Vipshop Holdings Limited (VIPS) Q1 2020 earnings call dated May 27, 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:
Han Joon Kim — Macquarie Capital — Analyst
Thomas Chong — Jefferies — Analyst
Alicia Yap — Citigroup, Inc. — Analyst
Andre Chang — JPMorgan — Analyst
Natalie Wu — CICC Securities — Analyst
Ronald Keung — Goldman Sachs — Analyst
Tina Long — Credit Suisse — Analyst
Joyce Ju — BofA Securities — Analyst
Eddy Wang — Morgan Stanley — Analyst
Jin Yoon — Newstreet Research — Analyst
Jialong Shi — Nomura Securities — Analyst
Sally Chan — CLSA Securities — Analyst
Hans Chung — KeyBanc Capital Markets — Analyst
Presentation:
Operator
Ladies and gentlemen, thank you for standing by. Good day, everyone, and welcome to Vipshop Holdings Limited First Quarter 2020 Earnings Conference Call. At this point, I would like to turn the call over to Ms. Jessie Fan, Vipshop’s Director of Investor Relations. Please go ahead, ma’am.
Jessie Fan — Director of Investor Relations
Thank you. Thank you, operator. Hello, everyone, and thank you for joining Vipshop’s first 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 facts we 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 and Chairman; 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 first quarter 2020 earnings conference call. We are pleased to have delivered resilient results in the first quarter of 2020, despite the negative impact from the COVID-19 pandemic.
The retail industry was meaningfully impacted by the pandemic and the apparel category was especially affected due to people leaving their home less often. Through this difficult time, we worked closely with our suppliers and the SF Express to continue to provide great products and reliable service to our customers.
We also spent a lot of efforts in buying medical and sanitizing products such as face masks and eco wipers that consumer need during this time. We are glad that everyday life in China has returned to normal and our business has been healthily recovered as well.
Our GMV has grown nicely in May, driven by the consumption recovered in our core category. In addition, we will be launching our June promotion event soon. We’re seeing this year’s June promotion event as a great opportunity to help our suppliers catch up on sales while providing our customers with great deals in summer wear as the change of the season.
Looking into the rest of the year and beyond, we see positive outlook of our company. We believe now is a great time for e-commerce company to gain share from offline retailer and we are especially well positioned to expand our market share in China’s discount retail market.
Looking ahead, we will continue to improve our merchandising capability as our brand partners are facing challenge with excess inventory. We are committed to working with them more effectively while offering the best view to our consumers, creating a win-win situation for all parties.
At this point, let me hand over the call to our CFO, Donghao Yang, so that he may discuss our strategy in more detail and go over our operational and the financial results.
Donghao Yang — Chief Financial Officer
Thanks, Eric. Hello, everyone. We are glad to have finished the first quarter of 2020 with fund growth that exceeded our expectations and solid profitability even amidst the COVID-19 pandemic. Although our gross margin was impacted during this quarter as a result of selling more standardized products with lower take rate during the pandemic, we delivered solid bottom line through the execution of effective cost control.
Therefore, in the first quarter of 2020, non-GAAP net income attributable to Vipshop shareholders increased by 20.8% year-over-year to RMB986 million from RMB816 million in the prior year period. Our non-GAAP net margin attributable to Vipshop shareholders increased to 5.2% from 3.8% in the prior year period.
During the first quarter, our number of active customers remained stable year-over-year and our total orders increased by 4% year-over-year to RMB121.7 million from RMB116.5 million in the prior year period. We see these metrics as positive results during such a turbulent time, especially since we invested very little into customer acquisition this quarter.
In the current environment, we believe the counter-cyclical nature of our business, positions us well for opportunities to gain market share in our core category.
Desirable brands that don’t currently work with us will be more open to partnering with us to clear their inventory through our platform. At the same time, as offline retail and in-season apparel are facing challenges, our existing suppliers work with us even more closely and give us more desirable product at deeper discounts.
