Vipshop Holdings Limited

Ladies and gentlemen, good day, everyone, and welcome to VIP Shop Holdings Limited Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, I would like to turn the call to Ms. Jessie Zheng, VIP Shop's Head of Investor Relations. Please proceed.

Thank you, operator. Hello, everyone, and thank you for joining VIP Shop's Fourth Quarter and Full Year 2021 Earnings Conference Call. With us today are Eric Shen, our co-founder, chairman, and CEO, and David Tsui, 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 public filing 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 reconciliation of our non-GAAP merits to GAAP merits. With that, I would now like to turn the call over to Mr. Eric Shen.

Good morning and good evening, everyone. Welcome and thank you for joining our fourth quarter and the full year 2021 earnings conference call. We are delighted with our solid business performance in 2021, despite a slow fourth quarter impact by the challenging external environment. For the full year, total active customers increased by 12% year over year to 93.9 million. GNV rose by 16% to RMB 191.5 billion. Notably, SuperVIP active customers grew by 50% to 6 million and contributed 36% of online net GNV. Driven by steadily growth in both customer base and average revenue per customer, Our total revenue for the year increased by 15% year-over-year to RMB 117.1 billion. Non-GAAP net income for the year exceeded RMB 6 billion and the net margin remained about 5%. Our solid operational and financial performance was led by continuous business upgrades based on our strategic position and as a discount platform for branded products at exceptional value. To further enhance our core competence, during the second half of 2021, we focused more on core brands and high-value customers to further strengthen our value proposition with them. Among many things, We rely and upgrade various channels on our platform to better empower brand partners and enhance shopping experience for customers. We are encouraged by the business synergy generated from the initiative. For example, multiple brands recorded their highest single-day GMV in recent years during the Super Brand Day and today's Top Brand Sales event. Many more brands came to us, providing our customers with more unique and price-competitive products. We are pleased to see that the contribution from core brands for the past year significantly improved from a year ago, with their GMV growing faster than the overall GMV on our platform. Through their deepened relationship with our brand partners, we were able to better cooperate with core brands on made-for-VIP shop products. In addition, to address the needs of younger customers, we also consistently added new and trendy brands to our platform. As we brought in more quality brands and products, we were better positioned to leverage integrated operations to improve customer thickness and output. In particular, super VIP member outperformed in most all operation metrics. They have a very high retention rate with their annual output at around eight times than that of non-SVIP customers. We expect this paid membership program to cover more high-value customers on our platform. Looking into 2022 and beyond, we will firmly execute on our merchandising strategy to secure an increasing share of quality products from carefully selected brand partners. To achieve this, we will keep allocating more resources to accelerate the growth of the core brands, differentiate our offering further through made-for-VIP products, and introduce more popular and high-end brands. In addition, we will continue to optimize our operations. We will improve the effectiveness of customer acquisition through personalized recommendations, enrich the shopping experience, and inspect target marketing for new and existing customers. We expect these efforts to collectively drive the quality and sustainable growth of our customers and revenue for the long term while consistently delivering daily and health profits. At this point, let me hand over the call to our CFO, David Cui, who will go over our financial results.

