Vipshop Holdings Limited (VIPS) Q1 2021 Earnings Call Transcript

Vipshop Holdings Limited (NYSE: VIPS) Q1 2021 earnings call dated May 19, 2021

Corporate Participants:

Jessie Fan — Head of Investor Relations

Eric Ya Shen — Chairman and Chief Executive Officer

David Cui — Chief Financial Officer

Analysts:

Eddy Wang — Morgan Stanley — Analyst

Joyce Ju — Bank of America Merrill Lynch — Analyst

Natalie Wu — Haitong — Analyst

Tian Hou — T.H. Capital — Analyst

Ashley Xu — Credit Suisse — Analyst

Feitong Zhang — CICC — Analyst

Charlie Chen — China Renaissance Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by. Good day, everyone, and welcome to the Vipshop Holdings Limited First Quarter 2021 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, ma’am.

Jessie Fan — Head of Investor Relations

Thank you, operator. Hello, everyone, and thank you for joining Vipshop’s first quarter 2021 earnings conference call. Before we begin, I will read the Safe Harbor statements. 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 David Cui, our CFO.

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

Eric Ya Shen — Chairman and Chief Executive Officer

Good morning and good evening, everyone. Welcome, and thank you for joining our first quarter 2021 earnings conference call. We delivered another quarter of strong financial and operational results in the first quarter of 2021, driven by the continued robust growth momentum in our number of active customers. During the quarter, our total number of active customers grew by 54% year-over-year to 45.8 million from 29.6 million in the same period last year. As a result, our GMV for the quarter increased by 59% year-over-year to RMB46.1 billion from RMB28.9 billion in the same period last year. GMV for apparel-related category, which are our bread and butter, grew even faster by 70% year-over-year. This success as a result of our focus on the execution of our merchandising strategy.

We have long-term callability relationship with our suppliers, particularly in our core categories. Leveraging those relationships, we aim to deepen our partnerships with them to increase contribution from our Made-for-Vipshop products. As we continue to offer value to our customers through differentiated offering from marketplace platforms, we believe we will acquire more new customers, while increasing the stickiness our existing customers. Going forward, we’ll remain committed to continuing to strengthen our leadership in China’s discount retail market, aiming to generate sustainable value for our customers and suppliers.

At this point, let me hand over the call to our CFO, David Cui, so that he may discuss our strategy in more detail and go over our operational and financial results.

David Cui — Chief Financial Officer

Thanks, Eric, and hello, everyone. We are pleased that we have delivered another quarter of solid top-line growth coupled with strong profitability. During the quarter, our total net revenue continued to see strong growth, increasing by 51% year-over-year to RMB28.4 billion from RMB18.8 billion in the prior year period. In addition, our profitability improved on a year-over-year basis. Our non-GAAP net income attributable to Vipshop’s shareholders for the quarter increased by 74% year-over-year to RMB1.7 billion from RMB986 million in the prior year period. And our non-GAAP net margin attributable to Vipshop’s shareholders for the quarter increased to 6.0% from 5.2% in the same period last year.

Looking ahead, we aim to grow our top-line as fast as possible, while keeping our margins stable through offering diversified, desirable products carefully prepared by our strong merchandisers on a daily basis. We will attract new customers and retain existing customers, while growing our ARPU over time. We are committed to delivering long-term sustainable value to all of our shareholders.

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 the percentage changes refer to year-over-year changes, unless otherwise noted. Total net revenue for the first quarter of 2021 increased by 51.1% year-over-year to RMB28.4 billion from RMB18.8 billion in the prior year period, primarily driven by the growth in the number of total active customers.

Gross profit for the first quarter of 2021 increased by 54.7% year-over-year to RMB5.6 billion from RMB3.6 billion in the prior year period. Gross margin for the first quarter of 2021 increased to 19.7% from 19.2% in the prior year period.

