Vipshop Holdings Limited (VIPS) Q1 2022 Earnings Call Transcript

Vipshop Holdings Limited  (NYSE: VIPS) Q1 2022 earnings call dated May. 19, 2022

Corporate Participants:

Jessie Zheng — Head of Investor Relations

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

David Cui — Chief Financial Officer

Analysts:

Thomas Chong — Jefferies — Analyst

Alicia Yap — Citi — Analyst

Ronald Keung — Goldman Sachs — Analyst

Natalie Wu — Haitong International Research — Analyst

Robin Leung — Daiwa — Analyst

Presentation:

Operator

Ladies and gentlemen, good day everyone and welcome to Vipshop Holdings Limited’s First Quarter 2022 Conference Call. At this time, I would like to turn the call to Ms. Jessie Zheng, Vipshop’s Head of Investor Relations. Please proceed.

Jessie Zheng — Head of Investor Relations

Thank you, operator. Hello, everyone, and thank you for joining Vipshop’s first quarter 2022 earnings conference call. With us today are Eric Shen, our Co-Founder, Chairman and CEO; and David Cui, our CFO.

Before management begins their prepared remarks, I would like to remind you that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in our Safe Harbor statements in our earnings release and public filings with the Securities and Exchange Commission, which also applies to this call to the extent any forward-looking statements may be made.

Please note that certain financial measures used on this call, such as non-GAAP operating income, non-GAAP net income and non-GAAP net income per ADS are not presented in accordance with US GAAP. Please refer to our earnings release for details relating to the reconciliations of our non-GAAP measures to GAAP measures.

With that, I would now like to turn the floor over to Mr. Eric Shen.

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

Okay. Good morning and good evening everyone. Welcome and thank you for joining our first quarter 2022 earnings conference call. We had slower than expected quarter due to the resurgence or COVID-19 cases in China on top of a already challenging micro environment, which deepened the general customer sentiment, starting in March with tightened controls and city lockdowns in many place. Our warehousing and the logistic capacity has been undergoing serious delays or destructions. This had undermined our fulfillment efficiency and further discarding due to consumers from spending, especially on discretionary items.

Despite great pressure on sales and the consumption, we remain on track to execute on our merchandising strategy to further strengthening our competitiveness for the long term. We are delighted to see that our proven business model enabled us to start seeing a healthy level of profits and achieve the resilient margins [Indecipherable] operations. In the first quarter, we continued to provide support for co-brand, offering them more leverage to improve sales through our upgrade merchant platform. We also brought in many new uncanny brands in reaching product selection on our platform.

Furthermore, we expanded our high-value customers. Our active Super VIP customer grew by 37% year-over-year and contributed about 38% our online net GMV in the first quarter. With the COVID-19 outbreak developing, we have responded quickly to changing consumer demand. By leveraging our merchandising capabilities, we added a range of product offerings in non-apparel categories including products for every day use. This helped in part offset the soft demand in apparel categories.

While we remain cautious ahead amid ongoing COVID-19 flare-ups, we are strongly committed to our strategic position and discount platform for branded products. We will take this opportunity to look to create exceptional value for our brand furnace and the consumers.

At this point, let me hand over the call to our CFO, David Cui, who will go over our financial results.

David Cui — Chief Financial Officer

Thanks Eric, and hello everyone. In the first quarter, despite softer topline performance due to macro headwinds, our margins held up relatively well, thanks to our initiatives to manage cost and expenses with greater discipline.

Our gross margin showed resilience after we implemented a number of cost saving measures, for example, we were able to effectively improve the margin profile of many product categories after we became more focused on shifting traffic and resources to core brands, while deprioritizing low quality products — low-quality brands. Our net margin also stayed well above 5% as we became more efficient in marketing spend. Looking ahead, we will continue to optimize operational efficiency and make effort to deliver healthy and sustainable profitability.

In addition, during the quarter, we had fully utilized the $500 million share buyback program that we announced last year. On March 31st this year, we announced another $1 billion share buyback program, which we may execute from time to time over a period of 24 months. This demonstrates our confidence in our business potential and our commitment to creating shareholder value for the long term.

Now moving on — moving to our detailed quarterly financial highlights. Before I get started, I would like to clarify that all financial numbers presented below are in renminbi and all the percentage changes are year-over-year changes unless otherwise noted. Total net revenues for the first quarter of 2022 were RMB 24.2 billion as compared with RMB 28.4 billion in the prior-year period, primarily attributable to soft consumer demand for discretionary categories and worst impact on warehousing and logistics networks caused by COVID-19 resurgence in China.

