Vipshop Holdings Limited

Ladies and gentlemen, good day, everyone, and welcome to VIP Shop Holdings Limited Second Quarter 2022 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 Second Quarter 2022 Earnings Conference Call. With us today are Eric Zheng, our co-founder, chairman, and CEO. and David Tsui, our CFO. Before we begin, I would like to remind you that a 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 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 the reconciliation of our non-GAAP mayors to GAAP mayors. 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 second quarter 2022 earnings conference call. Our second quarter results came in better than expected, driven by improving micro-conditions. Towards the end of the quarter, with the COVID-19 pandemic effectively under control, supply chain and logistic efficiency largely recovered, and consumer sentiment also picked up gradually. Our top-line performance was helped by a month-on-month recovery in consumption, especially a more resilient trend in June. Even though sales were still under pressure, our bottom line increased and the margins improved year over year, thanks to greater discipline in operations. This data result demonstrates the resilience of our business model, as well as the strong execution and flexibility of the entire company to address external uncertainties. Notably, we are doing a good job supporting the co-brands that appeal to the value of our consumers. This has translated into strong brand partnerships and improved customer loyalty. During the quarter, co-brands continued to outperform in sales momentum. Our buyer's team worked more closely than ever to engage with brand partners. We helped them navigate through an uncertain environment with extensive support from customer engagement, category planning to marketing campaigns. Brand partners were pleased to use our merchant platform with new features to manage and grow their business. In turn, we secured more supply of unique and quality products at competitive price. In addition, we have been consistently refreshing our brand mix. We added more new trendy and high-end brand in both apparel and non-apparel categories, targeting different customer groups. Accordingly, we load out several new channels such as Little Pink Box, VIP Trends, and VIP Luxury to support the growth of these new brands while creating a new field of shopping for our customers. In the second quarter, we successfully turned more high-value customers into paid members. Active super VIP customers grew by 21% year-over-year and contributed 38% of online net GNV. They once again showed their superior value with stable repeat purchase and outside made a few quotient statements. With the future recovery highly dependent on the micro development, We are strategically anchored in discount retail for the long term. We are convinced that consumers always desire for great brands, great selection at great values, especially as they become more rational in spending today. We will continue to enhance our value proposition, adapting our business as needed to best serve our brand partners and customers. At this point, let me hand over the call to our CFO, Barry Tree, who will go over our financial results.

