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spk08: Ladies and gentlemen, good day, everyone, and welcome to Vipshop Holdings Limited's third quarter 2022 earnings conference call. At this time, I would like to turn the call to Ms. Jessie Zheng, Vipshop's head of investor relations. Please proceed.
spk03: Thank you, operator. Hello, everyone, and thank you for joining VIP Shop's third quarter 2022 earnings conference call. With us today are Eric Shin, our co-founder, chairman, and the CEO. and David Tsui, our CFO. Before management begins your 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 public filings with the Securities and Exchange Commission, which also applies to this call to the extent any forward-looking statements may be made. Please note that certain financial measures used on this call, such as non-GAAP operating income, non-GAAP net income, and non-GAAP net income per ADS, are not presented in accordance with U.S. GAAP Please refer to our earnings release for details relating to the reconciliations of our non-debt merits to debt merits. With that, I would now like to turn the call over to Mr. Eric Shen.
spk06: Good morning and good evening, everyone. Welcome and thank you for joining our third quarter 2022 earnings conference call. We believe the strong earnings growth on narrowed revenue decline in the third quarter as we carefully execute on our proven business model. During the quarter, micro and pandemic uncertainly weighed on the top-line recovery, but customers' trends improved month by month, and overall repeat orders and purchase frequencies hold up well. Through further optimization of operations, we achieved 50% profit growth and meaningful margin expansion year-over-year. As we moved quickly to adapt to external changes, we also pushed ahead with initiatives to reinforce the strengths of our platform for the long run. Let me share some of our business progress in the third quarter. First, we continue to enhance our merchandising capabilities. We attract more diverse and high-quality partners to our platform and expanded our product offering. Especially in the trendy and high-end segments, we deep-diverted into different categories to capture the emerging customer trend as people revved up spending on guo chao or Chinese fashion styles, outdoor and isolation outfits, etc. Apparel-related GMV booked positive growth year-over-year during the quarter. We also worked more closely with key partners on the made-for-VIP shop, customized offerings, which become an important line for many brands to achieve greater sales efficiency. And most of the products had better conventions than the average level of the certain brand or category. Second, we gained better customer traction. In addition to prudent investing in external channels, we increasingly leverage our upgrade product selection to acquire and return customers. Increasing proportions of customers are gained there. and male customers who are appealed to more brands that reflect their values. And paid members continue to grow nicely as more high-value customers enjoy sensible membership privileges. Active super VIP customers grew by 21% year-over-year and contributed 40% of online net GMV. Third, we worked hard to unlock technological capabilities throughout our business processes. We made great efforts to further digitalize our merchant platform, adding tools like membership system and customer review for brand partners to better identify opportunities for growth. We also made continuously improvements in personalization, refining search, feed, and seeing basic recommendations for customers to discover their desired selections while typing into their underlying needs. Looking ahead, our business has been consistently based on the premise that customers love value for money. which holds even more truth today. We are committed to offering exceptional values on the wide area of branded quality products. And we will continue to win new customers and elevate the trust and the loyalty of existing ones. We are confident in our prospections for quality and sustainable growth in the long term. At this point, let me hand over the call to our CFO, David Cui, who will go over our financial results.
