Vipshop: Not Pursuing High Growth, but Will Gradually Increase Dividends

Below is the summary of Vipshop's 2023 fourth-quarter earnings conference call. For an interpretation of the earnings report, please visit " 天寒衣贵，Vipshops 无愧 “小而美” 》

1. Review of Key Financial Information:

2. Detailed Content of the Earnings Conference Call

2.1. Key Points from Executive Statements:

Overall Performance: a) Exceeded expectations in 2023, achieving the most profitable year in history. b) Clothing category was the main driver of growth, with a 24% YoY increase for the full year and a 29% YoY increase in the fourth quarter. c) Annual total sales exceeded RMB 200 billion for the first time.

Customer Base and Loyalty: a) Strong growth in high-value customer group, with a 14% YoY increase in active super VIP members, accounting for 46% of online spending. b) High renewal rate for super VIP members, with average spending over 8 times that of non-SVIP members.

Product Strategy and Brand Partnerships: a) Focused on brand discount retail, expanding and diversifying brand portfolio, introducing over 1500 new brands last year, mainly in fashion and high-end brands. b) Promoted sales through activities like "Super VIP Day" and "Super Category Day," with new brands performing well. c) Close collaboration with brand partners, establishing strong relationships, with over 150 brands currently participating in deepened cooperation plans.

Operational Efficiency and Financial Performance: a) Gross profit margin reached its highest level since 2017. b) Operating profit margin and net profit margin on a non-GAAP basis both hit historical highs. c) Announced annual cash dividend policy, distributing approximately USD 250 million in cash dividends, reflecting confidence in future growth and earnings.

Future Strategies and Directions: a) Continuously leverage product strategy capabilities to provide efficient and cost-effective inventory solutions for brands and partners. b) Customer-centric approach, simplifying the shopping process, and enhancing customer trust through a first-party model. c) Investing in interactive areas with brand partners and customers, maintaining operational discipline, and driving organic and profitable growth.

Future Revenue Outlook: Projected total net revenue for the first quarter of 2024 to be between RMB 27.5 billion and RMB 28.9 billion, with a YoY growth of approximately 0% to 5%.

2.1. Q&A Analysts' Questions and Answers

Q: Is it expected that most of the future growth will come from high-frequency and high-value consumption of existing loyal customers? Is there concern about a decrease in the frequency or amount of consumption by loyal customers? Does the company have strategies or plans for acquiring new users?

A: The contribution of Super VIP members to total spending has been increasing year by year, reaching 45% in 23. It is expected that in 24, the contribution of Super VIP members will continue to grow steadily. The consumption frequency of Super VIP members is also on the rise, with great potential for further improvement. Currently, there are only 7.6 million annual active Super VIP members, while there are still many potential high-value customers. Customers with high potential have the greatest consumption potential and have become the most effective channel for the company to acquire Super VIP members. The base of annual active customers in 23 meets expectations, and there are hopes for better performance in 24. The company will take multiple measures to drive new customer growth, in addition to traditional merchant channels, it will also focus on new channels that have not been closely cooperated with before, and continue to focus on targeted marketing, mobile pre-installation, and some brand advertising. The average order amount of Super VIP members shopping on Vipshops is relatively high, ranging from approximately 200 to 300 Chinese Yuan, which is considered a reasonable and affordable price range. Therefore, the company is not too concerned about the consumption environment.

Q: Why did the average price per order in product sales in the fourth quarter increase compared to the previous three quarters, which had a declining trend? What are the company's expectations for sales and marketing expenses in 2024? Is the widening gap between GMV and revenue in the fourth quarter related to a significant change in return rates?

A: The average order size has been relatively stable, with a slight increase in the fourth quarter compared to the same period last year, mainly due to increased sales of winter clothing, which usually have higher prices. In the fourth quarter, due to sales performing better than expected, the ratio of sales and marketing expenses has slightly decreased and will continue to remain relatively stable. The company is not worried about sales and marketing expenses as they account for a very small portion of total revenue. Over the past year, the return rate has been increasing year by year, with the company seeing a 3 to 4 percentage point increase in return rates, but it has not affected the profitability of the past few quarters. The increase in return rates is caused by multiple factors, including the growth in contributions from clothing products, which naturally have higher return rates, and the company's return and exchange services becoming standardized and attractive in the industry, with many customers viewing Vipshops as a fitting room. Consumers have become more cautious in spending, which may also be one of the reasons for the increase in return rates.

Q: How is the overall business trend in the first quarter of this year (January and February)? What about after the Chinese New Year? How do you view the gap between GMV and revenue in 24? The company has $1 billion in free cash flow, but has not done much stock repurchase in the past two quarters, now with $250 million in dividends, what are the plans for the remaining free cash flow? Is there still room for further shareholder returns?

A: In January, benefiting from very favorable weather conditions, the business performance was quite good. After the Chinese New Year, the company continues to see business recovery. Recently, due to expected weather conditions, the company's sales growth is slower than expected. This cold weather has somewhat delayed the launch of spring clothing, and the company expects Q1 to be another relatively stable growth quarter. For this year's revenue and GMV growth, the company continues to expect a slightly higher return rate, mainly because clothing products and SVIP contributions are still high, but it will not increase significantly, with an expected increase of at most 1.2 to 1.5 percentage points compared to 23. This implies the possibility of narrowing the gap between revenue and GMV growth to some extent. From April 2023 to the end of 2023, the company has repurchased nearly $2 billion worth of stocks. The existing $1 billion stock repurchase plan is valid until March 2025, with $452 million already utilized. As of December 30, 2023, the remaining portion will be executed in due course, taking into account factors such as price, operations, and market fluctuations. Dividends and stock repurchases are two ways the company provides returns to shareholders, and both will be implemented concurrently.

Q: Areas or channels to acquire new users? Factors driving increased user spending in 2024? The cash balance at the end of last year increased compared to the end of 2022, does this mean there is no need to use strong cash flow to reward shareholders?

A: Last year, the company invested in multiple channels to acquire new customers, such as marketing, cooperation with platforms like Tencent, and mobile pre-installation. This year, the company plans to add new channels through more brand advertising, especially targeting potential customers who are unfamiliar but have heard of Vipshop. The company also plans to leverage emerging and young channels, such as Bilibili's Oshawa, etc. The retention rate of acquired new customers is quite good, indicating a relatively high quality of customers acquired. Last year, the company benefited from favorable weather conditions in some seasons. However, the company also believes that customers are increasingly recognizing the value proposition of Vipshop as a platform for branded products and quality services. The company has seen an increase in cross-category purchases among customers. This year, in addition to driving growth in the clothing category, the company also aims to establish a stronger platform for standardized goods. For future repurchase plans, the company will evaluate stock prices and market fluctuations. If future stock prices are lower than expected or normal, the company will consider occasional ongoing stock repurchases. In the future, the company may increase its cash dividend policy and will assess its cash position, profitability, and capital expenditure plans. The company needs to ensure that its cash flow, profitability, and capital expenditures are within a controllable range when determining how much funds to distribute to shareholders. In addition to stock repurchases, the company may also reward shareholders by increasing cash dividends.

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