Thanks, Eric, and hello, everyone. During the second quarter, we delivered solid profitability on decent top-line performance that beat our prior guidance. Our initiative to focus on core brands has been working well and our gross margin increased to 20.5% from 20.1% a year ago. This was achieved as we identified many opportunities to streamline the cost structure in both apparel and non-apparel categories and managed to improve category gross margins effectively. We also made We lent less efforts to drive operational efficiency. Notably, we continued to see some leverage from marketing as we became more rational in spending as to acquiring and retaining customers. As a result, our non-GAAP net income increased year over year to 1.6 billion RMB, and non-GAAP net margin expanded by 1.5% to 6.5%. Additionally, we remain committed to our $1 billion U.S. dollar share buyback program announced in March. We had repurchased $177.1 million of our ADS during the second quarter. Looking ahead, we remain focused on merchandising strategy and looking at ways to operate our business more efficiently. Maintaining healthy and sustainable profitability continues to be our near-term financial priority amid an uncertain environment. 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 RMB and all the percentage changes are year-over-year changes unless otherwise noted. Total net revenues for the second quarter of 2022 were 24.5 billion RMB as compared with 29.6 billion RMB in the prior year period. primarily attributable to stop the consumer demand for discretionary categories amid a changing macro environment with the COVID-19 resurgence in China. Gross profit was 5.0 billion RMB as compared with 6.0 billion RMB in the prior year period. Gross margin increased to 20.5% from 20.5% in the prior year period. Total operating expenses decreased by 18.7% year-over-year to 3.9 billion RMB from 4.8 billion RMB in the prior year period. As a percentage of total net revenues, total operating expenses decreased 16.1% from 16.4% in the prior year period. Fulfillment expenses decreased by 13.7% year over year to 1.8 billion RMB from 2.1 billion RMB in the prior year period. As a percentage of total net revenues, fulfillment expenses was 7.2% as compared with 6.9% in the prior year period. marketing expenses decreased by 60.5% year-over-year to 555.6 million RMB from 1.4 billion RMB in the prior year period, primarily attributable to more prudent marketing strategy. As a percentage of total net revenues, marketing expenses decreased to 2.3% from 4.8% in the prior year period. technology and content expenses increased by 11.3% year-over-year to 411.8 million RMB from 369.9 million RMB in the prior year period. As a percentage of total net revenues, technology and content expenses increased to 1.7% from 1.2% in the prior year period. General and administrative expenses were 1.2 billion RMB as compared with 1.0 billion RMB in the prior year period. As a percentage of a total net revenues, general and administrative expenses was 4.9% as compared with 3.4% in the prior year period. Income from operations was 1.3 billion RMB as compared with 1.5 billion RMB in the prior year period. Operating margin increased to 5.2% from 5.0% in the prior year period. Non-GAAP income from operations was 1.6 billion RMB as compared with 1.7 billion RMB in the prior year period. Non-GAAP operating margin increased to 6.3% from 5.9% in the prior year period. Net income attributable to VIP shops shareholders increased by 17.4% year-over-year to 1.3 billion RMB from 1.1 billion RMB in the prior year period. Net margin attributable to VIP shops shareholders increased to 5.2% from 3.7% in the prior year period. Net income attributable to VIP shops shareholders per diluted ADS increased to 1.97 RMB from 1.56 RMB in the prior year period. Net gap or non-gap net income attributable to VIP shop shareholders increased by 8.4% year-over-year to 1.6 billion RMB from 1.5 billion RMB in the prior year period. Non-GAAP net margin attributable to VIP shop shareholders increased to 6.5% from 5.0% in the prior year period. Non-GAAP net income attributable to VIP shop shareholders per diluted ADS increased to 2.45 RMB from 2.10 RMB in the prior year period. Looking forward to the third quarter of 2022, we expect our total net revenues to be between 21. 2 billion RMB and 22.4 billion RMB, representing a year-over-year decrease rate of approximately 15% to 10%. 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, management. As a reminder, to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Thomas Chong of Jefferies. Please go ahead.

Good evening, thank you for accepting my question. Congratulations, our income and profit are better than the market forecast. I would like to ask, we now see that in July and August, our income situation has improved. Can you share with us? In addition, in a situation where the red light is not bright, how should we think about the first half of the year? 我第二個問題是想問關於在這個競爭環境那邊 我們怎麼看直播帶貨對我們的影響? Thanks management for taking my questions and congratulations on a very solid set of results with top and bottom line beating market expectations. When we come into the second half, given the global macro happens that we are facing right now, how should we think about the second half outlook, as well as the recovery momentum in July and August. And my second question is relating to competition. How should we think about the competitive threat from live streaming, online shopping, from the short form video side? Thank you.

Let me answer that. First, As you all know, the COVID-19 pandemic caused the whole e-commerce business to be in a bad state. But in June, the business basically recovered. In July, we saw that the recovery was better than in June. It was almost the same in August. Overall, we saw that the whole red-light environment, although it can't compare to last year, overall, we also saw China China China China China China China But compared to last year's entire purchasing power, the consumer hospital will still have a discount. Then the second one is to ask about live broadcast. In fact, we see that the live broadcast is doing well, but in general, it will not affect us too much. Because the live broadcast has been done for more than two years, it has been forgotten for more than two years. Then we see that the live broadcast may be in terms of standard products. Okay.