Going forward, we will continue to balance our top line growth and bottom line, supporting our brand partners where we can, to drive more sales for both parties.
Now, moving onto 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 first quarter of 2020 decreased by 8% year-over-year to RMB18.8 billion from RMB21.3 billion in the prior year period, primarily attributable to soft consumer demand for discretionary categories, delayed logistic services and slow response from the supply chain during the COVID-19 pandemic.
Gross profit for the first quarter of 2020 was RMB3.6 billion as compared with RMB4.4 billion in the prior year period. Gross margin was 19.2% as compared with 20.4% in the prior year period, primarily attributable to higher revenue contribution from standardized products with lower gross margin during the COVID-19 pandemic.
Total operating expenses for the first quarter of 2020 decreased to RMB3 billion from RMB3.6 billion in the prior year period. As a percentage of total net revenue, total operating expenses decreased to 15.9% from 16.9% in the prior year period, primarily attributable to strict cost control.
Fulfillment expenses for the first quarter of 2020 decreased to RMB1.4 billion from RMB1.8 billion in the prior year period. As a percentage of total net revenue, fulfillment expenses decreased to 7.4% from 8.3% in the prior year period, primarily attributable to the change in fulfillment logistics arrangement.
Marketing expenses for the first quarter of 2020 decreased to RMB412 million from RMB781 million in the prior year period. As a percentage of total net revenue, marketing expenses decreased to 2.2% from 3.7% in the prior year period, primarily attributable to reduced spending during the COVID-19 pandemic.
Technology and content expenses for the first quarter of 2020 decreased to RMB338 million from RMB383 million in the prior year period. As a percentage of total net revenue, technology and content expenses remained stable at 1.8% year-over-year.
General and administrative expenses for the first quarter of 2020 were RMB839 million as compared with RMB669 million in the prior year period. As a percentage of total net revenue, general and administrative expenses were 4.5% as compared with 3.1% in the prior year period, primarily attributable to operating expenses related to our offline stores and share options granted to our co-founders.
Our income from operations for the first quarter of 2020 was RMB782 million as compared with RMB863 million in the prior year period. Operating margin increased to 4.2% from 4% 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 was RMB1 billion as compared with RMB1 billion in the prior year period.
Non-GAAP operating income margin increased to 5.6% from 4.9% in the prior year period. Our net income attributable to Vipshop’s shareholders for the first quarter of 2020 was RMB685 million as compared with RMB872 million in the prior year period. Net margin attributable to Vipshop’s shareholders was 3.6% as compared with 4.1% in the prior year period. Net income attributable to Vipshop’s shareholders per diluted ADS was RMB1 as compared with RMB1.27 in the prior year period.
Non-GAAP net income attributable to Vipshop’s shareholders, which excluded share-based compensation expenses, impairment loss of investments, amortization of intangible assets resulting from business acquisitions, tax effect of amortization of intangible assets resulting from business acquisitions, investment gain and revaluation of investments excluding dividends, tax effect of investment gain and revaluation of investments excluding dividends, and share of gain or loss in investment of limited partnership that is accounted for as an equity method investee, increased by 20.8% to RMB986 million from RMB816 million in the prior year period.
Non-GAAP net margin attributable to Vipshop’s shareholders increased to 5.2% from 3.8% in the prior year period. Non-GAAP net income attributable to Vipshop’s shareholders per diluted ADS increased to RMB1.44 from RMB1.19 in the prior year period.
As of March 31, 2020, the company had cash and cash equivalents and restricted cash of RMB5.8 billion and short-term investments of RMB3.4 billion. For the first quarter of 2020, net cash used in operating activities was RMB1.7 billion.
Looking at our business outlook for the second quarter of 2020, we expect our total net revenue to be between RMB22.7 billion and RMB23.8 billion, representing a year-over-year growth rate of approximately 0% to 5%, primarily factoring in the continued impact from the COVID-19 pandemic.
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] Your first question comes from the line of Han Joon Kim from Macquarie. Please ask your question.
