Ladies and gentlemen, good day, everyone, and welcome to Vipshop Holdings Limited Third Quarter 2021 Earnings Conference Call. At this time, I would like to turn the call to Ms. Jessie Zheng, Vipshop Head of Investor Relations. Please proceed..

Thank you, operator. Hello, everyone, and thank you for joining Vipshop's third quarter 2021 earnings conference call. With us today are Eric Shen, our Co-Founder, Chairman and CEO; and David Cui, our CFO.

Before management begins their prepared remarks, I would like to remind you that the discussion today will contain forward-looking statements made under 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 that 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 measures to GAAP measures.

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 third quarter 2021 earnings conference call. During the third quarter, our business demonstrates resilience despite macro headwinds and the general weakness in the retail industry.

We continued our efforts to execute on our merchandising strategy while refining our operations. Everything we do as a business is intended to strengthen our core competence for long-term growth. As a result, key operational metrics, including our overall user base, GMV and ARPU achieved year-over-year growth.

Specifically, total active customers increased to 43.9 million, and the total GMV grew by 5% to RMB40.2 billion. Our most valuable customer growth continued its strong momentum during the quarter. Super VIP members grew over 40% year-over-year and contributed more than 1/3 of our total GMV.

In the third quarter, we focused -- strengthened our position and value proposition as a leading discount retailer among our brand partners and customers. In line with this goal, we prioritized core brands to better match traffic and resourcing for them.

And optimize our customers' operations, especially for high-value customers, including our Super VIP members, we are happy to see some encouraging results from these initiatives.

For example, during the Super Brand Day sales event in the quarter, multiple brands record higher-than-expected sales with a few even hitting their highest single day GMV in recent years. These brand partners are increasingly aware that Vipshop remains a reliable platform for them to increase sales efficiencies.

As this perception is strengthened more brand and are effectively motivated to maintain a closer relationship with us and the supply, Vipshop, with a great value chain of unique and price competitive products.

This was further evidenced in the past quarter by the solid increase in the number of SKUs and value of our merchandising as well as improving quality of branded products available on our platform. Moving to the customer side. In the third quarter, we were more in reach in our approach to managing our existing and potential customers.

We are committed to driving new customers' growth but are now doing this in a more efficiency and effective way. We have put great emphasize on recapture in active customers and more importantly, become better engaged with our Super VIP members.

We have seen rapid growth in our number of super VIP members who compare to regular customers and significantly more resilient in terms of consumption, post higher retention rates and generate higher ARPU. Through this consistent and sustained effect, we aim to increase our competitiveness in China's discount retail market.

Going forward, we will create more business synergy by empowering our co-brand partners and optimize user experience to drive the solid quality and the sustainable growth of our business. At this point, let me hand over the call to our CFO, David Cui, who will go over our financial results..

Thanks, Eric, and hello, everyone. In the third quarter of 2021, our top line growth was in line with our expectations despite external challenges, thanks to the effective implementation of our merchandising strategy and refine operations.

Notably the increasing contribution of our high-value customers helped improve our overall average revenue per user. We also continued to deliver solid profitability as we have greater discipline in spending and more focused on improving operating efficiencies.

Looking ahead, we will continue to drive business synergies on both our merchandising and operational site to deliver steady financial performance. 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 revenue increased by 7.5% to RMB24.9 billion from RMB23.2 billion in the prior year period, primarily driven by our growth in the average revenue per user. Gross profit was RMB4.8 billion as compared with RMB4.9 billion in the prior year period, and gross margin was 19.4% as compared with 21.1% in the prior year period.

Total operating expenses was RMB4.2 billion as compared with RMB3.9 billion in the prior year period. As a percentage of the total net revenue, total operating expenses was 17.0% as compared with 16.9% in the prior year period. Fulfillment expenses was RMB1.6 billion and it largely stayed flat as compared with the corresponding period in 2020.

As a percentage of the total net revenue, fulfillment expenses decreased to 6.5% from 7.0% in the prior year period. Marketing expenses were RMB1.2 billion compared with RMB1.1 billion in the prior year period. As a percentage of total net revenue, marketing expenses was 5.0% as compared with 4.9% in the prior year period.