spk04: Thanks, Eric. And hello, everyone. During the third quarter, our revenues came in line with our prior guidance. While the overall consumption was still under pressure, we did see a gradual recovery in spending on apparel-related categories. with strong execution across our business operations, which included preemptively securing supplies for seasonal trends and proactively launching promotional channels. We managed to minimize the negative impact from the pandemic resurgence on the top line recovery. And once again, we demonstrated a strong profitability with margins hitting their best levels since the beginning of 2021. Gross margin trended upward to 21.7%, thanks to our continued effort in optimizing cost structure across different categories. Non-GAAP net income increased by 55% to 1.6 billion RMB and non-GAAP net margins stood above 7% as we remain disciplined in operations. In addition, we continue to preserve shareholder value by steadily executing our share buyback program. During the third quarter, we repurchased approximately 257.6 million US dollars of our ADS. Near term, we remain focused on profitability and we'll work from every aspect to drive operational efficiency. We believe we are financially strong enough to navigate ongoing uncertainties as well as to reinforce our business fundamentals. which will help us eventually return to growth track. 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 changes are year-over-year changes unless otherwise noted. Total net revenues for the third quarter of 2022 were 21.6 billion RMB as compared with 24.9 billion RMB in the prior year period, primarily attributable to softer consumer needs for discretionary categories and a challenging macro environment with the COVID-19 resurgence in China. Growth profit was 4.7 billion RMB as compared with 4.8 billion RMB in the prior year period. Those margins increased to 21.7% from 19.4% in the prior year period. Total operating expenses decreased by 13.9% year-over-year to 3.7 billion RMB from 4.2 billion RMB in the prior year period. As a percentage of total net revenues, total operating expenses decreased to 16.9% from 17.0% in the prior year period. Fulfillment expenses were 1.6 billion RMB, which largely stayed flat as compared with the prior year period. As a percentage of the total net revenues, fulfillment expenses was 7.5% as compared with 6.5% in the prior year period. Marketing expenses decreased by 53.9%. year-over-year to 572.4 million RMB from 1.2 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 2.6% from 5.0% in the prior year period. Technology and content expenses increased by 7.6% year-over-year to 394.8 million RMB from 366.8 million RMB in the prior year period. As a percentage of the total net revenues, technology and content expenses increased 1.8% from 1.5% in the prior year period. General and administrative expenses increased by 5.0% year-over-year to 1.1 billion RMB from 1.0 billion RMB in the prior year period. As a percentage of the total net revenues General and administrative expenses was 5.0% as compared with 4.1% in the prior year period. Income from operations increased by 47.6% year-over-year to 1.1 billion RMB from 770.8 million RMB in the prior year period. Operating margin increased to 5.3% from 3.1% in the prior year period. Non-GAAP income from operations increased by 47.6% year over year to 1.6 billion RMB from 1.1 billion RMB in the prior year period. Non-GAAP operating margin increased to 7.2% from 4.2% in the prior year period. Net income attributable to VIP shops shareholders increased by 168.4% year-over-year to 1.7 billion RMB from 628.4 million RMB in the prior year period. Net margin attributable to VIP shops shareholders increased to 7.8% from 2.5% in the prior year period. Net income attributable to VIP shops shareholders per diluted AES increased to 2.70 RMB from 0.92 RMB in the prior year period. Non-GAAP net income attributable to VIP shops shareholders increased by 55.0% year-over-year to 1.6 billion RMB from 1.0 billion RMB in the prior year period. Non-GAAP net margin attributable to VIP shops shareholders increased to 7.4% from 4.1% in the prior year period. Non-GAAP net income attributable to VIP shops shareholders per diluted AES increased to 2.56 RMB from 1.50 RMB in the prior year period. Looking forward to the fourth quarter of 2022, we expect our total net revenues to be between 30.7 billion RMB and 32.4 billion RMB, representing a year-over-year decrease rate of approximately 10% to 5%. Please note that this forecast reflects our current 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.
spk08: Thank you. If you would like to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. Once again, that's star 1 1 to ask a question. Please stand by while we compile the Q&A roster. Thank you. We'll now take the first question. First question comes from the line of Thomas Chong from Jefferies. Please go ahead. Hello, Thomas Chong from Jefferies. Your line is open. Please ask your question.
spk01: My question is about the consumer sentiment given the outbreak of pandemic. as well as the macro headwinds. Just want to get some color from management about the trend in recent months, as well as our thoughts in 2023. Thank you. Let me answer.
spk06: The first one is to ask about our business growth and user trend in the second half of the year, right?
spk09: Yes, in recent months.
spk06: In recent months, we have seen that because of the recurrence of the epidemic, Including consumption, we say that everyone is still holding a lot of light. So the whole thing is because of the epidemic. The impact is still relatively large. So for us, the good thing is that we see that our number of users is gradually returning to normal. So our overall future, because in fact, the number of users is also a positive relationship with our business. So we theoretically think that as long as the number of users returns to normal, then our business is relatively stable. On the other hand, we believe that the pandemic will not affect the economy for too long, including next year. We believe that the overall sales trend and number of users will be relatively optimistic next year.
spk03: So actually in recent months, our business has been obviously affected by the pandemic challenges and the consumers are still staying on the sidelines. But on the bright side, we have seen our customer trend has been improving month by month and has been moving towards close to being flat-ish or even having some growth. So we are actually on the right track in terms of customer numbers. So we expect in the coming months, GME should stay relatively stable. For the next year, we still will focus on customer growth as long as we have the right customer platform And with the pandemic challenges going away over time, we are pretty optimistic about our GMB and customer growth for next year. Thank you.