Thanks, Eric. Hello, everyone. 2021 was a year of challenge and uncertainty. Despite this, we achieved a solid performance thanks to our continuous efforts in executing the merchandising strategy and refining operations. Our total revenue for 2021 increased by 15% year over year, driven by steady growth in both customer base and average revenue per customer. although the fourth quarter came under some pressure. Net margin attributable to VIP shops shareholders for the year remained resilient with sequential improvement in the fourth quarter due to disciplined operations, evidenced by more prudent marketing strategy through integrated customer acquisition. Going forward, we remain committed to delivering steady profitability with quality top-line growth and creating long-term value to our shareholders. 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 MMB and all the percentage changes are year-over-year changes, unless otherwise noted. Total net revenue for the fourth quarter of 2021 was 34.1 billion RMB as compared with 35.8 billion RMB in the prior year period, primarily attributable to soft consumer demand for discretionary categories impacted by the micro economy and COVID-19 pandemic. Gross profit was 6.7 billion RMB as compared with 7.8 billion RMB in the prior year period. Growth margin was 19.7%, as compared with 21.9% in the prior year period. Total operating expenses decreased to 5.0 billion RMB from 5.4 billion RMB in the prior year period. As a percentage of total net revenue, total operating expenses decreased to 14.6% from 15.2% in the prior year period. Fulfillment expenses was 2.2 billion RMB, which largely stayed flat as compared with the corresponding period in 2020. As a percentage of the total net revenue, fulfillment expenses was 6.4% as compared with 6.1% percent in the prior year period. Marketing expenses decreased to 1.1 billion RMB from 1.7 billion RMB in the prior year period. As a percentage of total net revenue, marketing expenses decreased to 3.4% from 4.8% in the prior year period, primarily attributable to more prudent marketing strategy. technology and content expenses increased to 443.0 million RMB from 272.4 million RMB in the prior year period. As a percentage of total net revenue, technology and content expenses was 1.3% as compared with 0.8% in the prior year period. General and administrative expenses were 1.2 billion RMB as compared with 1.3 billion RMB in the prior year period. As a percentage of a total net revenue, general and administrative expenses was 3.5%, which stayed flat as compared with the corresponding period in year 2020. Income from operations. was 1.8 billion RMB as compared with 2.6 billion RMB in the prior year period. Operating margin was 5.4% as compared with 7.2% in the prior year period. Non-GAAP income from operations was 2.1 billion RMB as compared with 2.8 billion RMB in the prior year period. Non-GAAP operating income margin was 6.1% as compared with 7.9% in the prior year period. Net income attributable to VIP shops shareholders was 1.4 billion RMB as compared with 2.4 billion RMB in the prior year period. Net margin attributable to VIP shops shareholders was 4.1% as compared with 6.8% in the prior year period. Net income attributable to VIP shops shareholders per diluted ADS was 2.07 RMB as compared with 3.51 RMB in the prior year period. Non-GAAP net income attributable to VIP shops shareholders was 1.8 billion RMB as compared with 2.6 billion RMB in the prior year period. Non-GAAP net margin attributable to VIP shops shareholders was 5.3% as compared with 7.2% in the prior year period. Non-GAAP net income attributable to VIP shops shareholders per diluted ADS was 2.64 RMB as compared with 3.70 RMB in the prior year period. As of December 31, 2021, the company had cash and cash equivalents and restricted cash of 17.2 billion RMB and short-term investments of 5.4 billion RMB. Now, I will briefly walk through the highlights of our four-year results. Total net revenue for the full year of 2021 increased by 14.9% year over year to 117.1 billion RMB from 101.9 billion RMB in the prior year, primarily driven by the growth in the number of total active customers. Growth margin increased by 8.6% year over year to 23.1 billion RMB from 21.3 billion RMB in the prior year. Growth margin was 19.7% as compared with 20.9% in the prior year. Income from operations for the full year of 2021 was 5.6 billion RMB as compared with 5.9 billion RMB in the prior year. Operating margin was 4.8% as compared with 5.8% in the prior year. Non-GAAP income from operations was 6.6 billion RMB as compared with 6.8 billion RMB in the prior year. Non-GAAP operating income margin was 5.6% as compared with 6.7% in the prior year. Net income attributable to VIP shops shareholders was 4.7 billion RMB as compared with 5.9 billion RMB in the prior year. Net margin attributable to VIP shops shareholders was 4.0% as compared with 5.8% in the prior year. Net income attributable to VIP shops shareholders per diluted ADS was 6.75 RMB as compared with 8.56 RMB in the prior year. Non-GAAP net income attributable to VIP shops shareholders was 6.0 billion RMB as compared with 6.3 billion RMB in the prior year. Non-GAAP net margin attributable to VIP shops shareholders was 5.1% as compared with 6.2% in the prior year. Non-GAAP net income attributable to VIP shop shareholders per diluted ADS was 8.67 RMB as compared with 9.08 RMB in the prior year. Looking forward to the first quarter of 2022, we expect our total net revenue to be between 27.0 billion RMB and 28.4 billion RMB, representing a year-over-year decrease rate of approximately 5% to 0%. 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.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to withdraw your request, please press the pound or hash key. Our first question comes from the line of Thomas Chong from Jefferies. Please ask your question.