Total operating expenses for the first quarter of 2021 were RMB4.4 billion as compared with RMB3.0 billion in the prior year period. As a percentage of the total net revenue, total operating expenses for the first quarter of 2021 decreased to 15.4% from 15.9% in the prior year period. Fulfillment expenses for the first quarter of 2021 were RMB1.8 billion as compared with RMB1.4 billion in the prior year period. As a percentage of the total net revenue, fulfillment expenses for the first quarter of 2021 decreased to 6.3% from 7.4% in the prior year period.

Marketing expenses for the first quarter of 2021 were RMB1.3 billion as compared with RMB412.3 million in the prior year period. As a percentage of total net revenue, marketing expenses for the first quarter of 2021 were 4.6% as compared with 2.2% in the prior year period, primarily attributable to increased investment in advertising activities relating to customer acquisition and retention.

Technology and content expenses for the first quarter of 2021 decreased to RMB337.5 million from RMB338.4 million in the prior year period. As a percentage of total net revenue, technology and content expenses for the first quarter of 2021 decreased to 1.2% from 1.8% in the prior year period.

General and the administrative expenses for the first quarter of 2021 were RMB956.7 million as compared with RMB839.2 million in the prior year period. As a percentage of total net revenue, general and administrative expenses for the first quarter of 2021 decreased to 3.4% from 4.5% in the prior year period. Our income from operations for the first quarter of 2021 increased by 93.2% year-over-year to RMB1.5 billion from RMB782.2 million in the prior year period. Operating margin for the first quarter of 2021 increased to 5.3% 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 66.0% year-over-year to RMB1.7 billion from RMB1.0 billion in the prior year period. Non-GAAP operating income margin for the first quarter of 2021 increased to 6.1% from 5.6% in the prior year period.

Our net income attributable to Vipshop’s shareholders for the first quarter of 2021 increased by 125.7% year-over-year to RMB1.5 billion from RMB684.8 million in the prior year period. Net margin attributable to Vipshop’s shareholders for the first quarter of 2021 increased to 5.4% from 3.6% in the prior year period. Net income attributable to Vipshop’s shareholders per diluted ADS for the first quarter of 2021 increased to RMB2.18 from RMB1.00 in the prior year period.

Non-GAAP net income attributable to Vipshop’s shareholders for the first quarter of 2021, which excluded share-based compensation expenses, impairment loss of the investment, 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 investment, excluding dividends and share of the loss or gain in the investments of limited partnership that are accounted for as equity method investees, increased by 73.7% year-over-year to RMB1.7 billion from RMB986.1 million in the prior year period.

Non-GAAP net margin attributable to Vipshop’s shareholders for the first quarter of 2021 increased to 6.0% from 5.2% in the prior year period. Non-GAAP net income attributable to Vipshop’s shareholders per diluted ADS for the first quarter of 2021 increased to RMB2.41 from RMB1.44 in the prior year period. As of March 31, 2021, our company had cash and cash equivalents and restricted cash of RMB15.1 billion and short-term investments of RMB3.7 billion. For the first quarter of 2021, net cash used in operating activities were RMB439.0 million.

Looking at our business outlook for the second quarter of 2021, we expect our total net revenue to be between RMB28.9 billion and RMB30.1 billion, representing a year-over-year growth rate of approximately 20% to 25%. 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

Thank you, sir. [Operator Instructions] We have the first question from the line of Eddy Wang. Please go ahead.

Eddy Wang — Morgan Stanley — Analyst

Thank you management for taking my question. So my question is about the outlook for the second quarter as well as for the second half of this year. So we noticed that we have hold out quite successful promotion event in April. So just want to check whether or not the 20% to 25% revenue growth in guidance for the second quarter already factor in this is very strong event, promotion event in the April? And if Eric Shen can give more color on the half year, the outlook for the — revenue growth outlook for the second half will be very helpful? Thank you.

Jessie Fan — Head of Investor Relations

Thank you. Eddy.

[Foreign Speech]

Eric Ya Shen — Chairman and Chief Executive Officer

[Foreign Speech]

Eddy, the second quarter guidance, we see it as rather conservative. There are a couple of factors in consideration. One is that, last year we didn’t run the April ’19 promotional event, but we did run it this year. So on that basis, it’s quite positive. But then also last year we saw extremely strong growth in May, particularly during the May holidays because that was when everyone started to come out of their quarantine and really starting to travel and buy new clothes after the lockdown in China. So this year we are facing much tougher comps in the beginning of May. We are going to have to see how the June promotional event period and the summer time goes to get a full picture of the second quarter.