Gross profit was RMB 5.0 billion as compared was RMB 5.6 billion in the prior year period. Gross margin increased to 19.8% from 19.7% in the prior year period. Total operating expenses decreased by 11.0% year-over-year to RMB 3.9 billion from RMB 4.4 billion in the prior year period. As a percentage of total net revenues, total operating expenses was 15.4%, which stayed flat as compared with the corresponding period in 2021. Fulfillment expenses decreased by 5.5% year-over-year to RMB 1.7 billion from RMB 1.8 billion in the prior year period.

As a percentage of the total net revenues fulfillment expenses was 6.7% as compared with 6.3% in the prior year period. Marketing expenses decreased by 41.3% year-over-year to RMB 759.3 million from RMB 1.3 billion in the prior-year period, primarily attributable to more prudent marketing strategy. As a percentage of the total net revenues, marketing expenses to 3.0% from 4.6% in the prior year period. Technology and content expenses increased to RMB 390.4 million from RMB 337.5 million in the prior year period. As a percentage of the total net revenues, technology and content expenses increased to 1.5% from 1.2% in the prior year period.

General and administrative expenses were RMB 1.1 billion as compared with RMB 956.7 million in the prior year period. As a percentage of the total net revenues, general and administrative expenses was 4.2% as compared with 3.4% in the prior year period. Income from operations was RMB 1.3 billion as compared with RMB 1.5 billion in the prior year period. Operating margin was 5.1% as compared with 5.3% in the prior year period.

Non-GAAP net — non-GAAP income from operations was RMB 1.5 billion as compared with RMB 1.7 billion in the prior year period. Non-GAAP operating margin was 6.0% as compared with 6.1% in the prior year period. Net income attributable to Vipshop shareholders was RMB 1.1 billion as compared with RMB 1.5 billion RMB in the prior year period. Net margin attributable to Vipshop shareholders was 4.3% as compared with 5.4% in the prior year period. Net income attributable to Vipshop shareholders per diluted ADS was RMB 1.61 as compared with RMB 2.18 in the prior year period.

Non-GAAP net income attributable to Vipshop shareholders was RMB 1.4 billion as compared with RMB 1.7 billion in the prior year period. Non-GAAP net margin attributable to Vipshop shareholders was 5.6% as compared with 6.0% in the prior year period. Non-GAAP net income attributable to Vipshop shareholders per diluted ADS was RMB 2.09 as compared with RMB 2.41 in the prior year period. As of March 31, 2022, the Company had cash and cash equivalents and restricted cash of RMB 14.3 billion and short-term investments of RMB 5.0 billion.

Moving forward to the second quarter of 2022, we expected our total net revenue to be between RMB 22.2 billion and RMB 23.7 billion representing a year-over-year decrease rate of approximately 25% to 20%. Please note that this forecast reflects our current and preliminary view of the market and operational conditions, which is subject to change.

With that, I would now like to open the call to Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question from Thomas Chong with Jefferies. Your line is open.

Thomas Chong — Jefferies — Analyst

Hi, good evening. Thanks management for taking my questions. My first question is about the second quarter guidance. Can management comment about the impact of pandemic to our business performance in April and so far in the month of May? And my second question is about the second half business momentum. Can management comment about the recovery momentum that we should expect, as well as the margin outlook for the year? [Foreign Speech]

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

[Foreign Speech] Okay. The guidance for the second quarter actually reflects our current mix for the uncertainties from the ongoing and potential restrictions to control the COVID outbreak, as well as the general weak consumer sentiment. Entering — our business has actually been quite normal until in the middle of March when the omicron outbreak had significantly impacted our business. Our warehousing and logistics capacity was disrupted or delayed and the whole supply chain faced a lot of problems. Some of our warehouses were closed down and logistics got delayed and also suppliers that also had restraints in terms of shipping and handling our parcels.

Entering into April, we — and then till now May, we actually had been facing continued pressure. I think, today, we still have over 1 million orders that cannot be delivered because of various reasons including suppliers based actually in restricted regions and that actually undermined the fulfillment efficiency. So, we expect for May and June, we haven’t seen clear signs of recovery and we actually don’t expect that the COVID impact will disappear very soon, especially we have seen other places like Beijing based restrictions or controls and also consumer sentiment — consumer confidence has not come back.

We’ve also seen that — the latest NBS data point to a very sluggish performance for discretionary items including apparel. So, generally speaking, we don’t feel very optimistic for the momentum for the second half, but we don’t expect it will be significantly worse as well. On the margin side, I think we are pretty confident in maintaining healthy level of profits and margins. And while we face a lot of challenges and uncertainties, we also remain — maintain very high level of disciplined operations. We manage our cost and expenses much more carefully. We scaled back a lot of low ROI spending. So, we are pretty confident that we will deliver healthy and sustainable profitability for this year.

