China's TJMAXX: Looking Beyond Poor Guidance,Golds lying under VIPS' Q3 Earnings

Just after the busy Double 11, e-commerce platforms have entered the performance season of "answering questions". The first e-commerce platform to take the lead this time is Vipshop, which is known for its discounted products.

On November 14th, before the US stock market opened, Vipshop released its third-quarter financial report for 2023. At first glance, the company's fourth-quarter guidance was quite intimidating. However, upon closer inspection, Vipshop's performance after operational adjustments was not as bad as it seemed.

The key points are as follows:

1. Strong growth in 3P business, decent GMV growth: With a GMV of 42.5 billion and a year-on-year GMV growth of 13%, Vipshop's performance is already quite good in the current retail environment, exceeding market expectations.

2. Revenue growth barely holds up: Due to Vipshop's poor performance in the previous quarter, the actual revenue growth of 2.28 billion RMB and 4% is within the expected range.

3. Contrary to the adverse competitive environment, gross profit margin increased: In the third quarter, Vipshop's gross profit margin reached 23.6%, which is higher than the market's expectation of a decline to 21.8%.

From a structural perspective, this is due to the high-gross-margin 3P business revenue growth (up 24% YoY). Considering the significant pressure on merchants' excess inventory and weak demand, Vipshop's bargaining power in the niche market of clearing inventory may have improved, allowing them to maintain gross profit margin without sacrificing it significantly.

4. Still a cautious investment style: Fulfillment expenses have increased due to a rise in return rates, but the situation is manageable and not worse than the previous quarter. Marketing expenses, research and development expenses, and management expenses have all increased YoY, partially offsetting the deterioration in expense ratio.

Overall, Vipshop achieved an operating profit of 1.5 billion, a cash profit of 2.1 billion (excluding stock option incentives), and an operating cash flow of 1.2 billion in the third quarter. The profits exceeded expectations.

5. The real blow came from the fourth-quarter guidance. Despite the low base caused by last year's pandemic disruptions, the company's revenue guidance is still 0-5% YoY, significantly lower than market expectations.

Dolphin Research's viewpoint:

Overall, Vipshop's performance in the third quarter exceeded market expectations despite weak guidance. Although Vipshop did not participate in the fierce competition among leading e-commerce platforms in the clearance sale niche, it managed to maintain its gross profit without significant growth. Although the economic efficiency of various investments, such as marketing expenses, has deteriorated, it has not spiraled out of control.

The core issue lies in the outlook. Once again, the company has given a revenue growth guidance of 0-5%! Considering the extremely low base caused by last year's fourth-quarter pandemic disruptions, giving the same growth rate guidance as the third quarter is quite disappointing. For this guidance, either Vipshop is habitually conservative and difficult to represent the ultimate performance range of delivery, or the fierce competition during this year's Double 11 has indeed hit Vipshop's survival space. Dolphin Research currently tends to be the first situation, but the specific situation still depends on any explanation the company can give during the conference call.

Moreover, if you have a little patience, remove the noise from the financial report and guidance information, and focus on the most critical GMV growth rate - 13%, and the net gross sales difference index (defined by Dolphin Research as the core index of the current stage, detailed definition can be found in the main text) - 12.9%. Dolphin Research believes that the actual value of Vipshop's performance delivery in the third quarter is not bad. The real profit growth calculated by this number has increased by 18% compared to the previous quarter.

From a valuation perspective, in the first three quarters of this year, its free cash flow has reached 8.1 billion RMB, and there should be no problem reaching 10-11 billion RMB for the whole year. Currently, the company's valuation is only 55 billion RMB, which is equivalent to a valuation of only 5 times. At the same time, the company has reduced its existing share capital by 10% through share repurchases this year. The cost-effectiveness of the valuation is visible to the naked eye. Currently, there is still 1 billion US dollars in repurchase amount, with 500 million US dollars remaining.