spk08: We'll now take our next question. Please stand by. This is from the line of Ronald Keung from Goldman Sachs. Please go ahead. Hello, Ronald Kim from Goldman Sachs. Your line is open. Please ask your question.
spk00: Oh, thank you. Sorry, I muted my line. Thank you, Mr. Chen and Mr. David. I would like to ask, first of all, our guidance for the fourth quarter, which is the same as the third quarter, has slowed down or has changed a little bit. I would like to know if this is mainly due to the sales of the 11th month of this quarter, or if it is due to some storage or tailings that have driven our return ratio to improve. In addition, this quarter, we also saw that the entire cash flow rate reached a new high of more than 7 points, and the sales cost was significantly reduced by 50% in the same ratio. Thank you, management. The first question is on your fourth quarter revenue guidance that implies that the year-on-year decline has a sequential improvement versus the third. I want to hear how have we done in the single-day November events, and have our business seen some inventory-driven demand, supply-driven demand that is driving some sequential improvement? Second is our net margin has reached a new high, and within that we've seen that the marketing cost fell around 50% year-on-year. Is this a new normal, or into next year will we actually start to spend a bit more, and how should we think about the margin outlook for next year? Thank you.
spk06: The first question is about Q4, that is, our overall sales expectation will be better than Q3. Although we have the impact of the epidemic, there are still many uncertainties. But as we just said, we see that the growth of users is slowly coming back to normal. So basically, we are still confident in the previous sales performance. Uh, The second is That about profits, we said that our profits this year are much better than last year, mainly because of the last report. We also said that on the one hand, we are actually strictly and carefully evaluating our new customers. Then we found that there were some non-economic ones. Then we made some economic adjustments this year, but we are relatively positive about the growth of new customers. That is to say, if LTV can be calculated, we will still increase the investment. On the other hand, our company has also reduced its cost-effectiveness. We have also saved a lot of money. We have also saved some of the original waste, or in the entire business cycle, we can continue to operate in a more detailed way. We have also made some adjustments. On the third hand, we are not blind to the cost. We are not blind to ourselves. So. Let me first translate Eric's comments.
spk03: For Q4, we expect revenue to further to narrow to a single digit decline, despite the fact that we have been more or less disrupted by the pandemic, especially actually we were located in Guangzhou and our office headquarters have been in restricted areas and we have to work from home. So we still are facing a lot of uncertainties And also on the logistic side, we have several millions of parcels pending delivery. So that's definitely going to impact our business, but we are quite confident that we will navigate through these uncertainties and achieve normal business growth. On the profitability side, We have strong profitability and we are going to demonstrate our efforts in various areas in terms of cost savings and rational spending initiatives. For example, we have been very prudently investing in external channels as to customer acquisition. We still focus on acquiring new . And we are quite proactive in trying to attract the right kind of new customers to our platform based on the LTV model. We are not going to spending away very freely. So that's helped us save a lot of customer acquisition costs. And on the other side, we had been streaming lying our host structure from every aspect. We did manage to achieve a lot of cost savings throughout our business processes, and we still have some potential to optimize our cost structure. And lastly, we are not blindly sending away coupons. We would rather work with a lot of brand partners to share the cost and be quite prudent in delivering coupons. So we have seen profitability is solid and we are confident to manage that kind of profitability. It's not a one-time thing. We're going to achieve sustainable profitability.
spk04: Eric partially answered your questions regarding the profit margin and the marketing expense ratio. I would like to add two more points. One is that our improvement in our profit margin is not just coming from our savings of our marketing expenses, but also coming from our improvements in our gross margin as a result of our operational efficiencies and better selections of our inventories that we carry. And we pay particular attention to our products margin and rebates. and the like. So that's one point. The other point is that we do focus our efforts more on our super VIP growth and that results in much better customer portfolio for us. So our number of our super VIP grow significantly in this quarter, year over year.
spk00: Thank you, Shenzong and David.
spk08: Thank you. We'll now take our next question. Please stand by. This is from the line of Alicia Yap from Citi. Please go ahead.