Han Joon Kim — Macquarie Capital — Analyst
Great, thank you very much for the chance to ask a question. In your opening remarks, you guys talked about the fact that there is more business partnerships that you’re doing with brands and that you are doing a lot more promotions into the June quarter. When I look at your guidance for the second quarter, it’s kind of the normal 0% to 5% that you’ve been giving for the past several quarters.
So, can you just let us know how you’re thinking about the process here, whether it’s just — the guidance is more a minimum target that you want to hit? And what kind of additional kind of opportunities actually do you see into the June quarter that fundamentally changes your relationship with brands and the opportunity to provide better benefits to consumers? Thank you.
Jessie Fan — Director of Investor Relations
Thank you, Han Joon. [Foreign Speech]
Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer
So Han Joon, regarding your question about the trend in the second quarter, if we didn’t have the COVID-19 pandemic in the second quarter, we would have delivered better results of course, but given that COVID-19 still have some impact in the second quarter, especially in April, even though China would likely recover in April, but apparel category specifically was still a bit softened. So, the decision we made back in April that we cancelled April 19th promotional event, which traditionally was our semi-annual promotional event due to the softness in the apparel in the month of April. But since May, we’ve seen full recovery in the business and we’ve seen really good recovery in the apparel category driven by the consumption recovery in the discretionary categories as well.
And if you look into June, in the June 18th or June 16th promotional period, which all the e-commerce companies will be participating in, we are also planning to be investing into the June promotional period as our semi-annual promotional period in order to capture the growth online, especially as consumers are moving increasingly from offline retailers to online e-commerce players, and we see great opportunities to invest in the quarter.
Operator
Your next question comes from the line of Thomas Chong from Jefferies. Please ask your question.
Thomas Chong — Jefferies — Analyst
Hi, good evening. Thanks, management, for taking my questions and congratulations on a solid set of result. My question is about the second half outlook. Given the fact that it’s recovered fully in the month of June, how should we think about the second half business trend in terms of the user and GMV?
And with that, can management also provide some color about the GMV by categories or 1P or 3P in Q2 this year versus Q1? Thank you.
Jessie Fan — Director of Investor Relations
Thank you, Thomas. [Foreign Speech]
Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer
So Thomas, regarding your first question on second half outlook, we are quite confident with our second half outlook given that we notice consumers are increasingly moving online after the pandemic and also for brands, especially apparel brands, we noted that a lot of them are halting their offline store opening and incrementally investing more into their online channel, and we also see this as a great opportunity to be here in our core category.
So, with that said, going forward, we would likely be more aggressive in investing into capturing more share in our core categories.
And regarding your second question on the GMV mix of our marketplace versus 1P, right now we are seeing our marketplace contribution being around 67% of total GMV, and most likely that trend will continue into the future, as these are more standardized non-core category in our market place.
Operator
Your next question comes from the line of Alicia Yap from Citigroup. Please ask your question.
Alicia Yap — Citigroup, Inc. — Analyst
Hi, thank you. Good evening, Shen-zong, Donghao, and Jessie. Thanks for taking my questions. Also, congrats on the solid results. My question is related to user behavior.
So, being a leading discount apparel platform, so post COVID-19, have you seen any meaningful shift or the change of the user behavior or the attitude towards the apparel purchase that might be either positive or negative to Vipshop? And how would you elaborate on the positive trend and tackle the negative shift? And how will your strategy change if any effect on your growth rate and margin profile going forward? Thank you.
Jessie Fan — Director of Investor Relations
Thank you, Alicia. [Foreign Speech]
Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer
Alicia, after COVID-19, we noticed that consumers still have very high demand for the apparel category. One trend that we noticed during the pandemic was that sportswear is becoming increasingly popular and the growth was very fast.
