Vipshop: Under the depression, only the weak get weaker?

Before the US stock market opened on August 20th Beijing time, Vipshop released its financial report for the second quarter of 2024. In summary, although the actual performance basically met market expectations under the company's previous guidance, the overall weakening business and growth indicators still reveal the pressure that Vipshop is facing. The detailed key points are as follows:

1. User and order volume loss, relying solely on SVIP for support. This quarter, Vipshop's GMV reached 50.6 billion, almost flat year-on-year, which is basically in line with market expectations. Although the market had already lowered its expectations, the actual performance met expectations. However, the undeniable fact is the weak zero growth year-on-year. In terms of driving factors, this quarter, Vipshop's order volume decreased by 7% year-on-year, a larger decline compared to the previous quarter, and the number of active users also decreased by about 1.4 million year-on-year, compared to a decrease of 700,000 in the previous quarter.

According to the company's explanation, the loss of users and order volume this quarter is mainly due to higher subsidies on other platforms, leading to the departure of some "wavering users." However, the consumption of core users (such as SVIP members) has not been greatly affected, and after purifying users, the average order value increased by 8%, maintaining GMV year-on-year without decline.

2. Due to the increase in returns and 3P income ratio, the gap between revenue growth and GMV growth remains. This quarter, revenue decreased by 3.6% year-on-year to 26.9 billion, which is 3 billion higher than the low expectations, but the negative growth is still a fact.

However, as the base period of low return rates has basically passed, the gap between revenue and GMV growth is narrowing, from nearly 8% last quarter to less than 4% this quarter, with the potential to continue narrowing in the future.

In terms of gross profit, the company achieved a gross profit of 6.3 billion this quarter, a 2% year-on-year increase, outperforming revenue and GMV growth. However, it is worth noting that the year-on-year base period for gross profit margin will increase significantly starting next quarter to a level close to the current one. In other words, the future growth rate of gross profit will converge more towards the growth rate of revenue.

3. Since the growth of GMV, revenue, and gross profit is not optimistic, cost control, as the last line of defense to maintain profit growth, was achieved this quarter. Overall operating expenses this quarter amounted to 4.29 billion, a 4.2% year-on-year decrease, with expense reduction exceeding all key growth indicators mentioned above. Among them, marketing expenses amounted to 740 million, a 17% year-on-year decrease, lower than the market's expected 800 million. Other expenses, such as management and fulfillment, also saw a year-on-year negative growth, with only research and development expenses increasing by 10% year-on-year, possibly due to the company's research and development investment in AI shopping guides, try-on functions, and other features.

In the end, with outstanding cost optimization, the company achieved an operating profit of 2.23 billion this quarter, a 16% year-on-year increase, exceeding expectations by 5%. Double-digit profit growth was still achieved at the profit level.

4. Looking ahead to the third quarter, the company guided a revenue range of negative growth of -10% to -5%, while the market originally expected flat year-on-year growth ( of course, this expectation may not necessarily have much reference value **) In other words, given the weak performance in this quarter, the company expects the situation in the next quarter to deteriorate further.

Dolphin Research Viewpoint:

In this quarter, although the company lowered expectations by taking preventive measures in advance, the actual performance of various indicators basically met market expectations. However, exceeding expectations, from an absolute perspective, all indicators of Vipshop reflect significant pressure on the company's operations.

On core operational indicators, both active users and order volume decreased by -3% to -4% year-on-year. With the low base period of gross profit margin in the following quarters, it will no longer be easy to rely on the year-on-year increase in gross profit margin to offset the impact of declining revenue. Although profit was maintained this quarter by controlling expenses, cost reduction can only provide temporary relief and not a long-term solution. If the business continues to shrink, profitability will eventually align with the decline in revenue growth. Looking ahead to the next quarter, the company's revenue guidance also suggests that the situation may further deteriorate.

Considering the overall weak performance of the e-commerce industry at present, as well as the intense competition among industry giants, the pressure for growth, which was already very limited, inevitably trickles down to Vipshop and similar niche market leaders after being divided by dominant players. The future prospects indeed do not look optimistic.

In terms of shareholder returns, after a significant decline in scale for three quarters, Vipshop's repurchase amount for this quarter has once again increased to slightly over $200 million, representing an annualized return rate of over 10% compared to the market value of just over $7 billion. However, there is a hidden risk due to the company's high capex spending over the past 24 years and the declining operating cash flow, which recorded operating cash flows of -1.3 billion and -0.8 billion in the two quarters respectively. Although the company has over 20 billion RMB in cash reserves, which prevents any liquidity issues, the sustainability of maintaining high repurchases and dividends under continued negative free cash flow is a question that cannot be overlooked.