Technology and content expenses were RMB366.8 million as compared with RMB305.1 million in the prior year period. As a percentage of total net revenue, technology and content expenses was 1.5% as compared with 1.3% in the prior year period.

General and administrative expenses were RMB1 billion as compared with RMB848.6 million in the prior year period. As a percentage of total net revenue, general and administrative expenses was 4.1% as compared with 3.7% in the prior year period. Income from operations was RMB770.8 million as compared with RMB1.2 billion in the prior year period.

Operating margin was 3.1% as compared with 5.4% in the prior year period. Non-GAAP income from operations, which excluded share-based compensation expenses and amortization of intangible assets resulting from business acquisitions, was RMB1.1 billion as compared with RMB1.5 billion in the prior year period.

Non-GAAP operating margin was 4.2% as compared with 6.4% in the prior year period. Net income attributable to Vipshop's shareholders was RMB628.4 million as compared with RMB1.2 billion in the prior year period. Net margin attributable to Vipshop shareholders was 2.5% as compared with 5.4% in the prior year period.

Net income attributable to Vipshop's shareholders per diluted ADS decreased to RMB0.92 from RMB1.8 in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders was RMB1.0 billion as compared with RMB1.4 billion in the prior year period.

Non-GAAP net margin attributable to Vipshop's shareholders was 4.1% as compared with 6.0% in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS decreased to RMB1.50 from RMB2.01 in the prior year period.

As of September 30, 2021, the Company had cash and cash equivalents and restricted cash of RMB13.2 billion and short-term investments of RMB3.7 billion.

Looking forward to the fourth quarter of 2021, we expect our total net revenue to be between RMB35.8 billion and RMB37.6 billion, representing a year-over-year growth rate of approximately zero percent to five percent.

Please note that the 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..

[Operator Instructions] The first question comes from the line of Thomas Chong from Jefferies. Please go ahead..

So my first question is about SVIP. So how should we expect the growing trend of SVIP as well as GMV in Q4 and next year? And my next question is about the competition landscape, especially in the discounted retail sector.

So any thoughts on the live streaming e-commerce?.

In terms of your question on SVIP, we have been focused on adding more SVIP members to our platform, and we've seen solid increase of over 40% in the third quarter. We will continue to improve their experiences so that more high-value users could be converted into SVIP members.

And you've already noticed -- you probably noticed that SVIP members as compared to regular users, their ARPU and retention rates are much higher. In the future, we expect they will continue to contribute more to our platform as they already accounted for 1/3 of -- over 1/3 of our total GMV for the past quarter.

In the past -- in Q3, we also further expanded and optimized the SVIP membership privilege to drive the user growth. For example, we provided extra 5% of benefits, expanding to more of our copy [indiscernible] rent. We also have dedicated Super Vip membership stores and also a sales day for them.

And we also have our cross-platform benefits, including buy one [indiscernible] campaign together with a lot of other platforms. So we've seen a very solid growth in SVIP members.

And for the foreseeable future, we will continue to expand the SVIP members and as they contribute 8x to 9x in terms of ARPU as compared to a regular user, we expect it will contribute more to the bottom line.

In terms of your question on competition -- competitive landscape, Vipshop is actually fundamentally different from other marketplace platforms. We are keenly focused on discount sales for brands, and we are taking the potential of becoming China's online outlet. We have to be more professional and more dedicated to discount sale.

We believe discount is a resilient and long proved business model and with the middle class in China increasing and their spending power growing, we believe, we still have plenty of room to grow. We do notice that live streaming platforms, they do attract user traffic.

But from what we've observed so far, they are more offered part of brand's multichannel marketing strategy that brings incremental traffic whether -- no matter whether it's shelf space or short video-based or content based e-commerce, we believe it really depends on how good is the merchandise.

And from the perspective of customer base -- perspective of our customers, actually, our customers are clearly very oriented. Vipshop brings them quality branded products with competitive price as well as hassle-free return exchange services.

In addition, not just a good brand, good quality, good pricing, good services, so we believe customers will have their awareness and make the right choice. We believe we are still leading this sale of brand, this market segment, and we do have a lot of room for growth..

[Operator Instructions] We have the next question coming from the [indiscernible] from TH Capital. Please go ahead..