By now, social activities in China are largely back on track. We are seeing women’s apparel is also growing quite nicely. And from our perspective, we are making some adjustments based on our popular, what’s in demand on the customers end, giving them the best assortment of products that they are looking for. But other than that, we’re seeing a lot of inventory in the market. And we will continue to work with our suppliers to offer the best mix of product at the lowest prices to our customers in order to capture the opportunities in the marketplace.
Donghao Yang — Chief Financial Officer
One thing to add to that comment, generally speaking, we will stick to our main strategy, which is focusing on merchandising and apparel, which is a core category. There will be small adjustments here and there, but our main strategy will not change. We will stick to it.
Operator
Your next question comes from the line of Andre Chang from JPMorgan. Please ask your question.
Andre Chang — JPMorgan — Analyst
[Foreign Speech]. So, my question is about margin in first quarter and the outlook. We noticed that despite COVID-19 impact, supposedly dragging down the high marginal apparel sales and deleveraging effect of the economies of scale, we still see the operating margin, net margin improve year-over-year in the first quarter. And also, it’s already above the level in the second quarter last year.
So, my question is, while the marketing spending has been cut aggressively in the first quarter, are we going to see, first of all, the marketing spending picking up meaningfully in second quarter? Or is the structural change to our current strategy to focus on merchandise will not require us to spend as much on marketing?
And secondly, will we see the margin to improve sequentially based on more apparel sales and better category mix? Thanks.
Donghao Yang — Chief Financial Officer
Well, thanks for that question. Well, the reason why our marketing cost went down so much in Q1 was because after the COVID-19 broke out, we decided that it was probably not a good time to spend our marketing dollars to acquire more traffic and users, given back then most — almost entire country was locked down and most people just stayed at home.
Just no matter how hard you try to make them buy any apparel, they will not any way. So that’s why we cut back on our marketing spend dramatically back in Q1, and we started to spend on marketing in early April and I think we’ve returned back to our normal level of marketing spend as of now, and we do expect to spend — continue to spend on marketing through the rest of the year and in the foreseeable future.
And to your second question, we do not provide guidance for margins for the next quarter, but we remain very confident about the long-term prospect of our profitability and margin levels.
Operator
[Operator Instructions] Your next question comes from the line of Natalie Wu from CICC. Please ask your question.
Natalie Wu — CICC Securities — Analyst
Hi, good evening. Thanks for taking my question. Shen-zong, when you mentioned that you are planning to invest heavily to seize the offline to online opportunity, can you elaborate more details on that? Will you give more discount to the consumers by offering lower price? Or are you planning a heavier sales and marketing expenses to attract new users for the rest of this year? Thank you.
Jessie Fan — Director of Investor Relations
Thank you, Natalie. [Foreign Speech]
Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer
Natalie, regarding your question on where we will invest, so since the second quarter, like we mentioned around late April, we have decided to reinvest into marketing again, introducing Vipshop to new customers as well as getting existing customers to come back more frequently.
So, we are making some changes to our investment strategy. We have invested into some short videos, as well as some TV endorsements. And we have seen quite positive customer acquisition, especially from new customers.
And also, in the past, we said we didn’t essentially invest into live streaming, but we are also starting to look into this field, for example, working with the link [Phonetic] a little more and so on.
But at the end of the day, what attracts customers to come to us and repeatedly come to Vipshop is our merchandising strategy. So, continuing to offer customers good brands, high quality SKUs at a deep discount. So, it wouldn’t be marketing that attracts customers to us, but we do want to invest in a certain level of marketing, so that customers know about us and are frequently reminded of Vipshop.
Operator
Your next question comes from the line of Ronald Keung from Goldman Sachs. Please ask your question.
Ronald Keung — Goldman Sachs — Analyst
Thank you. Thank you, Shen-zong, Yang-zong, and Jessie. So, question is on competitive landscape. With a larger than usual backlog of inventory where brands would like to clear, do you see a chance that they would like to expand online channels this year? And so, looking into, for example, the Pinduoduo channels and other channels, how do we see that playing within our leading position in discounted apparel retail? Thank you.