Hi. Good evening. Thanks, management, for taking my questions. My first question is relating to the consumer sentiment that we are seeing right now. Can we comment about how it is different in Q4 and so far right now in Q1? Because when I look at the guidance, it seems that it is a negative five to zero percent, which is similar to the guidance in Q4. So just want to see if any changes. in terms of our thoughts on macro headwinds. And secondly, I also want to get a sense about how we should think about the recovery momentum in Q2 and coming quarters. And then finally, that is more relating to competition. Can management comment about the live streaming, online shopping competition in China and how it affects our business Any thoughts on whether we can separate out or quantify the impact on competition and macro headwinds in 2022? Thank you.

There are three questions. The first question is, from Q4 to Q1, how has the consumer's mood changed? Because he noticed that the guidance we gave to Q1 is still negative to 0. Q4 is the same. There is no change in this quarter. The first question is about the consumer's

We see that Q4 is relatively weak because of the weather. The weather is not very cold. There is also the reason for the epidemic. We also see that Q1 will be a little better than Q4. But the epidemic continues. But Q1, we can see that many places are still turning cold. In fact, the factors of the season are still very important to the micro-pandemic. Because our main category is clothing.

In terms of the first question on consumer sentiment, actually, we have seen that it's really weak in the fourth quarter because of the warmer weather as well as sporadic COVID-19 cases. And in the first quarter, it's getting slightly better because the weather is getting colder. But still we are naturally impacted by the COVID-19 cases here and there. So seasonality still plays some role in our business performance because we are pretty much apparel category focused platform. The second question is, we are expecting Q2, the second quarter, and the next few quarters, what is the trend of recovery?

It is difficult to predict the whole year, because we believe that the whole epidemic will continue this year. In addition, it includes the confidence and enthusiasm of consumers, which we are talking about. In fact, we are looking at a relatively difficult situation, In terms of the recovery trend in the coming quarters, it's really hard to predict for now given the many uncertainties going on, especially we see that there are still cases of COVID-19.

And it's still too early to tell whether the consumer trend is going, whether when the consumption is coming back. But overall, we should see a relatively stable growth for 2022. We don't expect too much swing in our business performance. It's going to be quite stable. The third question is about the competition in our industry. What is the impact of the live streaming platform on us? Have you seen any changes? In addition, are there any quantitative indicators that can analyze the impact of the competition on our business?

So we see that the live streaming industry, for example, at the beginning, has indeed affected some of our shareholder stores. But when we look at the current live broadcast, it doesn't really affect our goods and services. It's basically at a stable stage. So we're not actually worried about live broadcasts or our goods and services. In the end, we think that as long as the goods are good, the consumers buy the goods, not how much time I have to spend today. The second is, if we talk about specific quantity of live broadcasts and so on,

In terms of competition, we haven't seen too much change recently.

We believe it's getting relatively stable.

We think that live streaming platforms, they have to take what they can take in the past from shelf-based e-commerce platforms. We didn't see competition as getting worse. We are actually not worried because as long as we get the right merchandising for our customers, they will always come to us. In terms of the impact from macro and competition, it's really hard to quantify because you cannot predict reliably whether macro is going to play out. But on the competition side, we are pretty sure that the impact is already there.

Thank you, Eric. Thank you. Our next question comes from Alicia Yeh from Citigroup. Please ask your question.

Hi. Good evening, management. Thanks for taking my questions. I have a couple questions here. The first one is a question related to the inventory status for the Winter Olympics merchandising. So have you been discussing with your brand partners or maybe your merchandising partners regarding the demand and the inventory situation? Do you see any opportunity that a VIP shop can get some of these products that is kind of left over. And given the timing, do you think you will be benefit more for the fall and winter season later in late 2022? Or do you think there could be some winter clearance activity that you can leverage later in March or the April promotion period? 他的问题主要是问冬奥会相关的库存

Do we receive any benefits? Do we discuss the needs with our brand partners? Do we have any opportunities? If we do, will the opportunity be in the autumn-winter season in 2022? Or will it be reflected in the sales season from March to April? For example, in the case of sports equipment companies,

China China China China China China In terms of the inventory related to Winter Olympics,

We haven't seen a very strong buildup in such inventory. So we do see that sports companies have been growing their business on our platform very fast in recent years. But they do not provide any dedicated inventory in terms of such as skiing, sportswear, et cetera. We think that they have a normal level of inventory for sportswear. So there is no anticipation that we are going to benefit from any excess inventories related to Winter Olympics.

