Vipshop: Will it get better in 2025? (3Q24 Conference Call)

The following is $Vipshops(VIPS.US) the conference call summary for the Q3 2024 financial report. For the financial report interpretation, please refer to Vipshop: Lying Flat to Survive, Not Wanting to Win Means Not Losing .

1. Core Information Review of the Financial Report:

2. Detailed Content of the Financial Report Conference Call

2.1 Key Information from Executive Statements:

The third-quarter performance generally met our expected targets, with the decline in Q3 sales reflecting the weak sales of non-essential goods as consumers face increasing pressure, which suppresses their spending on non-essentials. On a positive note, the growth of SVIP members remains strong, with a double-digit growth rate in the third quarter. The number of active SVIP customers increased by 11% year-on-year, contributing 49% of online sales.

Business highlights include:

We continue to favor resilient product categories and have provided a better mix of apparel and non-apparel products for household shoppers. We have seen excellent performance in categories such as sports, outdoor goods, and home products, and we are satisfied with the scale and depth of supply. We are pleased to see that with the strong influx of quality brand supplies, especially in deep discount inventory offered through more unique products, some long-term brand partners have achieved record sales through our major promotional channels (such as "Super Brand Day"). An increasing number of brands view us as a preferred partner, which also provides lower costs and a growing foundation for business operations and sales efficiency, which is core to our merchandise sales.

We launched "Limited Time Crazy Seconds" and "Everyday Low Prices" promotional activities to highlight SVIP members and provide targeted incentives for household shoppers who prefer to spend on high-frequency categories.

After upgrading SVIP benefits, we have also received some feedback, and we provide special offers to customers both online and offline. These privileges have been sustained for several quarters, and the trust and loyalty of SVIP members have significantly strengthened. We plan to maintain this business activity better and align it with customer interests and customization needs.

We continue to experiment and deploy new technologies across a broad user base, with one focus being to improve the relevance and aggregation of search and recommendations so that users with different intents are more likely to browse and shop across categories; another focus is to leverage AI capabilities to optimize content, helping customers find and purchase the products they expect. We recognize that new technologies are becoming key drivers of growth and efficiency improvements

2.2 Q&A Analyst Q&A

Q: What is the impact of government macro policies on consumer sentiment at the end of September, and how is the recent situation from the perspective of GMV? Considering that the gross margin reached 24% in the third quarter, what is the outlook for GMV and gross margin in 2025?

A: Recent consumption situation: October performed well in Q4, as consumption was brought forward due to the Double Eleven shopping festival. If we combine the data from October and November, it remains within the expected range for Q4. Overall consumption situation is not much different from Q3, with consumers tending to buy less but more refined items, and the willingness to purchase non-essential items is low. The national consumption stimulus policy has helped certain categories like home appliances, but has limited support for Vipshop, which is primarily focused on apparel.

2025 expectations: The trend from Q4 2024 may continue into 2025, depending on many uncertain factors such as macroeconomic recovery and consumer confidence improvement. GMV is expected to decline in 2024, with efforts to turn it positive in 2025. In terms of net profit, due to the stability of the overall revenue structure, no significant changes are expected; while there may be minor changes in expenses, the overall situation remains relatively stable.

Q: Did the performance during Double Eleven exceed expectations? What are the consumption expectations for December and the reasons for negative growth in the fourth quarter? Additionally, is the return rate during Double Eleven higher than in previous years?

A: Double Eleven growth situation: This year's Double Eleven promotion lasted for 28 days, compared to over 20 days last year. If we compare based on the same duration, the growth trend aligns with predictions; if calculated over the full 28 days, GMV grew by over 20%, with customer and revenue metrics exceeding expectations. However, Q4 remains in a sluggish state overall, as last year's performance was boosted by cold weather and frequent cold waves, while this year's weather is not as cold as last year. Based on this, the Q4 forecast is conservative, expecting a year-on-year decline of -5% to -10%.