Jessie Fan — Director of Investor Relations
Thank you, Ronald. [Foreign Speech]
Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer
So, Ronald, yes, you’re correct that after the COVID-19 pandemic, we’re seeing increased levels of inventory in the market. And many platforms are also selling some of even discount retail products.
Over the years, many new platforms tried to enter this field. So, this is not something new. But what keeps customers and suppliers on continuing to work with us is our first party model.
So, we actually have a buyer team that chooses the brands and the SKUs and negotiates with our suppliers, the kind of prices we’d like to offer on our platform. So, we have a lot of experience in the field, especially in merchandising and we provide best-in-class customer experience as well in the offseason apparel segment.
So, of course, competition will always exist. So, there is always excess inventory, but also a lot of players trying to enter this field, but at the end of the day, we believe that it depends on the core competency of Vipshop company to continuing to gain share in this market. And it is our goal to be a major player or a major partner that our brands work with, in order to clear their inventory.
Operator
Your next question comes from the line of Tina Long from Credit Suisse. Please ask your question.
Tina Long — Credit Suisse — Analyst
Hi. Thank you, management, for taking my question. Just a quick follow-up on the margin question first. Because of the industry-wide, very high inventory level, have we experienced a deeper discount than normal years from the suppliers? And if so, how that would benefit our margins and if we plan to reinvest some part of it?
And another question is actually on offline operation. Can I follow-up because of the COVID? Were our offline operations severely impacted in the first quarter? How much revenue is actually generated from those offline? And also, whether things actually have been already returned to normal? Thank you.
Jessie Fan — Director of Investor Relations
Thank you, Tina. [Foreign Speech].
Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer
So, Tina, regarding your first question on the profit size, yes, we are noticing that suppliers are giving us a lower discount than usual as a result of excess inventory in the market. But it is our intention, and what we have done is, we passed on the lower discount to our customers.
And in addition to that, we are actually also investing in some areas to lower the prices that we offer to customers with our suppliers. So, if we can continue to gain share in this market, then our profits will remain to be very solid as well without having to increase the price of the products that we offer.
Donghao Yang — Chief Financial Officer
Okay, let me take your second question. Offline business accounted for about 4% of our GMV in Q1 this year and less than 2% of our net revenue. So, it’s a very small part of our overall business.
On our offline business, we have basically two models. One is Shan Shan Outlets, the other one is just regular offline stores. Shan Shan has done much better. They have almost come back to its normal level in terms of daily revenue, GMV, and it was profitable. And the other offline business store hadn’t done nearly as well. They haven’t returned fully to its normal operations. And again, it was not profitable in Q1. But, again, the impact on our overall profitability was limited because of its small size.
Operator
Your next question comes from the line of Joyce Ju from Bank of America. Please ask your question.
Joyce Ju — BofA Securities — Analyst
Good evening, Shen-zong, Yang-zong and Jessie. Congrats on very solid results this quarter and thanks for taking my question.
My question is actually a more of a strategic one because Shen-zong previously just mentioned, actually Vipshop would like to — just like a period of time which those suppliers’ actually high inventory probably can offer us both deep discount and also better inventory and greater selections to actually extend our strength in discounted retail.
So, just want to have a full picture, from Shen-zong’s perspective, like you guess, how long period of time we actually will enjoy this kind of balances and what type of strategy we are actually executing and what kind of trends we want to use throughout this period of time, i.e. like, is this — we want to grow more active customers or we actually want to extend more supplier relationships or we want to extend — sorry, probably strengthen our business model to even some inventory, just like more qualitative colors will be good. Thank you.
Jessie Fan — Director of Investor Relations
Thank you, Joyce. [Foreign Speech].
Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer
So, Joyce, we believe that the benefit from the excess inventory will at least last until the end of this year and very likely it’ll be much longer than that. So, seeing this opportunity, we have communicated earlier that we will be ramping up marketing expenses slightly to get new customers and existing customers to both come to visit us more frequently and buy more from us because we have a lot of supply.
