Vipshop Holdings Limited (NYSE:VIPS) Q3 2023 Earnings Conference Call November 14, 2023 7:30 AM ET

Company Participants

Jessie Zheng - Head, IR

Eric Shen - Co-Founder, Chairman & CEO

Mark Wang - CFO

Conference Call Participants

Thomas Chong - Jefferies

Ronald Keung - Goldman Sachs

Alicia Yap - Citigroup

Jialong Shi - Nomura

Operator

Ladies and gentlemen, good day, everyone, and welcome to Vipshop Holdings Limited's Third Quarter 2023 Earnings Conference Call.

At this time, I would like to turn the call over to Ms. Jessie Zheng, Vipshop's Head of Investor Relations. Please proceed.

Jessie Zheng

Thank you, Operator. Hello, everyone, and thank you for joining Vipshop third quarter 2023 earnings conference call. With us today are Eric Shen, our Co-Founder, Chairman and CEO; and Mark Wang, 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 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 matters 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 reconciliation 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 third quarter 2023 earnings conference call.

We continued to see decent momentum throughout the third quarter, with sales and profit growth ahead of expectations. While we accelerate our efforts on strategic priority to capture customer mind share, among the drivers apparel category continued to outperform with over 16% growth in GMV year-over-year. High value customers increasingly relied on us as they looked for great deals.

Active Super VIP member grew 17% from a year ago and accounted for 45% of our online spending in the third quarter. We continue to execute well and drive changes for the long-term. We made it clear that we'd like to be the first go to online shopping destination for apparel.

To that end, we are pushing forward with a strategic improvement related to merchandise expansion, best value for money and wallet free service for our customers. Our merchandise team is more skilled at developing rich and diverse mix of branded products. Up-to-date we have added several hundred trendy and high end brands this year. And we have a complete system to help new brands grow their business faster by providing the right mix of resource support including traffic allocation, customer analytic, and channel promotion. Also, as a buyer-based platform that highlights carefully select products, we will launch the contents like buyers must have, which is tailored for apparel category and customer behaviors on Vipshop to interest different types of users.

On made for Vipshop, our team has done a better job of identify product opportunities together with brand partners. We now have an enlarged supply of customized offerings with SKUs available for sale trending up every month. The customized still perform better in categories like clothing and shoes and bags. This has motivated brand partners to deepen their collaboration of customized products with us. While we are growing our merchandise selection, we are committed to providing our customers with effort ability. We are focused on seeking out the best deal for our customers to make sure they get value with great everyday price and also through unique and customized products and we provide additional saving opportunities through our popular loyalty programs.

Lastly, we are improving customer shopping experience that includes overall set of enhanced capabilities from the wallet free quality guarantee enriched product detail page, integrated customer service together with brand partners to improve fulfillment efficiency through seamless process management. For example, as part of our enhanced quality assurance program, we recently reached a strategic collaboration with china inspect and certification group to upgrade our quality control system. With all of these competencies at the core of our business, we are in a better shape to deepen engagement with our customers.

Our Super VIP members recognize our big strengths more than the others because of the trust, value, and ease, they've enjoyed at every interaction. Super VIP member has consecutive quarters of double-digit growth. Overall, retention and renewal rates are trending higher average spending is also ticking up. As we look ahead, we are confident that our business will stand firm in the phase of a still challenging environment.

We are encouraged to see a deepening level to trust we were established with our brand partners and customers and we were unique positioned to secure consistent product supply that is aligned with customer performance for value spending. We are confident about being a longstanding player with stable, sustainable, growth prospects.

At this point, let me hand over the call to our CFO, Mark Wang, to go over our financial results.

Mark Wang

Thanks, Eric. Good morning, and good evening, everyone.

We are delighted to see the third quarter results exceeded our expectations. Leveraging our elevated customer mind share in our apparel categories and value for money offering, we delivered satisfactory revenue growth despite the slow season in the third quarter.

With continued focus on high quality growth, profitability remains strong. Gross margin increased by 2% points year-over-year to 23.6%, a record high in three years, primarily benefiting from favorable category mix and optimized merchandise portfolio.

Non-GAAP operating margin hit an all-time high of 9.1%, as we stayed disciplined when managing every expense item.