spk02: Good evening, Manager Cheng. Thank you for accepting my question. I'm Vicky Wei from Alicia. We have two small questions. The first is to follow up on what Manager Cheng just shared about the influence of logistics. Can you please ask Manager Cheng to share with you in detail how you see the influence of logistics? Have we seen the return rate rise over the past year? How should we view the trend of APU in the fourth quarter? Good evening, management. Thanks for taking my questions. This is Vicky Wei on behalf of Alicia Yap. My first question is, Would management provide some details on impact from logistics disruption and the latest return rate trend? And how should we think of the fourth quarter output trend? My second question is, would management provide some color on the latest competition and brand's attitude as well as inventory level? Thank you.
spk06: Let me talk about the influence of logistics. We now have nearly 4 million orders, right? That is to say, the customer we are talking about has ordered. So we can't actually send it to the customer. So some goods are in our warehouse. Some goods are at Shunfeng's stop. So because, for example, there are 1.4 million in 4 million. Because it's been three months, there's nothing we can do. So the goods in these three months have been waiting there for the closure of Xinjiang. For example, in recent times, Wuhan, Sichuan, Guangdong have been under a lot of pressure. But if we can't deliver these for a long time, there will be a rate of return in the future. That is, the rate of return will actually increase. But what we are thinking is that after all, there are only 4 million orders at the moment, but we can still accept the proportion of the total order volume. So what we are talking about is that we hope this epidemic will go away as soon as possible. Yes, so far, when we look at the brands, there are actually a lot of them because they are offline physical stores. So in theory, in fact, everyone's days are not good, especially in Q3, including Q4. Now the epidemic is in a place in the east and a place in the west. So in fact, we believe that in fact, everyone's days are not good. There is also a lot of inventory, and they can't make money. Then we are actually thinking that we are actually one of the sales channels of a brand. For example, they will also choose the basic brand we are talking about. There are also some live platforms, etc. But we say that we are firmly doing our own role. Then we, for example, do special sales. Then the brand has a deep discount Then let's talk about the first time we come to help them solve it Then include For example, some of them are ready to try it online Then found that it was not sold well enough Then just transfer it to us Or include them to customize it for us Customized products and so on So we theoretically think We are actually one of the channels of the brand But we have distinct characteristics That is, we must be So we think that there may be more storage in the future, but there won't be much in the future. But we think it's not just a storage problem for us, because we have a lot of brands that are specifically for our goods. So first on the logistics side, currently we have roughly 4 million orders pending delivery. Some of the orders are actually staying in our warehouses or the outlets of Shunfeng Express.
spk03: are waiting to be delivered. And especially of the 4 million, actually 1.4 million are going to Xinjiang, which actually has been locked down for over three months. So it's really a tough time. The delay has extended to places like Wuhan, Sichuan, Guangzhou. So with the delay, we expect to see some pickup in the cancellation or return rates. But 4 million is still a manageable portion of our total orders. So we hope that with the pandemic, challenges going away over time, we expect delivery and fulfillment efficiencies are returning to normal pace. And we can manage to meet customer needs. And on the competition side, I think we think our brand partners have quite some channels to choose from. But one thing is certain that the offline stores are still struggling, especially with the COVID resurgence in the latest third and fourth quarters, and they have a lot of inventory to clear, and it's very hard for them to make money. I think we think these brand partners will choose to go to the online channels, including us and other channels, including live streaming to clear their inventory. And we are one of their partners. And we know we have a strong value proposition in discount retail. And we managed to secure a lot of supply with deep discounts. And some of the suppliers are actually not selling well on other channels and then transferred to our platform. And many of them are customized offerings for VIP shop. So as long as we maintain our strong value proposition in branded quality products with steep discounts, We think we can and we will, we have the confidence to meet the growing needs from customers who care value for money product offerings. And there are a lot of the inventory out there and we have a very strong merchandising capabilities and we are confident that we can secure more supplies from all kinds of brand partners and secure a growing share of their inventories to our platform. Thank you.
spk08: We'll now take the next question. Please stand by. This is from the line of Andre Chang from JP Morgan. Please go ahead.