Yeah, thank you. Can I follow up one question on user growth strategy? So can you elaborate what are the current plans that you are thinking in terms of, you know, to help to boost your new user acquisitions later this year? Thank you.

The other problem is that we don't have any updates on our user growth strategy, especially how we will attract more new users in the future.

Last year, we made some adjustments to get higher quality users. In addition, we don't spend a lot of money because we are worried that some money will be wasted if spent incorrectly. Instead, we focus on getting high quality users. So we hope to continue our strategy of Q4 last year. This year, we still need to get new customers. In addition, we also need to ensure that our old customers are preserved. We will also invest heavily on users. But overall, we still use the principle of quality development.

In terms of our user growth strategy, I think from the fourth quarter of last year, we have been focused on acquiring quality users in a more efficient and effective way. We don't want to blindly spend money in old channels to acquire low-quality customers. Instead, we are trying to do it in a balanced and prudent way through integrated customer acquisition. This year, we are going to continue to invest a lot of efforts in acquiring new customers, but at the same time, we are going to improve the retention of our existing customers. We will maintain a decent level of marketing spend in new user acquisition. Okay, thank you, Jessie.

Oh, Alicia, I add a couple more. I think number one is we've seen a number of our super VIP increase year over year. So that's one of the key indicators that the quality of our customer base is getting better. And then we've also seen that our pool stabilized and have a slight increase actually starting last quarter. We've seen that trend.

I see. Thank you, David, for the additional color.

Thank you. As a reminder, if you wish to ask a question, please press star 1 on your telephone, and please ask your questions in English and Mandarin. Thank you. Our next question comes from Ronald Kohn from Goldman Sachs. Please ask your question.

Okay, thank you. Hi, Mr. Shen, David. Let me ask the question first, and then I'll translate it. First, I'd like to hear our thoughts on the interest rate. Because the 4th quarter is about 19.7%. I think in the past, the 4th quarter was usually the highest interest rate quarter, because the apparel price was higher. This year, it's probably... We didn't see the highest market share of the year. So how should we think about 2022? Our market share is already low enough. There are super VIPs and these considerations. So how should we think about the trend of the market share of 2022? Second, I want to hear about our business. We are now in a relatively stable maturity period. We also see that our balance sheet is very strong. It's already net cash. Thank you very much. taking my question. My first question is on gross margins. Fourth quarter is traditionally a high margin quarter with a high apparel make. So given this year is not the highest kind of quarter, margin quarter, just want to hear how are we thinking about the gross margin trends? and the implications for 2022. My second question is, as our business reaches a more mature stage and we have a very strong net cash balance sheet and a sizable earnings per share, we'd love to hear management's thoughts on whether there could be any potential plans even for rewarding shareholders like paying dividends. Thank you.

I will answer the first question, and David will answer the second question. The first question is that when we look at the Q4 this time, our interest rate should be low. We actually have 19.7. This time, because we did a lot of discount when we were in Q4, but what we did not do well was to see that, for example, the discount went down, and our subsidies went down, but because of the weather, etc., it caused the user's desire to buy to be not strong, so in fact, my discount went down and the return was not high. So we think that Q4 is not a long-term phenomenon. This year, we will continue to raise the interest rate steadily. We are not worried about this. Last year's low interest rate, Q4's low interest rate, is not the norm this year. The second question is from David.

In terms of the gross margin, although Q4 is a relatively lower level as compared to the full year, the same quarter of last year, it's really because of the promotions and the subsidies we did during the quarter. However, Because during the quarter, the weather was relatively warmer, and it didn't effectively motivate consumers to spend more on winter clothing. So the return on this marketing spend is not desirable. But the current level of gross margin is not something that we want for the long term. We will gradually bring our gross margin to a more normal level in the coming quarters. You don't have to worry about the gross margin going ahead.

In terms of the cash use, as you know, our board has approved a share buyback plan last year. So we have executed partially in the last year. And given that we made quite good profit in the year, and then we still see a healthy profitability in the coming year, in this year, 2020. So the board and the management is considering among the share buyback and distribution of the dividends. So it's within the process. We are considering and evaluating the options right now.

Thank you. Thank you, Chantal and David.

Thank you. Our next question comes from the line of Natalie Wu from Hightown International. Please ask your question.