Non-GAAP net margin attributable to Vipshop's shareholders maintained at a high level of 8.1%.

Meanwhile, we value shareholder interest from long-term perspective. As of the end of third quarter, we have returned a total of approximately US$2 billion to our shareholders since April 2021. We remain committed to executing our share repurchase program. Going forward, we are positive on the long-term growth outlook supported by the underlying strength of our unique business model. We believe our enhanced efforts from merchandising to supply chain will help us capture the opportunities presented by consumers increasing needs for value for money offerings.

Now 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 change are year-over-year change unlike otherwise noted.

Total net revenues for the third quarter of 2023 increased by 5.3% year-over-year to RMB22.8 billion from RMB21.6 billion in the prior year period, primarily attributable to the growth in active customers and spending driven by recovery in consumption of discretionary categories.

Gross profit increased by 19 -- increased by 14.9% year-over-year to RMB5.4 billion from RMB4.7 billion in the prior year period. Gross margin increased to 23.6% from 21.7% in the prior year period.

Total operating expenses increased by 9.6% year-over-year to RMB4.0 billion from RMB3.7 billion in the prior year period. As a percentage of total net revenues, total operating expenses was 17.6% as compared with 16.9% in the prior year period.

Fulfillment expenses increased by 9.5% year-over-year to RMB1.6 billion from RMB1.6 billion in the prior year period. As a percentage of total net revenues, fulfillment expenses was 7.8% as compared with 7.5% in the prior year period.

Marketing expenses increased by 17.0% year-over-year to RMB669.6 million from RMB572.4 million in the prior year period. As a percentage of total net revenues, marketing expenses was 2.9% as compared with 2.6% in the prior year period.

Technology and content expenses increased by 10.3% year-over-year to RMB435.3 million from RMB394.8 million in the prior year period. As a percentage of total net revenues, technology and content expenses was 1.9% as compared with 1.8% in the prior year period.

General and administrative expenses increased by 5.5% year-over-year to RMB1.13 billion from RMB1.07 billion in the prior year period. As a percentage of total net revenues, general and administrative expenses was 5.0%, which stayed flat as compared with that in the prior year period.

Income from operations increased by 34.8% year-over-year to RMB1.5 billion from RMB1.1 billion in the prior year period.

Operating margin increased to 6.7% from 5.3% in the prior year period.

Non-GAAP income from operations increased by 33.0% year-over-year to RMB2.1 billion from RMB1.6 billion in the prior year period. Non-GAAP operating margin increased to 9.1% from 7.2% in the prior year period.

Net income attributable to Vipshop's shareholders was RMB1.2 billion as compared with RMB1.7 billion in the prior year period. Net margin attributable to Vipshop's shareholders was 5.3% as compared with 7.8% in the prior year period.

Net income attributable to Vipshop's shareholders per diluted ADS was RMB2.91 as compared with RMB2.70 in the prior year period.

Non-GAAP net income attributable to Vipshop's shareholders increased by 15.5% year-over-year to RMB1.8 billion from RMB1.6 billion in the prior year period. Non-GAAP net margin attributable to Vipshop's shareholders increased to 8.1% from 7.4% in the prior year period.

Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS increased to RMB3.33 from RMB2.56 in the prior year period.

As of September 30, 2023, we had cash and cash equivalents and restricted cash of RMB19.6 billion and short-term investments of RMB451.9 million.

Looking forward to the fourth quarter of 2023, we expected our total net revenue to be between RMB31.8 billion and RMB33.3 billion, representing a year-over-year increase of approximately 0% to 5%. 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.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].

Thank you. We will now take our first question. Please stand by. First question is from the line of Thomas Chong from Jefferies. Please go ahead.

Thomas Chong

Hi, good evening. Thanks management for taking my questions. I have two questions. My first question is about the latest GMV trend that we are seeing in the month of October and so far in November, and also our feedback on Double 11. My second question is about 2024 outlook. Can management comment about how we should think about the outlook next year and also the competitive environment? [Foreign Language].

Eric Shen

[Foreign Language].