Can you hear me?.

Yes..

Okay. I have two. My first one is about your marketing and user base. I know your -- the marketing efforts in previous quarters were quite impressive. However, we have noticed that the number of your sponsorship in TV drama came down in this quarter.

So I was wondering if you can shed some light in the -- on the marketing strategy and how that will continue to fuel the growth of your user base? And some highlights on your progress of male customer acquisition will be great.

The second one is we have noticed that you established several new companies lately, it looks like that your business scope was expanded into new areas such as consumer finance result and advertising, et cetera. So can we assume that you are stacking into new business to diverse your revenue growth? That's it. Let me translate myself.

[Foreign Language].

Okay. To your first question on marketing strategy, we actually have been continuously investing in acquiring new users. But in the past, we have not been that efficient in new customer acquisition.

Recently, we were more integrated in allocating our marketing stores in terms of existing and potential customers, especially when we found that people that used to come to our platform, these inactive customers, actually, we can spend less money to acquire them back than a new customer. So we are just trying to be more efficient and effective.

In terms of TV drama sponsorship, it's not a regular thing. Not every quarter we're going to spend money on sponsorship, but we are continuing to do so depending on whether it's the right drama -- TV drama and the right user group for us.

We are also leveraging other new media formats, such as Bilibili, Little Red Book, and Douyin going to tap further customer acquisition channels to attract younger shoppers to our platform. In terms of the male customers, the contribution from male customers increased by actually around 3% in terms of the number of customers year-over-year.

And we've seen the increasing proportion of male customers come to our platform to buy menswear, sportswear and season bag. We will continue to drive the growth of male customers. As for new ventures for the recently established -- actually for the consumer finance entity, we've long ago applied a license for that and that entity has just opened.

It doesn't mean that we're going to have new business lines. Remember, we are still continuing to focus on discount sales for brands. We haven't spent too much in other business. We think that discount sale for brands is a green market, and it has a lot of growth potential.

We still focus on our online business as well as offline business as a complementary to our overall business..

The next question comes from the line of Guohan Wang from Daiwa. Please go ahead..

Okay. I'm Guohan from Daiwa Capital on behalf of John Choi. We understand the Super VIP is one of our contributors substantially to our ARPU growth this quarter. I want to have a better understanding on the new -- the conversion rate from new user accredited to our SVIP programs and especially imperative to convert these users.

And also do we have additional room for ARPU improvement for SVIP? So that's my question..

Okay. In terms of question on SVIP, I'm not sure if what do you mean by conversion rate, but there are a couple of numbers that I can give it to you for a reference as compared to a regular user as we actually attention rating up a much stronger and their consumption pattern is much more resilient.

We believe that there is still a lot of room for SVIP members to improve their ARPU because we have seen consistently for the past several years, we see solid increases in the ARPU for SVIP members. In addition to apparel related categories, we can also offer them standardized products for this SVIP members.

So we do see there is a lot of room for ARPU growth from SVIP members..

So I can add a little. So on our platform, we do have a considerable number of, we call it, high-value customers and who have higher spending frequencies and buying power. So we -- we were trying to convert these high-value customers to our super VIP members. Of course, we do have brand-new customers who become our super VIP.

And by providing targeted membership benefits and services for these people and to improve their experience on our platform, so that more and more high-value users can be converted to Super VIP members. And compared to regular customers, Super VIP members have much higher retention rate.

So if we don't have a conversion rate, but we do have a higher retention rate. And of course, an annual ARPU is significantly higher than the regular customers. So I just want to add this. Thank you..

Thanks. Sorry, may I have a follow-up. So given our more entries into new channels such as BBV and short term videos.

So from a management perspective, which channel do you think have the highest ROI and users with a relatively longer lifetime value? I understand that some channel users may not have strong such appetite on our discounted models, given their incomparable user profiles. So I will translate myself..

We still mainly rely on targeted marketing for customer acquisition, including Douyin, Toutiao, WeChat, et cetera. We also sponsored TV dramas and variety shows and also pre-installation app on mobile phones.

And for some innovative focus on new emerging channels like Bilibili, we actually have two types of ad for typing, one is actually with target -- looking for targeted transactions, and the other is trying to increase customer awareness of Vipshop. We are exploring different channels, and we will use multiple channels to acquire customers..