So turning to our first question, understandably, we have seen from March to May, the whole e-commerce sector has been very hearted by the COVID-19. But we have seen the year-over-year trend having been improving into June and also July and August. We have a better June promotion than expected. And the sales in July continue to show some slight month-on-month recovery. And in August, that momentum continued. But on the other hand, there is some still uncertainty regarding the recovery momentum. It's highly dependable, dependent on the macro developments, especially, you know, as well as the weather conditions. Actually, the e-commerce industry is very, especially as we are a power focus, We are very sensitive to the weather conditions. And favorable weather may delay the demand for autumn and winter clothing. And also, with the new COVID flare-ups, consumers are still cautious about spending. And the whole macro backdrop is not comparable to what we had seen for last year. So there is still some uncertainty ahead. Turning to our second question, live streaming, competition from live streaming. There is no big change in the competitive landscape, and we think competition is actually leveling off. Live streaming has been there for over two years. and they're doing fine, especially in standardized items, which they're performing much better than apparel categories. But we are more specialized in apparel categories, which is still a very sophisticated segment and difficult for live streaming platforms to absorb all the market share. We have been monitoring data of the live streaming platforms and we think their traffic and the business momentum has been relatively stable.

Thank you. Thank you for the question. We will now take the next question from Ashley Hsu of Credit Suisse. Please proceed with your question.

Thank you for accepting my question. First of all, congratulations on your good performance. Then I have two questions here. I would like to ask about our strategy for FVIP. And then what is the main motivation for our growth? Because I saw that we had an epidemic in this quarter, but FVIP did a good job. And then my second question is about the weather. It's very hot recently. How should we consider this for us? Thanks, management, for taking my question. My first question is about our SVIP strategy. I have seen that the growth has been quite good even during the COVID emergence. So just want to check what's the key driver of the growth. And my second question is related to the recent hot weather's impact on our strategy, both in consumer behavior and also merchandising. Thank you.

That kind of customer loyalty plan, then we hope to bind these users as much as possible to buy in Vipshop, then we will give him some convenience, the convenience of policy, the convenience of experience, including the discount of the purchase or some exclusive sales. So we want to use various methods to attract them to become our most loyal customers, or in the selection of various platforms, they may prioritize us. So we will develop this S-VIP in an unprecedented way. We believe that in the future, we will use various kinds of opening or turn many of our high-value users into VIPs. We will use various methods to continuously improve our S-VIP stand. In addition, we will also improve the up of S-VIP. In addition, we will also improve the stand of our entire S-VIP in Vip. The second point is to ask What do you think about the weather?

What do you think about the user behavior and our delivery strategy?

Yes, we are also well prepared for the goods. Because it will start to fall in September. So we have actually prepared a lot of goods. So we have done well. For example, in August, there may be a wave at the end of August. For example, if the weather is cold and we have to wear autumn clothes, then we have this kind of activity called autumn up-to-date. Because what we receive is a large supply of supplies, we are not worried that if the reaction is not fast today or the weather changes, then we will not be able to keep up. So we are also well prepared. We will also study with our partners. For example, today's winter raincoat How to prepare the goods, what brand, what price range, or how much quantity, including its new, thin, thick, etc. In fact, we will also participate with some brands in the overall plan. So we actually, e-commerce is the most hope that the weather this year will be cold. So for e-commerce, it's a good thing.

Okay, on the first question related to SVIP, we have been focusing on growing our SVIP customers for several quarters. And they now contributed around 38% of our online net GMV. And we expect this contribution to be higher in the coming quarters. We have a number of SVIP membership privileges to offer to them. to incentivize them to our high value customers interest VIPs. For example, we have extra 5% benefits. We have super VIP sales day on the 28th of every month and also super VIP membership stores. Now we increasingly focus on creating a different shopping experiences for them, offering them best sellers, brands and categories on a time limited basis. so that they can really feel they are constantly seeking out values on our platform. So we also have a variety of cross-platform programs to incentivize more high-value customers into SVIPs. So we are pretty confident that SVIPs, in terms of their customer base and as well as GME contribution, will be growing going forward. On the second question related to our merchandising strategy in response to the recent extremely hot weather conditions, actually we have a lot of plenty of time from our brand partners for autumn and winter closing. For example, by the end of August, we're going to launch our campaigns for autumn apparel if the weather conditions is favorable enough. We don't have a problem with the availability of the product supply from our brand partners because we have been highly engaged with them as to how we should prepare for the coming seasons. For example, we have been working with jacket brands for the winter clothing to stock as many SKUs as possible just in case the weather gets colder before we expect So that's how we work with our brand partners. We don't have a problem for the inventory supply from the best of our brand partners.