Jessie Zheng

Okay. On the first question of the latest GMV performance in recent months, actually, I think entering into Q4, overall performance was a bit muted especially for apparel categories because of the abnormal weather conditions in October, and the seasonal shift for autumn and winter closing seemed to come in later than -- slower than expected. But apparel categories have been picking up very nicely in recent weeks, especially during the Double 11. And the overall GMV growth during our Double 11 has actually reached double-digits growth outperforming the industry average quite meaningfully. So we still have some expectations for the rest of the quarter, but it still depends especially on the weather conditions. If the winter kicks in colder than expected, we should have much better performance.

For the year ahead, 2024, our overall strategy continues to be focusing on achieving stable and healthy growth. I think a lot of the things through the last couple of years developments have been reached a healthy level, especially for margins, no matter its gross margin or net profit margin, all are on the healthy track. But we are looking for better growth, especially on the customer front. We are trying to different ways to boost our customer growth for the long-term. And of course, certainty remains especially as to the consumption environment and a lot of other factors, et cetera. But we remain focused on the current strategy and we believe that we will continue to be a very stable and healthy player in the industry for the year ahead.

Thomas Chong

[Foreign Language]

Operator

Thank you. We will now take our next question. Please stand by. The question is from the line of Ronald Keung from Goldman Sachs. Please go ahead.

Ronald Keung

Thank you. Thank you Eric, Mark, and Jessie. So I have two questions. First is, we see that the gross margin has reached a new high. Where should we see kind of as apparel, I think this is a big quarter for in terms of mix that should have boosted gross margins because of the apparel mix in the quarter? But how should we think about the gross margin upside into let's say 2024? What are the levers that we see for gross margin uplift from here with this new high level? And then, my second question is on our buyback over the quarter. I think management, you just reiterated the ongoing buyback plan, but the absolute amount spent during the quarter is quite small compared to, let's say, the second quarter. So I want to know, is our buyback a function of share price or our cash which is onshore or offshore or this is just an unusual quarter and we plan to have a pretty balanced buyback schedule throughout each quarter. Let me translate myself. [Foreign Language].

Eric Shen

[Foreign Language].

Jessie Zheng

Okay. On the first question about GP margin expansion, the GP margin expansion in Q3 was actually primarily driven by the higher margin in turn higher contribution year-over-year. And also our saving initiatives, especially on the customer incentives have been well put in place is not that -- the take rate how much we take from brand partners has actually not changed that much. And instead of increasing the take rate from brand partners, we actually offered a lot of incentives for brand partners to grow their business together with us, so that they can actually save a lot of money. And the GP margin has reached relatively high level, so we think there is not that much room for it to improve further in Q4 or for the year ahead because we won't increase the take rates for brand partners. We won't issue that customer coupons as well. We think we find a better and a healthier way to grow our business and as well as our customers.

But on the other hand, in terms of NP margin, we think, we still have some room for further expansion and especially for Q4; it's typically a peak season for us in terms of margins, especially NP margin. So we should see a higher NP margin in Q4. And for 2024, we still have some economy of scale and some operating leverage, especially on the marketing expense front. We continue to be prudent and invest only when and where we feel there is a need and the returns are okay. So we think NP margin still has some room for expansion, but not as meaningful as we have seen for 2023 versus 2022.

Mark Wang

Okay. Hi Ronald, this is Mark, and thanks for your great question regarding the share buyback. I will answer your question, okay. Well, first, we have been steadily executing our buyback programs. As of the third quarter, we have utilized around US$448 million of our current US$1 billion share repurchase program. And that is to see, starting from the second quarter 2021; we have returned a total about US$2 billion to our shareholders as of the third quarter 2023. The remaining US$551 million buyback is being executed.

Secondly, we are committed to executing the buyback as it's a way to show confidence in our long-term growth prospect. And also we think about providing relatively stable returns for shareholders and investors. The last but not least, we have been doing from time to time with some flexibility, some take risk factors into account, and share price volatility, so then regarding the share buyback programs. Thank you.

Ronald Keung

Okay. Thank you very much.

Operator

Thank you. We'll now take our next question. Please stand by. Next question is from the line of Alicia Yap from Citigroup. Please go ahead.

Alicia Yap

Hi, good evening, management. Thanks for taking my questions. Very quickly I wanted to ask as we enter 2024 with demand for apparel and the discretionary spend likely to experiment the normalizing growth. So what are VIP strategies or plans to enhance your growth outlook or your user purchasing frequency? What could be the normalized growth percentage for next year? And does management think the consumption sentiment will be improving from this year level? Thank you.