spk05: Mr. Shen, Mr. David, Mr. Jesse, good evening, everyone. My question is about the interest rate. We have seen the interest rate continue to improve in the past two years. As the manager said, the price and strategy have improved with the selection of products. But we still have a big difference from the interest rate level three or five years ago. Thank you management for taking my question. My question is about the future upside of our gross margin. We noticed the efficiency gain, the product strategy has helped the company to improve the gross margin over the past two years. But there is still a significant gap against the gross margin that the company achieved probably back five years ago. So I wonder whether the management still sees a good room to improve the gross margin toward the historical level through the current strategy or other things. Or that we've already seen the near-term benefits being released and the margin should be relatively stable here?
spk06: Yes, we are looking at the net profit margin. But if we look at the net profit margin, the first thing we look at is the net profit margin. So the net profit margin we just talked about, if it affects the net profit margin we just mentioned, The most important point is that if we don't use discount, if we don't use this kind of discount coupon to make a big discount, then we can actually save a lot of money. For example, let's just say it's 21 now. Suppose this month is 21. If this month we have to paste the credit card and send the credit card to the user, China China China China But as we continue to refine our operations, as we increase orders, reduce logistics costs, reduce the entire administrative costs, and so on, including our SVIP, including our customers, the market does better with lower costs, then theoretically, the profit margin can still be increased.
spk03: Okay, on GP margin, one thing you should bear in mind that we always focus on achieving a solid and a sustainable net profit margin. Turning to GP margin, one of the biggest factor is actually the cost savings from the customer rebates or coupons. We are not, we are currently quite prudent on this side. For example, this month, we probably achieved 21% of our GDP margin. And if we are investing a lot of rebate or coupons, that could go down to 19%. So that's one of the biggest savings. Second, on the take rate, we have said for many times that we're not going to increase the take rate from brand partners because they are struggling with their business. So that line should remain stable. This means that the gross margin will not go back to the level of five years ago, say, 25%. It should largely remain stable at the current level. At the level we have seen for Q3 and Q4, 20, 21 something. That's for gross margin. But on the net profit margin, we still have a lot of potential to grow through further optimization of our operations. We can still achieve certain operating leverage on the fulfillment, customer acquisition, and other GMA expenses. So for the net profit margin, we still have room to grow.
spk08: Thank you. We'll now take our next question. Please stand by. This is from the line of Eddie Wang from Morgan Stanley. Please go ahead.
spk07: Hey, Mr. Shen. Hello, Mr. David. Thank you for accepting my question. My question is about the whole app. Because I see that according to the order of each user in this system, it is relatively stable. And GMV per customer or GMV per order is relatively stable. But sales per customer or sales per order, this system still has a certain degree of year-on-year decline. I don't know if this impact is because of the improvement of our standard, or because of the impact of the epidemic, which led to the so-called consumption decline, which led to the drop in the amount of each order, or there are other reasons. Thank you for taking my question. My question is about the user behavior change. We noticed that the net sales per customer and the net sales per order actually declined year-over-year in this quarter. But on the other hand, if you look at generally per customer, generally per order, actually quite stable. So I'm not sure if this is because of the COVID impact or it is because that we have the, you know, the 3P GNV actually increased, which has, you know, resolved this decline. And what's your thoughts about, you know, the further trend of this matrix? Thank you.
spk06: Okay. 我来简单说一下,David在补充。 就是我们其实Q3的话, 我们因为穿戴类做的是不错。 那么穿戴类比去年的Q3 China China China China China China China China China China Actually, the difference between GMV per order and revenue per order is primarily attributable to higher contribution from a pair of categories. Actually, we did quite well in Q4.
spk03: Q3 for apparel categories, which booked positive year-over-year growth at 3.5% growth. And normally, apparel categories carry relatively higher return reduction rates. So that's why you would see rapid growth. APU had declined a bit during the quarter. But if you look at the GME per order, that's quite stable. And the other thing is that returns and exchanges are totally manageable. It has been consistently reflected in our income statement. It has very little impact on the profit level.
spk04: Thank you. Yeah, I think Eric answered the key points on this question. Just to clarify that the job on our pool It's not because of the standardized item, it's purely because of the revenue mix. The apparel clothes and shoes categories increased. We did pretty well on that part. Apparels have higher return rates. And we believe that the return rates in future will remain relatively stable and that will not worsen the situation on our pool. And the other reason that you actually pointed out is that because of the softer consumer's demand and people spent less and also using the summer season. So the consumption is soft and that contributed another reason for that. Thank you.
spk08: 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.
spk03: 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.
spk08: Thank you. This does conclude the conference for today. Thank you for participating and you may now disconnect.
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