We have the next question coming from the line of Feitong Zhang from CICC. Please go ahead..

Management, it's Feitong from CICC. We have one question regarding the fourth quarter guidance. How should we interpret this guidance? Is it conservative? What's the newest trend we are seeing in November and December? And my second question is regarding to the inventory trend.

What is the trend of the amount of industry inventory is impacted by the weak macro? So the industry has more inventories or we experienced a shortage of supplies from overseas brands? So industry has less inventories, how would this impact our business?.

So the guidance for Q4 is based on a few factors, especially the external environment is not optimistic. There are still lingering uncertainties affecting consumers' sentiment. And so our guidance of 0% to 5.5% is apparently not high.

And we have observed that, for example, during the Double 11 event orders placed on our platform hasn't reached to many of the places because of the resurgence of the COVID-19 cases here and there.

And in terms of the Double 11 event sales, we did see some good developments, and we expect our anniversary event on December 8 to fare relatively better because autumn and winter clothing sales picked up as the temperature is getting -- as the weather is getting colder. So we do see some positive signs.

And for the Q4 guidance, I just want to add, actually, internally, we are upgrading our business strategy to focus on the core brands, the quality of brands and space out unqualified ones, this will actually have more or less impact on our business in the short term. So we want to give ourselves some leeway to do our business.

In terms of the inventory, we think that the current inventory in the power industry is okay. Actually, if you look at Q3 and Q4 with the resurgent the COVID-19 cases, the offline business is not actually not doing well. So they have a lot of excess inventory for us to clear.

And in addition to clearing inventory for the specific brand, [indiscernible] we also have other like made for Vipshop products customized with these brand partners. We also secure a more unique and better priced merchandise from these brand partners.

So we are within the inventory level is fine, and we are able to leverage our core competencies to secure more inventories from our brand partners..

We have the next question which is coming from the line of Joyce Ju from Bank of America. Please go ahead..

My question was actually regarding our offline outlet business. Just trying to understand, I think in the previous quarters, our offline outlet business indeed had a quite solid growth.

I just want to catch up on like this quarter's growth for our outlets with our going forward CapEx plan? And also, have we seen any impact from the pandemic to affect our offline traffic in these outlets? And also like with the GMV contribution and revenue contribution of those like offline, online and also our offline stores..

I'll take on this question. Okay. So even though the COVID-19 impact in this period and our offline business still grow quite good, I think it's roughly around 18% in this quarter. And our offline -- no, not the offline, I mean, the outlet grows quite significantly. And then the online provided 6% to 7% of our total revenue, yes. Total GMV, yes..

And also the CapEx plan for outlets or like Shan Shan related..

We will continue to grow that business. And every single year, we will build -- we will build two or three new outlets. So we do add a couple of new outlets this year, and we'll continue to do so in the next three, five years. That's -- as we have originally planned.

And for each of the -- depends on the size of the new outlets, it does require us RMB500 million maybe RMB800 million..

We have the next question. This is from the line of Natalie Wu from Haitong International. Please go ahead..

And my question is regarding the user cohort. For those active customers newly acquired last year, just trying to understand if there's any difference that we can notice compelled with the past branch of customers, say, ARPU, preference category, shopping frequency and retention, et cetera..

Okay. For the user metric, I think you've probably noticed that overall ARPU declined actually 7% in Q2, but managed to return to positive territory in Q3 because we continue to invest in growing our Super VIP members as well as their spending power. We've seen a continued increase in every metric for Super VIP members.

And we do believe that there is a lot of room for us to grow ARPU going forward. In terms of shopping preferences, actual apparel is due the most preferred category for most of consumers as contribution stays relatively stable, we've also seen very good momentum in sportswear and the shoes.

In terms of user mix, actually, we've seen -- I just mentioned, we've seen increasing contribution from male customers as well as from Tier 1 cities as well as from people in near 20s. So we do see very good momentum in growing our customers. And we believe that we'll be able to continue to expand our customer base..

And how about the retention?.

Retention rates for newly added customers for the past year remains relatively stable..

Thank you. Due to time constraints, that concludes today's question and other session. At this time, I will turn the conference back to Jessie 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..