Jessie Zheng

[Foreign Language].

Eric Shen

[Foreign Language].

Jessie Zheng

On the 2024 growth outlook, we are pretty confident that we can achieve stable and sustainable growth for the long-term. We are still a very small player in China's e-commerce industry and with a limited number of active customers. So we still have a lot of potential to grow our customer base. We are very confident about that.

On the one hand, we continue to attract new customers and improve the retention of existing customers and especially grow our SVIP members. And in addition to marketing spend; we think merchandising portfolio is a more important factor to help us grow faster. We continue to expand our merchandising portfolio including unique offerings made for Vipshop customized offerings as well as buyouts offerings. We will continue to leverage a combination of these product offerings to add value to our customers.

And speaking of customer base, we still have less than 100 million annual active customers. So we think as long as we can continue to upgrade our platform to focus on apparel categories to be a better and unique and the only one in the vertical discount retail segment. And as we continue to enhance our customer experience and services, we will grow our customer base from the current level very meaningfully.

Operator

Thank you. [Operator Instructions].

Thank you. We'll now take our next question. This is from the line of Jialong Shi from Nomura. Please go ahead.

Jialong Shi

[Foreign Language]. Thanks for taking my question. I will first ask my questions in Chinese and I will translate them myself. [Foreign Language].

So I just asked three questions to the management. The first question is a follow-up question on the buyback. Just wonder if we should expect the company VIPs to continue to top up the buyback program when the current US$500 million -- US$500 million plus buyback authorization is fully utilized. And also just wonder if management can provide some rough ideas. What is the size of buyback company may consider or company Board may consider on an annual basis. The second question is a follow-up on the management's earlier remarks on the gross margin. So I just wonder if VIPs will be able to maintain the current 23% to 24% gross margin stable going forward. And the third question is about the number of Super VIP member. Just wonder what is the growth -- the exact growth of the Super VIP member in this quarter and also the revenue contribution from Super VIP member in Q3. Thank you.

Eric Shen

[Foreign Language].

Jessie Zheng

Okay. First on the buyback, we still have $500 million left in our existing buyback program and we will continue to execute that. The Board is very supportive of the current buyback plan and the Europe factors first in the past is that as we are close to fully utilizing the buyback -- the current buyback program, we will ask the Board for the approval of the next buyback program. As the Board and the management has reached the consensus on the buyback, especially given the share price is still deeply undervalued. We will continue to approve new buybacks as long as -- as soon as we finish that, or even during the process.

As to how we are going to execute the buyback program, it's too much detail. You just have to remember that we will be executing the buyback program from time to time and on a continuous basis.

On the GP margin, we have reached a three-year high of over 23%. But as we mentioned earlier, there is not so much room for us to further expand our GP margin because we are not going to increase the take rates for brand partners, instead we are going to incentivize them to grow their business faster with a Vipshop. So there is not too much room for us to improve gross margin. But for the next year, the gross margin will be maintaining at a similar level as compared to 2023, especially in the quarters with relatively good gross margin.

And I've also mentioned that on the NP margin, we still have a good chance of expanding that because of the economy scale and operating leverage. We are pretty confident on that.

On SVIP, we currently have 6.7 million active SVIP customers, accounting for 45% of our online spending, and they have maintained a double-digit growth for several quarters so far. And all the operating metrics for SVIP members are outperforming including ARPU, frequency, et cetera. So we will continue to focus our efforts on maintaining the SVIP customer base and elevating their loyalty and trust with our platform so that they can spend much more for the longer-term.

Mark Wang

Okay. This is Mark. Jialong, I will give some supplement comments regarding your question for the share buyback and we would like to create and return value to our shareholders and we have confidence in our long-term growth prospect. Therefore, we will execute the share buyback program from time-to-time and we do not have accurate target volume or amount for the share buyback every quarter. But I think one thing is that we have US$1 billion share buyback program lasted for two years, okay. I think that can give you a concept regarding your question. Okay. That's all. Yes.

Jialong Shi

Thank you.

Operator

Thank you. 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 follow-up questions, please don't hesitate to contact our IR team. We look forward to speaking with you next quarter.

Operator

Thank you. That does conclude the conference for today. Thank you for participating and you may now disconnect.