Thank you for the questions.

Next question will come from the line of Alicia Yup from Citi. Please go ahead.

Thank you. Good evening, Manager Chen. Thank you for accepting my question. Congratulations on a strong performance. I have two questions. The first is to follow up on the guidance of the third quarter. In the second quarter, our performance is much better than expected. Manager Chen also said that July and August will be better than June. Is there room for improvement on this basis? Thanks for taking my questions. Congrats on the strong results. I have two questions. The first one is, it seems like your 3Q guidance is a bit conservative considering what you have beat for your second quarter. And also seems that you also been seeing improving trend in July and August. And then second question is on margin. This quarter margin actually improves quite a lot. Are there any further room to improve or the 2Q level will actually set as the new base for the future quarters? Thank you.

I'll answer the first question, that is, our expectations for Q3 are negative 10 to negative 15. So we actually also consider, because in the future, that is, there is indeed a repetition, that is, the repetition of the epidemic. So including the confidence of the consumer, in fact, no return. So in addition, especially in September, is it cold? So we actually don't have enough control over these. So we think it's still relatively conservative. But we will also work hard to do so. The second question, let me open my head and let David talk to you about it later. Because of the Q2, we have reduced some market fees due to the epidemic. So for us, everyone sees that the profit is also good. In fact, in terms of the overall profit of the company, we have actually accumulated enough experience. So in the future, OK.

Q3 guidance of 10% to 15% actually takes into account a number of factors. For example, we expect there will be some back and forth in COVID-19 cases, and also it takes time for consumer confidence to gradually recover. And lastly, we are not quite sure about the weather conditions in July, whether it's going to be cold enough for us to launch the marketing campaign for autumn closing. So we'd better be a little bit conservative, but we will try our best to achieve the top-line performance. On the margins, I'll start with a few points, and David will add some details later. We did scale back some of our marketing expenses in the second quarter, and that turned into very good profitability. But for the long term, for the coming quarters, Our goal is still trying to bring customers back to a positive growth trajectory. We'll spend as needed and we'll take opportunities whenever we can to acquire customers, but we'll continue to be quite rational. At the same time, we are confident that we can maintain healthy and sustainable profitability because We have been very good at managing our costs and expenses. We have a proven track record to provide the financial stability.

David? In the first half of this year, we have been focusing on the improvement of our operational efficiencies. And we have been very disciplined in our spending. And our goal for the second half is still to maintain a quality business scale. And while improving the operational efficiencies, and we have to balance our profitability and the growth. We will potentially looking into opportunities to acquire new customers. That means that we could increase our marketing expenditures, but we have to be really disciplined in that initiative. So having said all this, we are confident that our profitability, our net margin will at least remain stable for the second half.

Thank you for the questions.

Our next question comes from Delisle Kinhol of TH Capital. Please go ahead.

I have a question for Mr. Shen. I see that the foreign trade is not very good now. In the US, some retail orders are already very high, such as Walmart and Target. Looking at China's exports, the orders are also falling. In the past, in the past years, So it's related to the inventory build up overseas. And also in China, we saw the orders also decline. So things like the inventory among manufacturers are going to build up. In the past, the VIP is really good at it to help those manufacturers to get rid of inventory. It's a good opportunity for us. So I would like to have Mr. Hsien to give us some color in the second half, how the VIP shop is going to capture such opportunities like what you did before.