Hi, good evening. Thanks for taking my question. I have two here. First one is following up with Alicia's last question about the user acquisition. Can management elaborate more on your latest user acquisition strategy? For last quarter, we can see that your sales marketing is quite controlled, especially considering seasonal patterns. Just wondering any particular spanning channel has been typically chained, branding, performance-based ad or whatever. And what kind of the sales marketing budget you're preparing for this year? Could it be more of an absolute number or fixed revenue ratio depending on the timing of the improvement of the economy or the consumer confidence? Just curious how should we see the change. And a second one is related with your super VIP. Just wondering what's the current percentage of your super VIP and also the related gross profit margin profile contributed by them because they obviously have a higher pool which is I think favorable to the gross profit margin maybe. But in the meanwhile, they are enjoying a deeper discount. So it would be great if management can share some color on that. 我自己简单翻译一下。 就第一个问题的话是跟Alicia刚刚问的这个用户获取相关,想了解一下。 Is it possible to explain to us more in-depth about this recent change in a strategy that is not used? In the fourth quarter, our relevant marketing costs are actually very well controlled compared to the marketing forgetfulness. I don't know which special channel we are in. Is it the budget that is controlled? Is it the brand or the effect? Then this year, let's look at it in a more detailed way. How should we look at it? And when we set the budget for the marketing investment, is it more based on a year-round budget or a fixed rate of income? Because I think if we look at the last three seasons in terms of the absolute value, Actually, the net income ratio is slightly higher than the previous year, but the numbers were pulled down again during the recession. So I don't know if this is a percentage of our entire year's income to control the business budget for the whole year. The second question is about Super VIP. I just want to take a look at our current How is the ratio of superiors? What is the rate of income they contribute to the company compared to ordinary users? On the one hand, their APU is relatively high. Maybe some of the rate of income may be better. But on the other hand, their discount is relatively high. So I don't know how we should look at the overall impact on the rate of income.

OK, the first question is about the adjustment we made in Q4 regarding the cost of user acquisition. In fact, this year, Q4 began to strictly use LTV to measure the cost of customers in various channels and the month of return. Then we will find that, for example, some new customers foreign foreign foreign foreign foreign For example, in the TV series, in the various short videos we talked about, etc., we actually built a complete model that can be measured with LTV. So this year we followed this standard and removed a lot of unreliable or overspent money. So that's why we saw some results in Q4. So in the future, in 2022, we still want to continue to use our LTV, which is a relatively healthy return, to calculate. Then, for us, we don't know the amount, and we don't know the percentage, because if we say today, if LTV is all calculated, even if we say that our absolute number or proportion is the highest in history, we are not afraid, because we think this is healthy, and it is fixed on how much time to return. So we actually In terms of the latest update on user acquisition strategy, I think what we do differently from the fourth quarter is that we strictly follow the LTV model

to evaluate the marketing efficiency of our spending and as well as how many days to recover in terms of new customers as well as existing customers. In the past, we tend to see it takes longer time for us to recover the spend on new customers, so we did less. and for the listing commerce, we tended to send out many coupons and did a lot of advertising, but it turns out not to be very effective, so we also did less on that front. In general, we applied this LTV model in all the channels, including branding, as well as TV drama sponsorships, as well as advertising on short videos, et cetera. So we actually did see some positive results from the fourth quarter. This year, we will continue to use the LTV model to manage all our marketing spend across different channels We do not look at a certain absolute number of marketing expense as well as a certain percentage of the total net revenues. As long as the LTV model shows this is a healthy way to do, to acquire customers, we will keep doing so. So we are going to take this balanced and prudent approach to our marketing strategy.

The second point is about SVIP. SVIP has contributed about 36% of our sales. Our future plan is to continue to promote more people to become our SVIP, so that we can buy more and consume more. For us, SVIP may only bring us The profit will be a little lower. For example, it may have a little discount. In addition, the return rate may be a little higher than that of other users. But overall, because its entire contribution is many times that of ordinary users, so in theory, it is still profitable for us, and it still has a good profit. So we will continue to strengthen our SVIP this year. We hope that in the future, we will have enough medium-sized users to contribute here.

In terms of the margin profile for SVIP members, we've just mentioned that SVIP already accounted for roughly 36% of our online net GMV last year. In the future, we're going to continue to convert more high-value customers into SVIP members. In terms of the gross margin, SBIP members have a slightly lower gross margin than the overall level of our gross margin for the company and a slightly higher return rate. But SBIP proves to be spent much more than a non-SBIP member. So it is definitely a very profitable model for the company. And we expect as long as more high-value customers are successfully becoming SVIP members, they tend to come to shop more and spend more.

