Vipshop Holdings Limited (NYSE:VIPS) Q1 2022 Earnings Conference Call May 19, 2022 7:30 AM ET

Company Participants

Jessie Zheng - Head, Investor Relations

Eric Shen - Co-Founder, Chairman, and Chief Executive Officer

David Cui - Chief Financial Officer

Conference Call Participants

Thomas Chong - Jefferies

Alicia Yap - Citigroup

Ronald Keung - Goldman Sachs

Natalie Wu - Haitong International

Robin Leung - Daiwa

Operator

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

Jessie Zheng

Thank you, operator. Hello, everyone, and thank you for joining Vipshop 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 Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our Safe Harbor statements in our earnings release and the public filings with the Securities and Exchange Commission, which also applies to this call to the extent any forward-looking statements may be made. Please note that certain financial measures used on this call such as non-GAAP operating income, non-GAAP net income and non-GAAP net income per ADS are not presented in accordance with U.S. GAAP. Please refer to our earnings release for details relating to the reconciliations of our non-GAAP measures to GAAP measures.

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

Eric Shen

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

Despite great pressure on sales and consumption, we remained on track to execute on our merchandising strategy to further strengthen our competitiveness for the long-term. We are delighted to see that our proven business model enabled us to sustain a healthy level of profit and achieved resilient margins through disciplined operations. In the first quarter, we continued to provide support for core brand, offering them more leverage to improve sales through our upgraded merchant platform.

We also brought in many new and trendy brands, enriching 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% of 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 everyday use. This helped in part offset the soft demand in apparel categories. While we remain cautious ahead amid ongoing COVID-19 flash-ups, we are strongly committed to our strategic position as a discount platform for branded products. We will take this opportunity to look to create exceptional value for our brand partners 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

Thanks, Eric, and hello, everyone. In the first quarter, despite soft top-line 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 prioritizing low-quality products – low-quality brands.

Our non-GAAP 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 every 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 31 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 to our detailed quarterly financial highlights. Before I get started, I would like to clarify that our 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 RMB24.2 billion as compared with RMB28.4 billion in the prior year period, primarily attributable to soft consumer demand for discretionary categories and a worse impact on warehouse and logistics networks caused by COVID-19 resurgence in China.

Gross profit was RMB5.0 billion as compared with RMB5.6 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 RMB3.9 billion from RMB4.4 billion in the prior year period. As a percentage of the 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 RMB1.7 billion from RMB1.8 billion in the prior year period. As a percentage of 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 RMB739.3 million from RMB1.3 billion in the prior year period, primarily attributable to more prudent marketing strategy. As a percentage of total net revenue, marketing expenses decreased to 3.0% from 4.6% in the prior year period.

Technology and content expenses increased to RMB390.4 million from RMB337.5 million in the prior year period. As a percentage of total net revenues, technology and content expenses increased to 1.5% from 1.2% in the prior year period. General and administrative expenses were RMB1.1 billion as compared with RMB956.7 million in the prior year period. As a percentage of total net revenue, general and administrative expenses, was 4.2% as compared with 3.4% in the prior year period. Income from operations was RMB1.3 billion as compared with RMB1.5 billion in the prior year period.

Operating margin was 5.1% as compared with 5.3% in the prior year period. Non-GAAP income from operations was RMB1.5 billion as compared with RMB1.7 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’s shareholders was RMB1.1 billion as compared with RMB1.5 billion in the prior year period. Net margin attributable to Vipshop’s shareholders was 4.3% as compared with 5.4% in the prior year period. Net income attributable to Vipshop’s shareholders per diluted ADS was RMB1.61 as compared with RMB2.18 in the prior year period.

Non-GAAP net income attributable to Vipshop’s shareholders was RMB1.4 billion as compared with RMB1.7 billion in the prior year period. Non-GAAP net margin attributable to Vipshop’s shareholders was 5.6% as compared with 6.0% in the prior year period. Non-GAAP net income attributable to Vipshop’s shareholders per diluted ADS was RMB2.09 as compared with RMB2.41 in the prior year period. As of March 31, 2022, the company had cash and cash equivalents and restricted cash of RMB14.3 billion and short-term investments of RMB5.0 billion.

Looking forward to the second quarter of 2022, we expect that our total net revenue to be between RMB22.2 billion and RMB23.7 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 condition, which is subject to change.

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

Question-and-Answer Session

Operator

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

Thomas Chong

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?

Eric Shen

The guidance for the second quarter actually reflects our current look 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 a restraint in terms of shipping and handling are part of.