OK. Let me talk about my point of view. Because we mainly cooperate with, for example, domestic brands, including some international brands. International brands have imports. Some of them are directly produced in factories. According to what we have seen, the current situation has little impact on the overall environment of exports. Because they may be two systems. Some of them are dedicated to domestic markets. So it has nothing to do with exports. It's just a factory. It may be the same factory. So we see it ourselves. In fact, China's current entire inventory is still quite powerful. So there are two points of view. One is because during the epidemic, that is, especially during three, four, three, four, five months, during the epidemic, many stores are closed. So what we said is that everyone is saying that the entire inventory is very large. So there is also a saying that some brands are actually After the lockdown, some of them didn't go to work and didn't go to work, but now they are going to start working again because they know they will have to chase for the second half of the year or even next year. So in general, according to our observation, in fact, what we currently have in our hands The inventory is still very large. It is even more than last year's level. So we are not worried. In addition, no matter what the inventory is like, because we have specialized customizations with many brands, these are guaranteed for a long time. So what we are talking about is the supply of goods in the second half of this year. We are enough. Let me share a few of my observations here. So first, we work with a lot of primary domestic brands and also some of the international brands.

But that's not quite relevant to the export environment because they rely on imports, and we've seen some productions kicked off in recent months. And second, on the inventory, there are a few things about inventory today. First, because of the COVID-19, there are a lot of many offline stores are struggling. Inventory is definitely building up. And second, since there have been a lot of lockdowns in the past months, some of the brands may have scaled back some of their productions. But things are getting better now. So they are starting to pick up momentum in terms of placing orders. So generally speaking, I think we potentially should benefit from a favorable inventory cycle because we do see excess inventories nowadays. And the amount of which has actually exceeded the level we have seen for last year. And in addition to securing the supply, the unique and quality supply from our brand partners, remember we also have the made for VIP shop line, which is quite stable and it's a long-term channel for us. So we think we don't have a problem with the inventory and we have the ability to secure the best supply from our brand partners.

Thank you for the questions. Our next question comes from Eddie Wang of Morgan Stanley. Please proceed.

Mr. Shen, Mr. David, Mr. Jesse, thank you for accepting my question. I also have two questions. The first one is what Mr. Shen shared earlier, that is, the trend in July and June is more similar to the trend of online clothing sales as mentioned by the National Bureau of Statistics. But we can see that the number of national statistics in June and July is actually a positive increase in online service. But we may still have a decline. This is mainly because of the technical reasons for our company. The next question is, when do we expect to see our revenue return to a positive growth trend? The second question is, is this closely related to our plan to make users grow again? Thank you for taking my question. My first question is related to the revenue growth. When should we expect that our revenue growth will, you know, turn to a positive target again in the following quarters? And second is the second question here that it will be mainly driven by the user growth, you know, for the revenue growth turning into the positive target. Thank you.

Let me answer that. What I just asked is the estimate of Q3, right? On the one hand, retail, that is to say, the overall retail has recovered. But what are we worried about? That is to say, because of the epidemic, we have reduced the number of users in Q2 this year. So, for example, last year's Q2 was 100 people buying things. So this year's Q2, we actually only have 83 people buying things. Then in fact, users are rolling to buy it, which is equal to his, that is to say, 83 people buy it, plus his season resupply, that will remain until this year's Q3 will be less. So in fact, what we are talking about, in fact, we are worried that the number of users will have a pit due to the epidemic, so we have to hurry up and sell this pit. So it is this aspect of consideration, plus what I said earlier, There are three aspects, the pandemic, the weather, and low economic consumption. These are the three factors, so we are making conservative plans. In addition, our goal is to achieve user feedback as soon as possible in Q3, because our Q2 pit is a bit big, so we are fighting to achieve user feedback in Q3. In addition, in terms of overall, the up of our users in all aspects are actually positive, including our SVIP, etc., are positive. So we are actually working hard in Q3 to return the users. The overall users in the back are rolling, including Q4. In fact, these are relatively smooth.