So, therefore, what we actually need is more customers to come, both new and existing customers. So, it is our goal to expand our customer base in the next few quarters.
Operator
Your next question comes from the line of Eddy Wang from Morgan Stanley. Please ask your question.
Eddy Wang — Morgan Stanley — Analyst
[Foreign Speech] Thank you for taking my question. My question is also related to the user and marketing expense. So, if you look at user in the first quarter, actually flattish year-over-year, and I think I understand it’s mainly because of the COVID-19. But given that sales and marketing is also kind of in the first quarter, do you think it’s any — the impact from the reduced marketing spending?
And on top of that, as you mentioned that you have increased marketing spending in the second quarter to drive the user growth, can you give us some color in terms of how the user growth has been so far in the second quarter? So, is the growth actually come back to the growth of second quarter of last year, close to around 20%?
And last one is, given the intense competition in e-commerce, have you seen any increased cost of customer acquisition in the second quarter? Thank you.
Jessie Fan — Director of Investor Relations
[Foreign Speech].
Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer
So, Eddy, regarding your question on the marketing expenses and customer acquisition, we are seeing that COVID-19 impacts were quite big in the first quarter. And, therefore, we stopped marketing investment entirely for a little while.
What surprised us positively was that our customers actually remained quite loyal, and our customer number year-over-year remains flattish even though we didn’t invest much into customer acquisition or old customer reactivation.
Since the second quarter, we mentioned that we have started to invest into marketing again, and we’re seeing quite positive trends in terms of customer growth.
So, we do believe that right now is a good opportunity for us to get more customers to come and visit us and see that we are a discount retailer, offering great brands and deep discount.
And regarding your last question on the customer acquisition costs in the market, we haven’t seen much change before or after the pandemic. So, our customer acquisition cost remains flattish per customer.
Operator
Your next question comes from the line of Jin Yoon from New Street Research. Please ask your question.
Jin Yoon — Newstreet Research — Analyst
Good evening, guys. Thanks for taking my question. I think on your prepared remarks, Donghao, you mentioned that gross margins trend a little bit lower given the contribution of the mix on the standardized products.
I apologize if this question was asked before. I dropped off for a few minutes. But related to the standardized products, with COVID-19 largely — the spread largely behind us and with more availability across the board of PPE products in the marketplace, should we expect the standardized product mix to reverse as we approach the second half of the year, and so gross margin should reflect back to plus 20% mark that we saw this time last year?
So, how should we look at the contribution mix on the standardized product as we kind of move away from the spread of COVID-19 in China? Thanks, guys.
Donghao Yang — Chief Financial Officer
Yes. Well, actually, you’re absolutely right. So, in Q1, we sold a lot more standardized products than we used to, including facial masks and other sanitizing product. And going forward, as our apparel business continues to come back, return to its normal mix level, we do expect our gross margin to recover and to improve and go back to its normal level.
Jin Yoon — Newstreet Research — Analyst
Got it. Thanks, Donghao.
Donghao Yang — Chief Financial Officer
Yes. Thank you.
Operator
Your next question comes from the line of Jialong Shi from Nomura. Please ask your question.
Jialong Shi — Nomura Securities — Analyst
Thanks for taking my question. Good evening, Shen-zong, Yang-zong, Jessie. Congratulations on a very solid quarter.
My question is about your fulfillment expense. Based on my calculation, your fulfillment expense per order was slightly over RMB11 per order in 1Q, as 1Q was the first full quarter since you outsourced the entire deliveries to ShunFeng Express. Just wonder if we should extrapolate this per order fulfillment expense in 1Q to future quarters? Or else, just wonder if there is more room for this metric to trend even lower in your future quarters.
Donghao Yang — Chief Financial Officer
Thanks, Jialong, for your question. Well, in our fulfillment expenses, actually, there are two main components. One is the last mile delivery cost. Since last December, we started working with ShunFeng and we paid them a predetermined fixed amount per order for their last mile delivery service. So, that part is mostly fixed. But in Q1, we also had another component, which was the warehousing component. Since our business was negatively impacted by the COVID-19 pandemic, a lot of the warehousing costs were fixed costs.