However, we are growing quite steadily and we are achieving sustainable growth driven by strong user growth. So we are confident about our growth in the second half and in the long-term. More specifically, we saw quite strong user growth especially in the number of male customers that shopped with us. We believe that this is driven by our expansion into more categories, our focus on sportswear, for example, as well as better personalization. In addition, we also saw strong growth in the number of paid Super VIPs, which are our most loyal customers that contribute to quite a sizable chunk of the overall revenue. So we are quite confident about the long-term growth of the business and the long-term healthy development of the business.

Operator

[Operator Instructions] 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

Good evening, management. Thanks for taking my question, and congrats on the solid quarter. My question was related to the gross margin topic this quarter. It seems like this number actually down sequentially and also quite meaningfully. So just want to get color in terms of the future, like gross margin trend. Is it because like we have new discounting strategy or it’s because like probably we changed our take rate gain with the brands? I just want to get more colors on it. Thanks.

Jessie Fan — Head of Investor Relations

Thanks, Joyce.

[Foreign Speech]

Eric Ya Shen — Chairman and Chief Executive Officer

[Foreign Speech]

Hi, Joyce. Your question on the gross profit and gross margin outlook, in fact, we are quite optimism think about the long-term gross margin trend. We focus more internally on managing to the bottom line. As we have communicated in the past, we aim to grow top-line as fast as possible provided that our bottom line remains relatively stable and healthy. So in the first quarter, we spent more money on reactivating old customers, getting their shopping frequency up as well as paying more benefits to our SVIPs.

So for our paid Super VIP members, we are offering selectively to some members an actual 5% off, which during the test period is mostly — the cost is mostly bared by our own company, but in the future, more brands will participate to share the cost. And we are happy to see the net margin trend in the first quarter continues to be very solid, increasing on the net margin basis, on a year-over-year basis. So over the long run, we’re still quite confident and quite optimistic about the long-term outlook of our gross profit as well as our net margins.

Operator

We have the next question from the line of Thomas Chong from Jefferies. Please ask your question.

Unidentified Participant — — Analyst

Hi, management. Thanks for taking my question. So I have a question about customer acquisition. So do we have any new initiatives on channels for customer acquisition that you can share with us this year? Thanks.

Jessie Fan — Head of Investor Relations

Thank you.

[Foreign Speech]

Eric Ya Shen — Chairman and Chief Executive Officer

[Foreign Speech]

We actually a various — very diversified customer acquisition channels, including targeted advertising, including endorsements on TV shows and reality shows as well as cellphone pre-installation, and at the same time, we’re also exploring more into short videos, live streaming and so on. What’s different this year is that we are going to start to be more — to try to be even more personalized in our customer acquisition. Uniformed, improved, more optimized operations in terms of how we invest our marketing dollars. So we do believe that is going to be more targeted and give us better results than what we have done in the past.

The one thing that is worth mentioning is that we are looking to invest a little more into live streaming in terms of customer acquisition. We don’t think that will be a much more meaningful portion of the overall marketing budget, but we do think that it’s going to be increasing compared to before.

Operator

We have the next question from the line of Natalie Wu from Haitong International. Please ask your question.

Natalie Wu — Haitong — Analyst

Hi, good evening. Thanks for taking my question. Just wondering if we take a longer term view, let’s say, after completion of COVID-19, what kind of the advanced rate [Phonetic] could be the most comfortable on the — as stable state? And also related to the margin profile at that time do you expect? Just want to get some sense of your thoughts on that. And also regarding the competition, just wondering what’s management thoughts on recent dynamic change considering anti-monopoly moves and also considering empties, including some short video tap-ons? Thank you.

Jessie Fan — Head of Investor Relations

Thank you, Natalie.