Thomas Chong — Jefferies — Analyst

Thank you.

Operator

Our next question is from Alicia Yap with Citigroup. Your line is open.

Alicia Yap — Citi — Analyst

Hi, thank you. Good evening, management. Thanks for taking my questions. I have a question related to the expansion into the non-apparel products. So, can management elaborate a little bit more detail — the various price of the products on this category. And can you remind us — is this strategy — strategic change or the strategic business model shift or is it just a temporary approach so that we can navigate through the soft demand for the apparel business? And then second question is any colors in [Indecipherable]? What are some of the current inventory level for the apparel brand? Can we get any kind of leverage or is it just because consumption is so weak? So even though there’s a lot of inventory, we can do some promotion discount, but there’s still lack of the demand. So, any color you can share would be good. [Foreign Speech].

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

[Foreign Speech] Okay. First standardized products. Actually, I think, as a company, we still focus on apparel categories. Currently, we still have 70% generally from apparel and the rest 30% from standardized products. Standardized product, a very good complement to our overall platform. They can help us to cater to diverse range of customer needs, which actually very depending on season and a lot of other factors. For example, in summer, typically customers would like to buy a lot of the standardized products in addition to summer closing. And also we approach standardized products very carefully.

For example, we want to make sure we have the unique supply from top brands and with very competitive pricing. We try to meet our customer needs, especially when they are shop for clothing, they will have something else to chose from, to provide them with a one-stop shopping experience. So, this is our overall strategy on standardized products. And given the COVID-19 outbreak [Indecipherable], we proactively added some non-apparel product offerings by especially — including products for everyday use to meet customer needs. This is in line with our overall strategy on standardized products. We will gradually improve the contribution from these standardized products to improve the overall customer experience on our platform and also to improve their overall ARPU.

And on brand inventory, apparently a lot of our brand partners are very hard shaped by the COVID flare-ups. They faced a lot of store closures and they have a lot of supply, but generally speaking, I think we have the ability to secure a lot of quality inventory from brands and help them to sell through these inventories very efficiently. But at the same time, some of the brand partners are also facing continued pressure, especially when they are based in restrictive regions including Shanghai. So this is — it is a positive to our online business. I think, although the — generally speaking, the market is in a downturn, but it’s not that bad as long as we can help brands to sell through their inventory. I think we will be providing a valuable proposition for them.

Alicia Yap — Citi — Analyst

Can I have a follow — quick follow-up on the margins for the standardized products, given the mix, how should we think about the gross — total gross margin trends going forward in the near term?

David Cui — Chief Financial Officer

For the standardized items, we carefully choose what products we will carry. Generally, we will not accept the products that’s with very low margin. So, overall, the impact of the margin is not that bad. And also the apparel product still represents 70% of our total carrying. So, we are committed to the overall gross margin stability.

Alicia Yap — Citi — Analyst

Okay, thank you.

Operator

Our next question comes from Ronald Keung with Goldman Sachs. Your line is open.

Ronald Keung — Goldman Sachs — Analyst

Thank you, Ya Shen and David and team. [Foreign Speech] Thank you, management. My first question is on your second quarter revenue guidance whether that assumes a similar growth rate for May and June of what we’ve seen in the April run rates and some expectations on our June 16th for us. Any expectations on that as we’re assuming some of the stronger growth, especially into the month of June and some of the cancellation rates that this — that we are seeing. Second is on free cash flow. We’ve seen a reduction of that. So when I hear what were the reasons behind and besides a buyback program that have been launched, I want to hear any dividend policies that — any updates on any of those, any potential and also for Hong Kong listing? Thank you.

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

[Foreign Speech] Okay. The second quarter guidance, actually, already factored in the April and May run rate. I think, it’s the latter half of May and we — from our observation, we have had similar downside trend as we saw in April and expect June will continue this momentum for sure. It’s going to be strong on a year-over-year basis and come out with COVID-19 cases with related restrictions and controls are still going on and consumption sentiment has not coming back — come back yet. So, that’s creating the reality for this quarter to date. So, our second quarter guidance is just a reflection of that reality.

In terms of cancellation rate, absolutely — actually from the middle of March, we’ve seen cancellation of orders or has been going up due to logistics delayed and the cancellation rate actually went up 6 percentage points year-over-year and it has caused very significant losses to us and we see increasing of cancellation of orders from customers actually has dampened the general sentiment to the e-commerce sector. I think we for sure hope that with restrictions gradually lifted, we expect cancellation rate to normalize over time.