That's very helpful. Thanks, Angela and Jessi.

Thank you. Our next question comes from Eddie Wang from Morgan Stanley. Please ask your question.

Hey, Mr. Shen, Mr. David, and Ms. Jessie, thank you for your questions. I have two questions. The first one is related to storage. Mr. Shen mentioned that there may not be any serious problems with the storage of sportswear. I would like to ask, in the second half of last year, the demand for sportswear was relatively low. Have you noticed that some non-exercise clothing brands are having problems with their stock? Will this lead to a chance for us to have a chance for this year? This is the first question. The second question is, as you mentioned earlier, we are actively working on SVIP in this regard. I would like to ask, considering that the demand for clothing in the second half of last year is relatively low, have we thought about I think these two questions, and then I'll translate them myself. Thank you for taking my question. My first question is also about the inventory distorting. Shengdong, you mentioned that for the non-spots apparel, there's no inventory issue, but I just want to asked if there's any, you know, the administration for the women's apparel or branded apparel given the weak sentiment of the apparel in China since the second half of last year. And if that's the case, do we have any, you know, the opportunity for the stocking in the coming quarters? The second question is about if there's any plan for the, you know, the category expansion on top of the apparel. given that apparel sentiment is quite weak, and if we have more SVIP on our platform, so we can meet their demands of a different category, not just about apparel. If that is the case, what's the impact on the margin profile as a whole? Thank you.

Among our sales, the first question, among our sales, our business model is the sales of a consignment So majority of our business was done through consignment. So on our balance sheets, the inventory balance is quite small as compared to our total annual GMV. And you can also see the inventory balance is decreasing thanks to our effort to clear some of our aged inventory. And to add some color to this, And among the inventory balance, quite a big portion of that is coming from our shops and offline stores. So they have to carry some inventories. So take out that, and then the real inventory we carry for our online business is quite immaterial, I would say. Yeah.

OK. The first thing I would like to add is that we can see that the inventory of brands is indeed increasing. Last year, due to the weather and the pandemic, everyone's inventory was increasing. So, in 2022, we are doing well. But we are not purely relying on inventory. In addition to solving the inventory problem, a large number of brands have cooperated with us.

Adding to David's point, in terms of the inventory from non-sportwear apparel, we do see some build-up in inventory from the fourth quarter because of the weather conditions as well as COVID-19 cases. So it's going to be a good thing for us. But on top of clearing excess inventories for brands, we also, you know, customer product offerings with some of the core brands. So we are trying to secure the best supply from our brand partners. 第二个问题是问标品,对吧?

Then we actually also see that we are asking about new products. We actually see that we are doing well in clothing, but we are actually solving the online shopping. For example, some products are not enough for us, so we actually make adjustments in these areas this year, including everyone. You can also see that our first page will also be launched. What kind of membership store is it called? It's the kind of store called the standard store. Then it includes the beauty salon. Then in fact, we include the fast wall of our standard products. We actually hope that we will also make an advantage on our standard products. Because a normal online shopping user will also buy a lot of standard products for daily use in addition to buying clothes. But the standard products for our daily use don't want to do it. That is to say, we must do it with characteristics. Then we have enough cost-effectiveness advantages. So we will increase some power on this label. We hope that users will buy more from us. So we don't consider the profit and profit of the label, and how to compare the profit and loss. In fact, if users buy more on our WePingHui, then the number of purchases will be more. In fact, for us, it is a benefit.

In terms of the category extension, in the past we did really well in the para-related categories, but it's not enough to meet the diversified needs of a vast range of consumers. So we are really investing additional efforts in bringing more standardized products to our platform. For example, we've already built up SBIP special store. We have a dedicated channel for standardized products. We have a very good cosmetic channel. We have the Fengqiang channel to attract a lot of consumers to come to us to look for unique offerings with competitive pricing to look for block faster standardized products. So we're definitely going to increase our efforts on this front. In terms of the gross margin for standardized products, probably some of them may have a relatively lower growth margin, but it's really helping expand our brand portfolio and especially improve customer stickiness and repeat orders. So the increase in the proportion of standard products, if any, will have limited impact on the overall level of gross margin. And adding to that, actually the conversion for standard products is actually higher than lot of apparel-related categories for the same amount of traffic. So that's something we'll look at this year.

