today and we look forward to speaking with you next quarter. So please keep in mind, next quarter, it will still be me. Thank you. Bye-bye.

Operator

[Operator Closing Remarks]