David Cui — Chief Financial Officer

We have been profitable for consequently over like 38 quarters. So, we are confident that we will continue to making profit even though we encountered a difficult time in software business. So, in general, the cash — free cash flow should mirror our profitability. In Q1, operating cash flow turned negative because we made a lot of payments to suppliers and for other miscellaneous expenses. So, the decrease in accrued expenses and accounts payable is the main reason for the negative cash flow. In the long run, the cash flow should mirror our profitability.

And then in terms of the Hong Kong listing. So, that is still in our radar. Our board and the management team are still evaluating the options and we still got some time to execute the plan and execute the Hong Kong listing plan. [Speech Overlap] Sorry, on the dividends, so we — currently, we don’t have a plan to pay out the dividends, but we are committed to our share buyback program.

Ronald Keung — Goldman Sachs — Analyst

Understood. Thank you.

Operator

Our next question comes from Natalie Wu with Haitong International. Your line is open.

Natalie Wu — Haitong International Research — Analyst

[Foreign Speech] Good evening management. Thanks for taking my question. So, my question is regarding with the product mix shift, you mentioned that you decided to shift the product mix towards the standardized goods in the upcoming future. Just wondering, can you give us more color on exactly what — which categories helped us analyze the products you are referring to? Because back in 2018 and ’19, you’ve also tried some category expansion, but just wondering if there’s difference compelled with last round of standardized product shift? Also, how should we differentiate ourselves from other general e-commerce platforms if we shift the way to standardized products? Thank you.

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

[Foreign Speech] In terms of our strategy on standardized products, actually all the categories are already on our platform, including beauty products, home goods, kitchenware, live and grocery and healthcare products, etc. These [Indecipherable] products are standardized items we are looking at. We will manage the product offerings very carefully in each category, not necessary as many SKUs as you just see on other platforms, we want to make sure that we can have very quality supply from brands and sometimes may be unique supply from the top brands and it has to be to provide very competitive pricing and a very reasonable gross margin. So we will approach standardized items very carefully.

Currently we have 30% from standardized items. Our goal is to gradually improve the contribution to let’s say 33% over time. Increase of 10% on the current spaces. And standardized items are not going to be a drag on the overall gross margin. And it actually improve ARPU from customers. So, over the time, we think, we will have a more balanced customer experience for our platform.

Natalie Wu — Haitong International Research — Analyst

Got it. Thank you.

Operator

Our next question comes from Robin Leung with Daiwa. Your line is open.

Robin Leung — Daiwa — Analyst

Hi, this is Robin asking on behalf of John Choi. Thanks management for taking my questions. This quarter gross margin is slightly higher than our expectation. Is it because of the change in the category mix and because I remember the SVIP members they carry a lower margins, but then mix this quarter is also higher. So, wonder what is the reason that this quarter we see a more better than expected gross margin and also the trend in the second half if the SVIP continues to increase the mix? Are you going to see any impact on the gross margin? And the second question is could management comment on the user growth trend in the second half? [Foreign Speech]

David Cui — Chief Financial Officer

Okay. So, this year, we have taken many cost saving measures to improve our margin. That includes the selection of the products, the brands carried on our platforms. For example, we were able to improve the margin profile of many categories after we shifted our resources to the core brands that we selected and deprioritize some of the non-core brands. So, that helps improve our margins.

For the coming quarters, we will continue to be disciplined and make sure that we have a healthy margin and eventually achieve a healthy bottom line net margin and only category mix and the apparel are still representing 70% of our total GMV right and then supplemented by the standardized products and as we talked about it earlier, for the standardized products we also carefully choose what to carry to make sure that our overall gross margin will remain stable and potentially we could improve gross margin also.

In terms of the impact of the Super VIP and we know the Super VIP have slightly lower gross margin because of the benefits and we provided the tool to the Group, but since they spent more — they spent a lot, much more. And then, their frequencies, their ARPU are much higher. So, overall, it’s just a matter of a time when they can contribute — contributed positively to the overall gross margin. So, this is kind of a balance. And then — but in summary, we are committed to the overall improvements of gross margin.

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

[Foreign Speech] In terms of a customer growth for the second half, I think our customer growth has been relatively in line with our overall business performance. And given that our ARPU has actually been quite stable over time. But we will evaluate our marketing spend from time to time, especially given the many uncertainties going on. We are apparently facing a much less favorable customer acquisition environment. So, instead of just throwing money away, we will focus on acquiring high-quality customers. We don’t want to invest too much on low ROI on customers and we will evaluate their lifetime value very carefully to ensure that they will be a valuable customer to our platform. So, we are committed to customer growth and we believe that for the quarters ahead, we will maintain a relatively stable customer base.

Robin Leung — Daiwa — Analyst

Thank you.

Operator

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

Jessie Zheng — Head of Investor Relations

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

Operator

[Operator Closing Remarks]