So, back to your question, going forward, as we continue to grow our business, as in general the economy recovers from the pandemic impact, we do expect — there’s room for us to reduce our warehousing-related costs. So, yes, there is room for us to continue to reduce the per order fulfillment cost in terms of absolute RMB.
Operator
Your next question comes from the line of Sally Chan from CLSA. Please ask your question.
Sally Chan — CLSA Securities — Analyst
Hi. Good evening, management. Thank you for taking my question. I actually have a follow-up question on GP margin. So, for the first quarter, the margin only fell very slightly, 1 percentage point year-on-year. So, I’m wondering if you can help us think about how we should think about the gross margin trend in 2Q. Because from my calculation, in the first quarter, we should have some benefit, maybe 1 to 2 percentage points on the discontinuation of Pinjun. And then, you’ll also have some one-off drivers, like you mentioned, on the lower apparel contribution.
So, I’m wondering if you could tell us roughly how has the apparel contribution changed on a year-on-year basis? And then, were there some one-off or some other factors like subsidies level changes in the first quarter? I recall we just mentioned we are investing more to offer lower pricing for the customer. Thank you very much.
Donghao Yang — Chief Financial Officer
Okay, thank you very much for your question. Well, again, we do not provide guidance on gross margin or on margins in general for the second quarter — or for the next quarter. But, in Q1, understandably, gross margin was negatively impacted by the COVID-19 pandemic. We had to sell a lot — not a lot, but substantially more standardized products than we used to with lower margins. So, that was one of the biggest reasons why our gross margin in Q1 was lower from a year-over-year comparison perspective.
And going forward, as people start to — slowly-slowly start go back to work, as people’s life starts to go back to normal, people will buy more clothes. And as we explained earlier on the call, we’re going to be one of the main beneficiaries of that trend. So, we do expect, in our future business, apparel will go up substantially compared to standardized products, and so will our gross margin, you know, will also improve.
Operator
Your next question comes from the line of Hans Chung from KeyBanc. Please ask your question.
Hans Chung — KeyBanc Capital Markets — Analyst
Hi, good evening. Thank you for taking my question. I have a question about the average order value. In Q1, it is down 16%, decelerating from Q1. I think that’s partly because of the mix shift.
As we have a recovery in apparel into Q2 and, I suppose, the rest of the year, how should we think about the trend for the average order value? Because, I mean, as we see more and more apparel mix, there should be a positive impact. And — but in the meantime, we may also see more discount from the platform or the merchant, and that could be a negative impact for the average order value. And also, we also implement that lower shipping, threshold initiative last year. So, just wonder the trend for the average order value. Thank you.
Jessie Fan — Director of Investor Relations
[Foreign Speech].
Eric Ya Shen — Chairman of the Board of Directors and Chief Executive Officer
So, Hans, to answer your question on ticket size, yes, the ticket size in the first quarter decreased due to various reasons that existed. For example, higher standardized product mix. And another reason is, we also — as we focus on deep discounted products, even within our apparel category, our SKU is also becoming cheaper. And the third factor is the RMB88 free shipping threshold. And it’s our intention to get customers to buy as easily as possible, so that even if they only buy one item, they can most likely get it from our platform for free shipping.
So, from that perspective, ticket size may continue to see the decreasing trend in the future. But from our perspective, what we really care about is the ARPU. As long as the average revenue per customer continues to be strong, we’re not concerned about ticket size, as our CPC fulfillment will cover incremental costs.
Operator
Thank you, ladies and gentlemen. Unfortunately, we have run out of time for any further questions. I would now like to hand the conference back to today’s presenters, please continue.
Donghao Yang — Chief Financial Officer
Thank you all for taking the time to join us and we look forward to speaking with you next quarter. Thank you.
Operator
[Operator Closing Remarks]