Vipshop: The return rate will continue to be relatively high.

Summary of Vipshop Conference Call, Please refer to " Vipshop: Intensifying Competition among Giants, Is the Sweet Period of Being Small and Beautiful Over? "

Q1: How is the recent consumption situation? What is the GMV growth rate in the recent and upcoming quarters? Considering the better margin in 2Q, how do you view the future margin trend?

Regarding GMV, for the past month of 3Q, the data we have observed has been relatively normal and within expectations. The company remains confident in 4Q and future GMV. The third quarter, especially the summer season, is not the period with the highest volume and frequency of clothing sales, and the average order value is also lower. However, in 4Q, customers will purchase a large amount of clothing, especially expensive winter clothing, so we have confidence in 4Q GMV.

As for the future, we are confident in GMV as the impact of the pandemic has diminished. In terms of profitability, 2Q gross margin was better, and we have become more prudent in controlling profitability, which is a sustainable capability that will not result in significant differences between quarters. Therefore, we also have confidence in future profitability.

Q2: Why has the gross margin increased recently, while the gross margin rate usually declines during promotional seasons? Is this level of profitability sustainable? Regarding clothing consumption, what are consumers' preferences? Do they prefer certain fashion styles or categories, such as discounted clothing or sportswear, or have color preferences?

2Q was a promotional season, and although we focused on sales during this period, we did not engage in blind subsidies. In this situation, we achieved good results. This means that in the future, regardless of whether there are major promotions in any quarter, we will maintain a relatively stable pattern of gross margin minus expenses equals net profit, without significant fluctuations.

Regarding clothing consumption, due to the partial sales suspension in some regions during 2Q last year due to the pandemic, there has been strong YoY growth this year.

Categories such as women's clothing, men's clothing, children's clothing, including sportswear and home underwear, have all shown good growth. We estimate that last year's 2Q was affected by suppressed travel demand, while now society is more active and people no longer need to wear masks, resulting in a strong demand for clothing.

In addition, the growth rate of shoes and bags is similar to that of clothing, as people make complementary purchases. Furthermore, due to our involvement in deep discounts, we have found that consumers prefer affordable and cost-effective products and make rational decisions.

There is little homogeneity among products, and there is a wide variety of clothing styles without any particular standout.

Q3: Regarding future growth, is the company's expectation of 0-5% YoY growth in the third quarter mainly related to recent macro and competitive conditions or to the base effect from last year? If it is the latter, can we consider this number as the normal growth rate for next year or beyond? Or will the group increase marketing investment next year to drive revenue growth? The company's estimate for Q3 is 0-5%, mainly due to the off-season for wearable products, which is a strong area for the company's business. Therefore, the overall guidance is not very strong. At the same time, we have observed that the company's GMV growth is good, but compared to last year, the return rate is higher, indicating that customers may be more cautious when spending money.

In addition, the company's service in the wearable sector is hassle-free returns, which is also expected to be a long-term trend. So we are not overly concerned at the moment.

We have a positive outlook for Q4. One reason why Q3 expectations are average is that last year Q3 was less affected by the pandemic, while Q2 and Q4 were heavily impacted.

Regarding whether the 0-5% growth will be maintained in the long term, we hope to continue to leverage our brand advantages, including increasing market investment and acquiring more users in 3Q. Our internal requirements will be higher than these numbers.

Q4: Regarding the return rate, the proportion of fulfillment costs in the second quarter has increased significantly compared to previous periods. What is the trend when comparing the return rates of the first, second, and third quarters? Is it increasing, fluctuating, or relatively stable at a high level? Does it mean that a higher fulfillment cost rate needs to be estimated in the future? In addition, with the good growth of GMV in the third quarter so far, is there a significant gap in the expected difference between revenue and GMV growth?

The return rate started to increase in 1Q, but it surged in 2Q. We expect the return rate in Q3 to be similar to that of 2Q, and the return rate in Q4 may be slightly higher or slightly lower.

Overall, we believe that this level of return rate will continue until next year. The behavior of returning items that are not suitable will continue.

Therefore, we believe that the proportion of GMV to net revenue will be different next year compared to previous years. Regarding fulfillment costs, although the return rate has increased by a few points, the costs we incur are limited to shipping back and forth. So the increase in the fulfillment cost rate is related to the budgeted orders plus the amortized shipping costs. Therefore, we believe that the fulfillment cost rate in the future is generally controllable and will not increase significantly. For example, during the peak season, the fulfillment cost rate will decrease significantly due to the drastic increase in order volume.

Q5: The company repurchased approximately $350 million worth of shares this quarter, and the current plan is to repurchase approximately $1 billion within two years, so the progress is far ahead of the average pace of the plan. At the same time, the company's stock price remained stable in the second quarter, and there was no motivation to actively buy at particularly low prices. The amount of repurchases is in line with the free cash flow for the quarter. Can you share the company's thoughts on share repurchases and shareholder returns? How is the repurchase pace considered?

Actually, there are no specific rules. Generally, if the stock price is very low, far below the company's value, the company will definitely repurchase shares. Or when the stock price is high and during periods of volatility, we will not choose to repurchase.

We hope to create value for shareholders, so we have been steadily executing our repurchase plan.

Q6: What is the return rate compared to competitors and the industry? Is the increasing return rate only related to consumers' cautious attitude? Is it still related to competition and other factors? How many SVIP members are there in Q2? What is the proportion of GMV contribution?

Regarding the return rate, our return rate is slightly higher by 2-3% compared to other similar platforms, such as shelf e-commerce. For example, we make instant decisions and the items stay in the shopping cart for only 20 minutes. In addition, some other platforms' customer service tries to avoid returns by offering coupons to dissatisfied customers, which is not consistent with our shopping logic, resulting in a slightly higher return rate. At the same time, we only have data from a few platforms for recent return rates and have not observed the overall trend, so we are still studying it.

Secondly, we can only speculate that the return rate is related to customers' cautious attitude, but it is not easy to prove. As for the competition issue, I don't think it is the cause of the return rate. For example, if a consumer pays for three items and originally intended to keep two, but now only wants to keep one, the payment has already been made, so theoretically there is no reason for price differences among different platforms. We don't have a final conclusion on the high return rate; we have only observed that this trend will continue.

As of June 30th, the number of SVIP members is 6.7 million, contributing 44% of the sales. Additionally, the number of SVIP members increases every quarter. Furthermore, the return refusal rate for SVIP members is higher than that of regular users because they prefer to buy and return items regularly, treating our platform as a fitting room in a shopping mall. We are happy to provide such services. Therefore, the increase in SVIP members is also one of the reasons for the recent high return refusal rate.

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