So on the question of whether it's our revenue growth would be driven by customer growth in the coming quarters. Yes, I think our goal is to try to bring our customers to positive growth starting from the third quarter. Because in the second quarter, we've seen a drastic decline in the customers. And we've seen fewer customers shopping on our platform because of the COVID impact, mostly related to the factor that people cannot move around as freely as before. For example, last year, there were 100 people shopping on our platform, but in the second quarter this year, it was 83 people. And because it's on a rolling basis, so entering into the subquarter, we may face additional pressure on customer base. That's why we will spend as needed to bring our customers to positive growth starting from this quarter.

Thank you for the questions.

Now I'll take the next questions from Wei Xiong of UBS. Please proceed.

Good evening, Director Guan. Thank you for accepting my question. Congratulations on the strong performance of this quarter. I also have two follow-up questions. Because we just talked about the hope that the third quarter will be able to achieve the return of users as soon as possible. I would like to ask about the corresponding strategy that we will use to acquire users, including how the arrangement of marketing fees will be done specifically. Secondly, I would also like to ask about Thank you management for taking my questions and I have two follow-up questions. First is we just talked about we want to see the user growth returning to positive territory starting from the third quarter, just want to ask what's the marketing strategy, user acquisition strategy, and marketing expense planned around this goal? And my second question is, given that our third quarter guidance has more conservatism built in based on the macro uncertainty, do we see a bigger chance to see a very strong result rebound in the fourth quarter given the year-end promotion as well as the low base last year? Thank you.

Let me answer these two questions. The first one is about the users, that is, how do I get the users back? So, for example, we are now also getting new customers outside. Because new customers, when we stopped for a while during Q2, or some places with the epidemic, we stopped getting them. So now we are getting more and more. In addition, it is like our old customers who have lost. We have to wake them up. So this is, for example, like last year, so this year's Q1, Also, as we just talked about, the 17 people from 100 to 83, they didn't come because of the epidemic. So we have to bring them back. So we actually use several methods. So the new class is that we continue to use the original pre-installed application market, including accurate placement. As for the old customer, we actually use precision to recall. We recall him, give him coupons, etc. Find him precisely outside, give him coupons, etc. I hope he will come back to buy again. As long as he comes back to buy, we may continue to activate him. So this is our current Q3 method. The second question is If the growth of our users in Q3 can be rectified, then we are actually very confident about the fourth quarter, because the users have already returned. And Q4 is also the most forgotten time for us, including our current overall goods structure, price advantage, including our customer sales value, which is actually better and better than before. So we believe that if the users come back, we don't have to worry too much about Q4 next year.

Okay, in terms of our customer acquisition strategy, we are trying to increase spending in acquiring new customers from the third quarter. Because in the past several quarters, because of COVID restrictions, we have more or less stopped new customer acquisition in certain geographies. Now we are trying to restart our investing in this region. Our strategy continues to be pre-installation, App Store, and targeted marketing for new customers. At the same time, we're trying to pull back the old customers who used to shop with us in the past year or in the first quarter, we're trying to reactivate this group of customers by leveraging targeted marketing. And we're trying to bring back the 17% of the customers who were unable to shop with us because of the various COVID restrictions. Second, in terms of our In terms of the Q4 outlook, we are actually quite confident under the condition that if we can turn our customer into the growth trajectory in the sub-quarter, because as long as we bring new customers in, we are going to see some upside in the fourth quarter performance. because that's going to be the peak season for us. And in the past several quarters, we have been able to take the economic downturn as opportunities to optimize our merchandising portfolio and increase the customer mindshare for discount retail among our customers. So we are pretty confident I will see some upside in the fourth quarter if everything goes on well.

Thank you for the question. Sorry, please continue.

Oh yeah, I just add something here. So when we're implementing all these marketing initiatives in the third quarter and the quarter after, we will not sacrifice our profitability. We'll be really careful when we launch all this program. We will try to do a much better job as compared to what we did in the past and to ensure the ROI on all these programs is good.

Thank you.

We have a next question from the line of Andre Chang from JP Morgan. Please ask your question.