Thank you. Our next question comes from Andre Chang from JP Morgan. Please ask your question.

Good evening, Mr. Shen, Mr. David, and Ms. Jessie. I have two related questions. I have noticed that in 2021, the number of capital expenditure is going up. I don't know if I can talk about it in more detail. Is it because of the expansion of the 3355? Or what is the reason? Is it because of the share buyback and the share buyback after the shutdown? I will answer the first question. So in this year, 2021, our capital expenditure is about

3.5 billion RMB. So a little bit over half of that are actually for Shanshan. And then we also have some payments for completion of our existing warehouses, which is in the work in progress. And then also some upgrades of our technology and servers and the like. So that's pretty much the ballpark. There's no additional other expenditures.

The second question is for Shanshan. Shanshan's operation is relatively healthy. Last year, because of the pandemic, the business was in the same situation. In terms of our expansion plan for Shanshan Outlets, actually the Shanshan business is really doing very well. Although last year, same-store performance

or was relatively weaker because of the COVID-19 pandemic, but excluding that impact, the same-store performance is actually trending very healthy We believe that offline outlets is going to present a large addressable market and is going to grow very fast in the next couple of years. So we are going to continue our expansion plan, trying to add two to three offline outlets each year to capture the increasing consumer demand offline. We think this offline outlet business model is very solid. sustainable and very healthy for the long term.

Okay, thank you, Ms. Guan.

Thank you. Our next question comes from the line of Ashley Xu from Credit Suisse.

Please ask your question. Thank you, Ms. Guan, for accepting my question. My first question is about core brands and new brands. Then I don't know if there will be any impact on our users' behavior after such a change, such as purchase frequency or thickness. Then the second question is to see our shipping and handling expense. If you look at the cost of the unit, Q1Q and EonEar have a relatively obvious improvement. I don't know if this is related to the trend of the entire industry. Then if we look at the cost of the future, Thanks, management, for taking my question. The first question is about our strategy shift to focus on the core brands. Is there any impact on some users' stickiness and purchasing frequency? And my second question is related to the shipping and handling expense. We are seeing that the per-order expense is increasing both QMQ and Yang Ye. Should we take this new level as a futures reference? Is it driven by the structural trend in the industry? Thank you.

Let me answer the first question. Let's start from the second half of last year. It should be mainly from Q4. We focus on core brands. We give core brands fixed support. In fact, we are not actively embracing ordinary brands, including bad brands. So we receive some results, especially users who bought well-known brand discounted products. Or if we do something similar to this, such as big brand day, and so on, in fact, the recovery rate will be much better than the original normal activity. So when we see this trend, we are more determined to say that we actually need to focus on key brands. We will continue to do so in the future, because we think that customers will recognize that smart brands have good goods and good prices. This is what we said. This is the main reason why users come to Vipshop.

In terms of the customer behavior, since actually the second half of last year, especially from the fourth quarter, we began to focus more on core brands. We provided the core brands with certain support in a time of a lot of uncertainties. So we do see many positive developments. For example, customers who attended the sales event In our super brand day sales or today's top brand sales, they tend to have a much higher retention rate than those customers who didn't have the opportunity to join this event. So that actually gave us very strong confidence to continue to focus on the core brand, to provide our customers with good, high quality merchandises with competitive pricing. As long as we have the right brand supply for our customers, they will come more and spend more.

We have been trying to improve our efficiencies over our fulfillment expenses. expenses over years. So the more volume we can achieve and then the more efficiencies we can get. So as you can see, the number of orders in 2021 has increased as compared to year 2020. So also, we try That includes we try to find ways to improve our efficiency in the warehouses, and then try to reduce the number of returns and exchanges. Those all will affect the efficiencies. Having said all this, we have been trying this for years, and then we believe that we pretty much achieved the optimized efficiency. and we should be able to find ways, but it's going to be limited in future, yeah.

Right, thank you. Now that concludes today's question and answer session. At this time, I'll turn the conference back to Jesse for any closing remarks.

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

Thank you. Ladies and gentlemen, let this conclude our conference for today. Thank you for participating. You may all disconnect.