Below are the detailed financial report:

I. User attrition, declining order volume, amidst fierce competition among giants, affecting smaller players?

In this quarter, Vipshop's GMV reached 50.6 billion, almost flat year-on-year, in line with market expectations. Due to the company's earlier preventive measures, the market had already lowered expectations, so from the perspective of expectation deviation, the performance does not seem poor. However, falling into year-on-year zero growth, a significant slowdown from the 8% in the previous quarter, it is still a rather weak performance.

Driven by price and volume factors, Vipshop's order volume in this quarter decreased by 7% year-on-year, a larger decline compared to the previous quarter, and 3% lower than expected. At the same time, the number of active users at Vipshop decreased by approximately 1.4 million year-on-year this quarter, compared to a decrease of 700,000 in the previous quarter. Although the actual performance is not significantly different from expectations, the further widening of the loss in users and order volume highlights the operational and growth pressures that Vipshop cannot ignore

The year-on-year comparison of order volume has significantly declined, while GMV remains flat year-on-year, thanks to the support of the rising average order value. This quarter, the average order value reached 256 yuan, an 8% year-on-year increase. According to the company's explanation, the loss of users and orders this quarter is mainly due to some "wavering users" shifting to other platforms due to higher subsidies offered by those platforms. However, the consumption of core users who remain (such as SVIP members) has not been greatly affected, thereby boosting the average order value.

II. The final contribution of the low gross profit margin base

As GMV has basically shown zero growth, the gap between revenue growth and GMV growth still exists due to the increase in returns and 3P category revenue proportion. This quarter, revenue decreased by 3.6% year-on-year to 26.9 billion, although weaker, it exceeded expectations slightly by 3 billion.

However, we can also see that the gap between revenue and GMV growth is narrowing, from nearly 8% last quarter to less than 4% this quarter. We believe this is mainly because the base period of low return rates in the past has basically passed, and the gap between revenue and GMV is expected to continue to narrow in the future.

In terms of gross profit, this quarter the company achieved a gross profit of 6.3 billion, a 2% year-on-year increase, outperforming revenue and GMV growth. However, we also need to note that the year-on-year base for gross profit margin will significantly increase to a level close to the current one starting next quarter, in other words, the growth rate of gross profit will significantly converge with the revenue growth rate starting next quarter.

III. Optimizing expenses to maintain profit growth

As the growth of GMV, revenue, and gross profit is not optimistic, expense control is the last line of defense to maintain profit growth this quarter. This quarter, the overall expenditure on the four operating expenses was 4.29 billion, a 4.2% year-on-year decrease, higher than all the key indicators mentioned above. Among them, marketing expenses amounted to 740 million, a 17% year-on-year decrease, also lower than the market's expectation of 800 million.

On other expenses, both management and performance expenditures saw negative year-on-year growth, with only R&D expenses increasing by 10%. Combined with Vipshop's relatively high capex spending in recent quarters, we believe that the company may have made certain R&D investments in AI shopping guides, try-on functions, and other areas.

Ultimately, the performance of various growth indicators was not satisfactory, despite excellent cost optimization. The company achieved an operating profit of 2.23 billion this quarter, a 16% year-on-year increase, exceeding expectations by 5%. Ultimately, the company still achieved double-digit growth at the profit level.

Dolphin Research on Vipshop in the past:

May 23, 2024 Conference Call " Vipshop: Short-term caution, focus on shareholder returns "

May 23, 2024 Financial Report Review " Vipshop: Guiding "thunder"? Not afraid, buybacks to the rescue "

February 29, 2024 Conference Call " Vipshop: Not seeking high growth, but will gradually increase dividends "

February 29, 2024 Financial Report Review " Cold weather, expensive clothes, Vipshop lives up to "small and beautiful" "

November 14, 2023 Financial Report Review " Vipshop: Don't be misled by thunder, there's gold to be found "

November 15, 2023 Conference Call " Vipshop Summary: Double-digit growth on Singles' Day, net profit margin space higher than gross profit margin " 2023 August 18th Conference Call "Vipshop: Will the high return rate continue"

2023 August 18th Financial Report Review "Vipshop: Intense internal competition among giants, has the sweet period of being small and beautiful passed?"

2023 May 24th Conference Call "Vipshop: Cautiously optimistic about the second half of the year recovery, increased investment in new customer acquisition will lead to growth"

2023 May 23rd Financial Report Review "Vipshop: Small and beautiful, better than big and 'declining'?"

2023 February 24th Conference Call "Vipshop: Not participating in internal competition, focusing on being small and beautiful"

2023 February 23rd Financial Report Review "Will Vipshop's spring come with a 'reversal of fortune'?"

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