Thank you for accepting my question. I have two questions. The first one is about the seasonal impact on our product structure and the interest rate. Because in the past, our second quarter, because of the big vinegar, so the supply and demand are particularly high, and the supply and demand are also high, so the supply and demand of the second quarter will be higher than the supply and demand of the third quarter. I don't know if the supply and demand of the second quarter will be relatively low this year because of the epidemic and the impact of the consumer environment. When I think about it, it means that when we enter the third quarter, the decline in the supply and demand rate may not be as much as it was in previous years. This is the first question. The second question is that I noticed that our CapEx is still quite strong. Although the marketing cost is much reduced, CapEx is still doubled year to year. I don't know if this is purely because 33A is still expanding. Under this environment, the company's next idea is to continue this capital expenditure strategy. There will still be some corresponding environmental adjustments. So let me translate my two questions. The first question is about the impact on the gross margin and the product mix. Historically, the second quarter is the peak season for apparel sales, which lead to higher gross margin. But this year, is there any change of the mix? And also, does that mean the gross margin seasonal decline into third quarter will be milder than usual? Second question is about the capex, which seems to be doubling in second quarter. What's the driver, and are we still going to invest at this pace in the current micro-environment? Thanks. 刚刚问的Q2的毛利跟Q3的毛利相比吗?

Then Q2 is because there is a discount, there will be a relatively large discount. We said that everyone may think that Q2's profit will be lower, but if the clothing is sold more, it may pull it down again. Then Q3 may consider no discount, or Q3 may have fewer clothes, etc. Then I look at it this way now, we actually made some big adjustments to the whole company this year, especially in the front end control of profit. We have some experience, So it includes, especially if you have refused to do the activity, do the promotion, and stick to the money, stick to the advice. So we actually don't use the company's money and the company's advice to supplement the promotion. So in this case, our overall profit is relatively healthy. So this is the first point. The second point is that we actually found that there are some non-economic ones in the market investment. Although we are actually actively investing in the most reliable market investment, we are actively investing in it to win customers, but some non-economic ones we will reject. The third point is that in fact, this year, In terms of process chain management, including saving, that is, including what we said, for example, today's customer's return, how can we deal with it better and faster? So, etc., or that you don't suffer this loss because of our return, there will be a lot of miscarriages, etc. We are actually on these chains. Okay, on a gross margin, we think

actually does not impact our gross margin that much. In the second quarter, gross margin tends to be lower because of the promotions and because apparel demand was relatively weak. And in the third quarter, there are not so many promotions and we may sell less apparel. I just want to try to share that we actually have taken many cost savings initiatives this year to try to stabilize and improve our gross margins. For example, we have stopped delivering coupons at the cost of our own benefits. We are trying to be prudent. in giving additional coupons to customers. We're trying to engage brand partners to do that at some time. Second, we have stopped investing in those channels which proves not to be that economical. So that is part of our cost saving initiatives as well. And lastly, we have done a lot of, taken a lot of measures to try to optimize the cost structure, the process related to gross margin. For example, we're trying to handle customer returns in a better way without sacrificing our benefits. These initiatives all prove to be very effective, and we are quite confident that we will maintain a stable gross margin going forward.

The capital expenditure in the quarter is largely for sanction outlets. So we will add three new outlets in this year. A lot of the times that the payments for the land use rights are upfront. and the cash outflow is not necessarily in line with the opening of the outlets. But if we look at the capacity for Shanshan outlets year over year, the amount should be quite comparable. This particular quarter maybe appears a lot more, over the year, it should be quite comparable.

Thank you for the questions. Our next question comes from Natalie Wu of Hightone International. Please go ahead.