[Foreign Speech]

Eric Ya Shen — Chairman and Chief Executive Officer

[Foreign Speech]

Natalie, in the long-term, we are aiming to achieve a more steady and sustainable long-term growth, and we are quite confident about the long-term growth strategy of our business.

[Foreign Speech]

Natalie, on the customer acquisition channels, we are actively exploring many programs as well as short videos and testing with all the partners in terms of customer acquisition, but there isn’t a single channel that is at 15% to 20% of the overall customer acquisition contribution. So in the future we will continue to explore and enhance the performance of our marketing dollars.

Operator

We have the next question from the line of Ronald Keung from Goldman Sachs. Please ask your question.

Unidentified Participant — — Analyst

Thank you management for taking my questions. I will be asking on behalf of Ronald. In terms of development of the Vipshop products, as management shared with us in last quarter, VIP has collaborated with a few hundred brands. Just wondering how many brands have we expanded collaboration with in the past quarter? And if there is any related operating metrics can be shared will be great? For example, SKU of the sales and how many users have purchased Vipshop product on our app, the AUV, etc.? Thanks.

Jessie Fan — Head of Investor Relations

Thank you for the question.

[Foreign Speech]

Eric Ya Shen — Chairman and Chief Executive Officer

[Foreign Speech]

On the Made-for-Vipshop collaboration, we are currently already working with around 500 brands on the Made-for-Vipshop products. However, every brand’s level of sophistication and how much product that they’re working with us and the contribution for that brand’s sales on our platform is a bit different. The good news is that we’ve seen improved conversion rate and higher sell through rates for these products than the other products in our platform, meaning that the metrics are quite solid and prove that this strategy is on track.

However, it hasn’t been long enough, we need more time to figure out what kind of brands this works best with and how to deepen our collaboration with brands on the Made-for-Vipshop products. But we do believe that these products will be very important for our long-term growth and to create more differentiation from other platforms over time.

Operator

We have the next question from the line of Tian Hou from T.H. Capital. Please ask your question.

Tian Hou — T.H. Capital — Analyst

Thanks, management.

[Foreign Speech]

For our 3P business, what is our strategy to develop this part of the business by the end of the year? So what is management’s expectation for 3P business to be percentage of total business? Thank you.

Eric Ya Shen — Chairman and Chief Executive Officer

[Foreign Speech]

Tian, on the marketplace development, this quarter, the contribution is less than 5%, around 4.7%, 4.8% of the total GMV comes from sales through marketplace. We do plan to grow the marketplace business, but only provided if the user experience and the complaint rates under our control. So we want to offer the same level of experience in marketplace business as our first-party business. But in terms of how much we want to grow that business, in the first quarter, the contribution, as we said, is less than 5% and in the fourth quarter of this year we hope to get it to, say, slightly over 6%. But it wouldn’t be a very meaningful increase in the total contribution as we still want to focus on the 1P business.

Operator

We have the next question from the line of Ashley Xu from Credit Suisse. Please ask your question.

Ashley Xu — Credit Suisse — Analyst

Thank you management for taking my question. Just want to ask about how do we see the de-stocking needs from brands in past few months and how do we see their needs in second half this year? And whether the previous boycott against some international brands would impact the overall needs in 3Q and 4Q? Thank you

Jessie Fan — Head of Investor Relations

Thanks, Ashley.

[Foreign Speech]

Eric Ya Shen — Chairman and Chief Executive Officer

[Foreign Speech]

Ashley, as the brand’s partner of choice in excess inventory clearance, we are not owning clear excess inventory that are already in stock for them, but we also grow with them via Made-for-Vipshop products, which we’ve discussed in the past and earlier in the call. And we also do a lot of in-season slow-moving extra inventory for our brand partners. And we also contribute in many other formats, for example, some brands will choose to allocate different SKUs to different e-commerce channels to be sold. So we are actually a top partner for our apparel brand partners, especially in their e-commerce and online sales, which is a very meaningful channel for a lot of our brand partners. And we grow with our customers in terms of — we grow with our brand partners in terms of both gain new shoppers for their brand as well as growing their sales.