Dolphin Research understands the market's concerns about Vipshop's growth, but the profit balance ability implied in the third quarter performance of Vipshop also shows the unique platform value of the clearance market and the relative bargaining power of merchants under the background of inventory backlog and weak demand.

Therefore, even if the performance guidance for the fourth quarter is poor and the stock price fluctuates, in fact, as one of the few Chinese concept assets with substantial share repurchase actions, Vipshop's downside space is not large. After the negative news is released, attention should be paid to opportunities.

The following is the detailed financial report:

1. Poor guidance is a fatal blow

As for the overall performance of Vipshop in the third quarter, there are no obvious flaws and it performs better than market expectations. The main problem lies in the performance guidance for the fourth quarter.

Under the low base of last year, Vipshop surprisingly gave a revenue growth guidance of 0-5%. If it is not Vipshop's habit of giving a growth guidance of 0-5% regardless of actual operations, it basically means that it has "sacrificed" in the fierce e-commerce promotion competition in the fourth quarter.

However, based on the continuous tracking of Vipshop and the actual delivery under normal year-on-year base in the third quarter, Dolphin Research tends to believe that this guidance may be a habitual conservative guidance.

After discussing this major issue, let's take a look at its actual performance in the third quarter.

2. Abundant supply, user and order recovery

Vipshop's GMV growth in the third quarter is still good, with a year-on-year growth of 13%, reaching 42.5 billion RMB, which is significantly higher than the market's expected 5%. Among the three traditional e-commerce platforms, being able to achieve nearly double-digit growth is already quite good.

Looking at the breakdown of price and volume, the unexpected growth in GMV mainly comes from an increase in order volume, with a slight improvement in both the number of active buyers and the purchase frequency of each active buyer compared to the same period last year.

Specifically, the average order value this quarter is 236 yuan, a 6% increase compared to the same period last year, indicating that Vipshop did not follow the trend of lowering prices to attract users. Combined with the improvement in gross profit margin during the same period, this shows that Vipshop has maintained a stable pricing strategy to acquire users.

The introduction of the 3P business does not focus on low-priced daily necessities, so both the gross profit margin driven by self-operated business and the GMV contributed by the 3P business seem to be doing well.

Overall, in the third quarter, Vipshop performed well in various operating indicators such as GMV, number of users, average order value, and purchase frequency.

3. 3P business growth improves revenue quality

Although there is still a 13% growth in GMV, the actual total revenue only increased by 5%, reaching only 22.8 billion RMB, failing to significantly surpass the weaker guidance from before.

A major reason for this is the significant increase in revenue from the 3P GMV, which grew by 24%, while the self-operated business only grew by 4%. Of course, there are still factors related to returns, but it is not as significant as in the second quarter.

Without lowering the average order value, Vipshop achieved growth in high-margin 3P business and maintained stability in the 1P business. Vipshop's gross profit margin in this quarter increased by another 2 percentage points, higher than the previous quarter, marking the third consecutive quarter of improvement.

While Dolphin Research understands the market's concerns about the growth of revenue guidance, behind the improvement in revenue structure and profit margin, it is necessary to consider that Vipshop has gained some bargaining power over merchants in the current situation of pressure on end-of-season inventory and low consumer demand.

4. Fulfillment: decent cost increase

From a cost perspective, Vipshop's fulfillment costs increased by 17% YoY this quarter, slightly exceeding the 13% growth in GMV during the same period (Note: Vipshop's GMV statistics include items that have left the warehouse and entered the delivery stage, but do not exclude returns), indicating a certain increase in the return rate (returns of the same value of GMV incur additional shipping costs, leading to an increase in the fulfillment cost rate per unit of GMV).

However, the increase in return rate is still within a manageable range. This quarter, the main reason for the increase in marketing expenses compared to the same period last year is due to the implementation of the 3P model, which includes corresponding incentives reflected in the marketing expenses. Other technology and management expenses are relatively controllable.

Overall, with guaranteed GMV, the 3P business has distorted Vipshop's revenue and profit structure, resulting in slower revenue growth and higher sales expenses.