Return rate situation: The annual return rate has increased by two percentage points compared to last year, and the return rate during Double Eleven is consistent with the annual trend, remaining relatively stable. The platform's return policy has been stable and in place for five to six years, providing good service, including free returns, which is different from the recent high return rates seen on other platforms.

Q: This year's third-quarter gross margin reached a historical high. Compared to last year's fourth quarter, where typically other categories would lower the gross margin, last year's fourth quarter had a higher gross margin. What is the situation for this year's fourth quarter gross margin and apparel category combination? There is a significant drop in economic growth between operating profit and net profit, with tax rate impacts increasing by about 30%. Is this related to the allocation of funds from domestic to overseas for financial returns? How do you view future tax expenditures and shareholder returns?

A: Gross margin outlook: The gross margin for Q3 was 24%, and due to the competitive environment in Q4, there may be subsidies involved, with an expected gross margin of around 23.7%. Although it will decrease, it will not change significantly and remains within a reasonable range. The increase in Q3 gross margin is mainly attributed to the increased contribution from high-margin apparel categories, multiple cost-saving measures such as optimizing product mix and managing customer incentives, as well as contributions from high-margin other income, such as leasing income recognized on a net basis Taxation: This quarter, approximately RMB 3.5 billion in dividends was allocated to foreign entities for stock repurchase, resulting in a withholding income tax expense of RMB 175 million. Excluding this factor, the effective tax rate is approximately 17-18%. In the long term, excluding the impact of withholding income tax, the effective tax rate remains around 17-18%. Regarding shareholder returns, the company will continue to execute stock repurchases and dividend distributions as planned, with a plan to allocate no less than 75% of the full-year non-GAAP net profit for stock repurchases and dividend distributions in 2025.

Q: Could management share the performance differences among various categories in the third quarter, especially the GMV proportion of the wearables category? Were there any significant changes in user behavior regarding consumption frequency and average transaction value among SVIP users this quarter?

A: Category Performance: In the third quarter, the GMV of the wearables category saw a slight decline, with a more pronounced drop in standard products, but it was not more severe than before. This is mainly due to competitive pricing advantages from other platforms. The platform is adjusting and providing limited targeted incentives, such as increasing cross-category shopping opportunities for family shoppers, hoping to mitigate losses in standard products.

SVIP User Behavior Changes: In Q3, there were 7.5 million active SVIP users, contributing 49% of online sales, with the number of users increasing by 11% year-on-year. The addition of new SVIP users has lowered the overall average transaction value and consumption frequency. Over the past two years, the average transaction value of SVIP users has changed slightly, mainly due to a decrease in consumption frequency, and the overall consumption health of SVIP users shows no additional losses.

Q: What are the reasons for the decline in consumption frequency among SVIP users, and what measures will the company take to stabilize consumption frequency? How does the trade-in policy affect Vipshop?

A: SVIP Consumption Frequency: The consumption frequency of SVIP users has declined, and the platform is taking various measures to stabilize it, including lowering the membership threshold to attract new customers to open accounts and renew old memberships, offering more 5% discounts and special products, conducting online and offline activities (such as private sales), and focusing on pushing relevant categories to family shoppers to enhance the perceived value of the platform for SVIP users, thereby improving user retention and consumption. The platform is currently working to increase user engagement and loyalty, but it is difficult to determine when consumption frequency can be stabilized; however, related measures will continue to be promoted.

Impact of the Trade-in Policy: Offline outlets mainly operate in clothing and are hardly affected by the trade-in policy; the online business is expected to generate RMB 400-500 million in sales through this policy by the end of this year, which is a small proportion and may be related to weak consumer awareness. The platform hopes the government will expand the categories eligible for subsidies; if extended to other categories, the platform is expected to benefit. Currently, the platform is also actively cooperating with government-related work to promote policy development and seek more opportunities.

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