On your second question on the [Indecipherable] the event, the impact on international brands is there but quite minimal. At the same time, we’re seeing domestic brands picking up momentum. So we are seeing the search results for domestic brands and the demand for domestic brands growing quite fast. Over time we believe domestic brands will likely take share from international brands.

Operator

We have the next question from the line of Feitong Zhang of CICC. Please ask your question.

Feitong Zhang — CICC — Analyst

Hi, Shen, Ciu and Jessie. This is Feitong on behalf of Yang from CICC. Thanks for taking my question, and congrats on the solid results. I have one question about category expansion. Will we accelerate the category expansion? For example, in 3C category to acquire more users, especially you mentioned that we have — we’re now having more male customers? If so, what would be the impact on the margin? Are we going to subsidize or just de-stocking for those male brands, like 3C those categories? Thank you.

Jessie Fan — Head of Investor Relations

Thanks, Feitong.

[Foreign Speech]

Eric Ya Shen — Chairman and Chief Executive Officer

[Foreign Speech]

So the contribution from male customers was up by around 5% in terms of the number of customers year-over-year and that’s why we saw men’s wear and sportswear sales growing exponentially. Male customers as a total pool of customers in the overall contribution might continue to grow, but we will still be primarily focusing our efforts on female customers, which are our bread and butter, for women’s apparel mainly. Male customers might be shopping with us a lot more frequently and we might be able to acquire more male customers, but still we are acquiring them via apparel-related categories. So they are not going to come and be buying a ton of cell phones driving down the margins. So from our perspective, it’s all about the apparel and wearable category. And we’re confident that we can serve male customers quite well in this category.

The one really positive thing that we see in how male customers shop is that they have much higher conversion rate and make decisions much more quickly. So we will be improving our personalized shopping experiences for male and female customers when they come to our platform.

Operator

We have the next question from the line of Charlie Chen from China Renaissance. Please ask your question.

Charlie Chen — China Renaissance Securities — Analyst

Thanks management for taking my question. Actually, I have a question regarding the average revenue per user as well as the trend going forward. So I did a quick calculation, it seems that the average revenue per user for this quarter, if we use U.S. dollar basis, actually it’s year-on-year started to grow. That’s actually the first time for the past few quarters. And even if you use RMB, the decline actually is very, very narrow already. So how do you see the momentum or trend of the average revenue trend going forward? And also, can you give us more color on what is driving that? Is that cross-border everyone is buying more or in particular new users are contributing more on the average revenue or the old core customers are contributing more? Thank you.

Jessie Fan — Head of Investor Relations

[Foreign Speech]

Eric Ya Shen — Chairman and Chief Executive Officer

[Foreign Speech]

Charlie, the RMB88 free shipping impacted the ARPU in the year of 2020. And therefore, throughout the year, we saw a year-over-year decline in ARPU mostly because customers do not need to get to a certain basket size in order to get free shipping anymore, but now in 2021 you see that trend is normalizing. So this is, as we’ve communicated prior, this is what we expect and this is because our customers are still very sticky to the platform and this is just the change in the shopping habits due to some of the change in policy last year. We will continue to grow our ARPU going forward.

One thing that we like to mention is our focus on the Super VIP paid members and their spending. On average, a Super VIP customer spends eight to nine times more than an average customers. So from that perspective, if we can get more customers to join the Super VIP program, we are confident that the ARPU on the platform will also increase over time. Additionally, we continue to focus on personalization and improving the experience of each customer when they come to our platform. So we do believe that over time will also increase the ARPU and stickiness of the customers. If we continue to grow the number of customers that shop with us and the ARPU of the customers, we do believe that our long-term growth prospects are quite good. Operator?

Operator

Ladies and gentlemen, as we come to the end of today’s conference, I would like to hand the call back to our speakers for any closing remarks.

Charlie Chen — China Renaissance Securities — Analyst

Thank you everyone for taking the time to join us, and we look forward to speaking with you next quarter. Thank you.

Eric Ya Shen — Chairman and Chief Executive Officer

Thank you.

Jessie Fan — Head of Investor Relations

Thank you.

Operator

[Operator Closing Remarks]