However, after excluding the cost impact of returns and the distortion of the financial statements caused by the 3P business, Dolphin Research has defined a core observation indicator called "Net Gross Sales Difference" (gross profit margin - fulfillment cost rate - marketing cost rate). This indicator removes the cost impact of returns and the distortion of the financial statements caused by the 3P business, and reflects the company's spending on internal logistical functions (such as research and development and administration) after external expenditure.

Therefore, if we filter out the noise and focus on the key indicators of GMV growth rate (13%) and net gross sales difference (12.9%), Dolphin Research believes that Vipshop's performance in the third quarter is satisfactory. The actual profit growth compared to the same period last year is 18%, which is faster than the previous quarter.

Overall, Vipshop achieved an operating profit of 1.5 billion, a year-on-year increase of 35%.

On the net profit level, due to foreign exchange losses in the third quarter, compared to the same period last year when there was a foreign exchange gain of over 300 million, the profit performance appears to have declined. However, this is mainly due to the distortion caused by external factors. The focus should be on operating profit and the core indicator of net gross sales difference as defined by Dolphin Research.

Dolphin Research's previous research:

August 21, 2023 conference call: "Vipshop: High Continuation of Return Rate" Link

End of the article. August 21, 2023 Earnings Report Review: "Vipshop: Intense competition among giants, has the sweet period of being small and beautiful passed?" (Link: Vipshop: Intense competition among giants, has the sweet period of being small and beautiful passed?)

May 24, 2023 Conference Call: "Vipshop: Cautiously optimistic about the second half of the year, new user acquisition will grow" (Link: Vipshop: Cautiously optimistic about the second half of the year, new user acquisition will grow)

May 23, 2023 Earnings Report Review: "Vipshop: Small and beautiful, better than big and 'declining'?" (Link: Vipshop: Small and beautiful, better than big and 'declining'?)

February 24, 2023 Conference Call: "Vipshop: Not participating in the competition, focusing on being small and beautiful" (Link: Vipshop: Not participating in the competition, focusing on being small and beautiful)

February 23, 2023 Earnings Report Review: "Will Vipshop have a 'reversal of fortune'? Will spring come for Vipshop?" (Link: Will Vipshop have a 'reversal of fortune'? Will spring come for Vipshop?)

November 22, 2022 Conference Call: "Vipshop: Less subsidies, less investment, let's see user growth next year (Conference call summary)" (Link: Vipshop: Less subsidies, less investment, let's see user growth next year (Conference call summary))

November 22, 2022 Earnings Report Review: "After all the turmoil, can Vipshop only be a 'cigarette butt stock'?" (Link: After all the turmoil, can Vipshop only be a 'cigarette butt stock'?)

August 19, 2022 Conference Call: "Increase investment, strive for user growth in 3Q, revenue growth in 4Q (Vipshop conference call summary)" (Link: Increase investment, strive for user growth in 3Q, revenue growth in 4Q (Vipshop conference call summary))

August 19, 2022 Earnings Report Review: "Give up! Vipshop's countercyclical story has no substance" (Link: Give up! Vipshop's countercyclical story has no substance)

May 19, 2022 Conference Call: "Can breaking through non-apparel categories save Vipshop? (Conference call summary)" (Link: Can breaking through non-apparel categories save Vipshop? (Conference call summary))

May 19, 2022 Earnings Report Review: "Deepening performance decline, the dawn for Vipshop is hard to find" (Link: Deepening performance decline, the dawn for Vipshop is hard to find) Analysis Report on the Financial Results of February 23, 2022: "No Survival Space for Vipshop Under the Intense Competition"

Analysis Report on the Financial Results of November 18, 2021: "What is the Latest Situation of Vipshop? Ten Charts Explain Everything"

Risk Disclosure and Statement in this Article: "Disclaimer and General Disclosure of Dolphin Research"

Please note that the translations of the article titles and the names of the companies have been adjusted to match the colloquial style.