Entering into April, we – and until now May, we actually had been facing continued pressure. I think till 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 faced restrictions or controls and also consumer sentiment, consumer confidence has not come back. And we also will see that the latest MBS 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 a healthy level of profit and margins. While we face a lot of challenges and uncertainties, we also maintain a very high level of discipline in our operations. We managed 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

Thank you.

Operator

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

Alicia Yap

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

Eric Shen

Okay, first, on standardized products. Actually, I think as a company, we still focus on apparel category. Currently, we still have 70% generally from apparel and the rest 30% from standardized products. Standardized products are very good complement to our overall platform. They can help us to cater to a diverse range of customer needs, which actually very dependent on season and a lot of other factors. For example, in summer, typically customers would like to buy a lot of standardized products in addition to summer clothing. And also, we approach standardized products very carefully. For example, we want to make sure we have the unique supply from top brand and with a very competitive pricing. We try to meet customer needs, especially when they shop for clothing, they will have something else to choose 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, I think we are proactively added from our non-apparel product offering, especially including our products for everyday use to meet customer needs. This is in line with our overall strategy to set 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 hit by the COVID [indiscernible]. They faced a lot of store disclosures 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 restricted regions, including Shanghai. So this 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 a brand to sell through their inventory, I think we will be providing a valuable proposition for them.

Alicia Yap

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

David Cui

For the standard items, we carefully choose what products that we will carry. Generally, we will not accept the product 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

Okay, thank you.

Operator

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

Ronald Keung

Thank you, Shen and David. 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 June 16 for us. Any expectations on that that we’re assuming some of the stronger growth better into the month of June and some of the cancellation rates that we are seeing? Second is on free cash flow, we’ve seen a reduction of that. So I want to hear what were the reasons behind? And besides the buyback program that we’ve been lodged, want to hear any dividend policies that – any updates on any of those, any potential and also for Hong Kong listing? Thank you.

Eric Shen

Okay. The second quarter guidance actually already factored in the April and the May run-rate. I think it’s the latter half of May. And then we – from our observation, we have had similar downside trend as we saw in April and we expect June will continue this momentum for sure. It’s going to be down on a year-over-year basis. And coupled with COVID-19 cases, with related restrictions and controls are still going down and the consumption sentiment has not 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 have seen a cancellation of orders 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 cancellation of orders from customers actually has dampened the general sentiment to the e-commerce sector. I think we for sure hope that with the restrictions gradually lifted, we expect confirmation rates to normalize over time.

David Cui

We have been profitable for consequent – over like 38 quarters. So, we are confident that we will continue to making profit even though we encountered a difficult time and softer business. So, in general, the cash – free cash flow should mirror our profitability. In Q1, our 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. The dividends, so we – currently, we don’t have a plan to pay out dividends, but we are committed to our share buyback program.

Ronald Keung

Understood. Thank you.

Operator

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

Natalie Wu

Good evening management. Thanks for taking my question. So, my question is regarded with the product mix shift. Since you have 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 about exactly which categories help us standardize the products you are referring to, because back in 2018 and ‘19, you have also tried some category expansion. So, just wondering if there is a difference compelled with large 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 Shen

In terms of our strategy on standardized products, actually all the categories are already on our platform, including beauty products, home goods, kitchenware, life and grocery and healthcare products, etcetera. These non-sized products are standardized items we are looking at. We will manage the product offerings very carefully in each category, not necessarily as many as SKUs as you see on other platforms. We want to make sure that we can have very quality supply from brands, and sometimes, it may be unique supply from the top brands. And there has to be – to provide a 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, an increase of 10% on a current basis. And standardized items are not going to be a drag on the overall gross margin and it actually improved ARPU from our customers. So, over the time, we think we will have a more balanced customer experience for our platform.

Natalie Wu

Got it. Thank you.

Operator

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

Robin Leung

Hi, this is Robin asking on behalf of John Choi. Thanks management for taking my questions. This quarter, the gross margin is slightly higher than our expectation. Is it because of the change in the category mix? And as I remember the SVIPs, the members, they carry lower margins, but the mix this quarter is also higher. So, I 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 we 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?

David Cui

Okay. So, this year, we have taken many cost saving measures to improve our margin. That includes the selection of the products and 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 prioritize some of the non-core brands. So, that helps improve our margin. 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 on the category mix, the apparels are still representing 70% of our total GMV, right, and then supplemented by the standardized product. 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 the gross margin also. In terms of the impact of the Super VIP and we know the Super VIP has slightly lower gross margin because of the benefits we provided 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 time when they can contribute positively to the overall gross margin. So, it is kind of a balance. And then – but in summary, we are committed to the overall improvement of the gross margin.

Eric Shen

In terms of 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 tight and not 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 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

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

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

Operator

This concludes today’s conference call. Thank you for participating. You may now disconnect.