Hi, thank you. Thank you for accepting my question. I have two small questions. The first one is about the user growth rate we just talked about. Do you want to confirm that this is the same as the contract purchase number? If so, let me calculate it. We need to add 2.2 million, that is, a contract purchase of 2.2 million users. According to the previous user acquisition cost, if one or two hundred users are not mentioned, then this corresponds to an increase of two to four billion in sales budget. I don't know how this thing can maintain a relatively good level of profitability with the 3C2 that we talked about. This is the first one. And then the second one is to understand this. It's a question about the situation in which the industry storage was mentioned when the epidemic was mentioned. Let me translate myself briefly. So thank you for taking my question. And I have two. The first one is regarding the previously mentioned the user growth turning positive. I just want to clarify if this refers to the year-on-year growth of the active customer number in the third quarter. And if yes, that actually translates to 2.2 million active users. If the cost of the user addition is capped constant, which also translates to 200 to 400 million RMB in terms of the additional sales marketing expenses. Just wondering how does that align with the margin, a stable margin profile, as you just mentioned previously. And second one is regarding the the bargaining power. So just wondering, during the current situation, given that the suppliers affected from COVID has been witnessing an intensified issue for inventory stock, just curious, does that help enhance your bargaining power and get a more favorable offer? Thank you.

The first question I just asked is that if we want more than 200 users, it is not so calculated. For example, one or two hundred yuan for a new class, because our cost of new classes may be higher, but we wake up the old class, including, for example, the previous Q user to wake him up. In fact, the cost is very low, it may be tens of dollars. In addition, some are not used for money. For example, we are now talking about assuming that the new class uses money, the old class uses money, but many are actually relying on We are talking about more, for example, we are talking about more good products, more good prices, including better personalization to encourage users to convert in Q3. In this case, it is possible to achieve it with a few legs. So don't worry about Q2, Q3, in order to turn over the number of users, we have to spend a lot of money on user acquisition. Because we Our goal is to get Q3 users certified. In addition, we can guarantee that the market cost of Q3 will certainly not be higher than that of Q2 and Q3 last year. So this is actually the cost. So these are the costs. Because we just said that we actually found that our original market investment will have some unprofitable places. So after we actually cut these out, we have the rest. So rest assured. Then the second point is about Now there are a lot of stocks, but we don't actually talk to the supplier. Because to be honest, we don't buy much. So if we buy, we will cut the price heavily. But many are in the sales mode. So we actually don't go with the brand. For example, let's say that our original discount price is 25. I said, now that you have a lot of stocks, I will charge you a discount of 28 points. No, because we think it's a long-term collaboration with the brand. We won't pressurize them. In addition, we will actually give some key brands this year. We will make an exception. That is, if they can do business bigger, then provide more goods. Then everyone cooperates better. How much does business increase in the original technology? We will also give them additional discounts. That is to say, we will give them some OK, first on the customer acquisition cost.

It's not a simple mess. It doesn't mean that adding 2 million customers, we will have to spend 200 to 400 million RMB every quarter. We may have to spend a little bit more on acquiring new customers. But reacting old customers, especially the active customers in the past quarter, doesn't It's not that expensive. It's much lower than 100 RMB per customer. So we don't have to spend that much. We can ensure you that our marketing spend as a percentage of total revenue is not going to be higher than what we have seen for the same period of last year, and we are going to leverage a combination of great brands, great selections, and great prices, as well as better personalized recommendation to achieve our goal of positive customer growth. Second, on the inventory, we have plenty of inventory, as I've mentioned just now. We work very closely with our brand partners securing the best supply of unique and quality products. And most of them are still on the consignment model. If we are buying out supplies, we probably have much higher bargaining power because it's on consignment model. And we don't have to increase the percentage we take from brands. It's still within the normal range. And actually, we want to give certain support for the core brands. And we can afford to decrease the take rate a little bit to make sure that they can grow faster on our platform with a stronger supply of unique kind of quality product offerings. Because core brands can really help deliver value to our customers and increase consumer for the IP shop as a discount platform. So that's how we work with our brand suppliers. We can support them and create a win-win situation for both parties.

Thank you very much. Sorry, please continue.

Just to add clarity to your first question regarding the customer acquisition, a large portion of the customer addition should come from the calling back of the existing registered, I would call inactive registered customers. The cost for calling back those people is relatively small, yeah.

Thank you very much. Due to the time constraint, that concludes today's question and answer session. At this time, I'll turn the conference back to Ms. Jessie Cheng for her closing remarks.

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