Vipshop: Less subsidies and investment, let's see the user growth next year (telephone conference summary)

Below are the minutes of the 3Q22 conference call for Vipshop. For financial analysis, please refer to "Back to Square One after a Bus-ted Rally, Can Vipshop Only be a “Cigarette Butt Stock”?".

I. Remarks from the Management Team:

1. The company's platform has attracted diversified and high-quality partners, and has expanded its product supply, particularly in the fashion and high-end fields.

2. GMV for apparel-related products has increased YoY this quarter. We have also worked more closely with our main partners on customized products, which has become a channel for many brands to increase sales.

3. We are cautious in investing in external channels and are increasingly using upgraded product offerings to acquire and retain customers. More and more customers are from Generation Z and male customers. The number of paying members continues to grow, and the active super VIP customers have increased by 21%, contributing 40% of online net GMV.

II. Analyst Q&A:

Q1: In the uncertain macro environment caused by the recent outbreak of COVID-19, how do you think about GMV and customer growth? What is the outlook for 2023 as a whole?

A1: In recent months, our business has been significantly affected by the epidemic and consumer sentiment is cautious. However, we have observed that user numbers are gradually returning to normal, so overall GMV is stabilizing. For next year's outlook, we will still focus on achieving positive user growth (to maintain relatively stable GMV). We believe that factors from the epidemic that affect next year's performance will gradually decrease, so we are optimistic about the overall GMV and user growth in 2023.

Q2: Compared to Q3, the guidance for Q4 has improved. What are the driving factors? In light of the new high in net profit margin and the significant decrease in sales costs, may I ask if this is a short-term factor or a new trend? Can the company's profit margin reach a new level? Will the company increase its investment in the market in 2023?

A2: We have seen the trend of user growth stabilizing and sales performance improving in our latest data.

Regarding profits, we have strictly and prudently evaluated new customer acquisitions and made some optimization adjustments, but we still maintain a positive attitude towards new customer acquisitions; secondly, the company continues to reduce costs and increase efficiency, and has made necessary adjustments in resource conservation and refined operations; third, we have stopped blindly giving away coupons to share costs with merchants instead of solely relying on discounting. Therefore, we believe that this profit growth is sustainable and have confidence in the future.

The increase in profit margin not only comes from the marketing expenses saved, but also from the increase in gross profit margin. This is due to the improvement in our operating efficiency and better inventory management.

In addition, this quarter, we have focused more on the growth of super VIP customers, which has brought about better customer composition and obvious driving force for profit growth.

Q3: Can you provide details about how the epidemic has affected logistics and returns? Can you share the latest competitive landscape and brand merchant competition strategies? A3: Currently, there are about 4 million unfulfilled orders, mainly due to long-term control measures in Xinjiang, Wuhan, Sichuan, Guangdong and other places. As a result of this impact, return rates are expected to increase. With the improved control of the epidemic, delivery and logistics commitment can be restored to normal.

Due to the repeated impact of the epidemic, a large number of offline physical stores have an inventory backlog and find it difficult to make a profit. As one of the brand's sales channels, we are in contact with brand merchants' demands (special sales/deep discounts/directed customization, etc.). There may be more or less inventory in the future, but the company's diversified demand for channels is not worried about inventory backlog problems.

Q4: How do you view the rise of gross profit margin?

A4: The most important factor affecting gross profit margin is coupons, vouchers, etc. In this respect, the recent quarter has been relatively restrained. However, under normal business operations, there is no need to spend additional costs to promote sales. Gross profit margin may reach 25 in that year, and now gross profit margin may be roughly maintained in the current company Q3/4 gross profit margin interval. It is probably difficult to reach the ceiling at that time. However, there is still room for improvement in the level of net profit through refined operations, reduced customer acquisition costs and other means.

Q5: What are the factors that affect the year-over-year decline of ARPU? What is the future trend?

A5: The wearables category with a relatively high return rate has grown compared to Q3 last year, so the ARPU value may look slightly lower in the financial report, but operationally, the change in ARPU value is not significant. Even if wearables have a higher return rate, it means controllable cost for us, so there is no need to worry excessively.

Supplement: The declining ARPU is due to income diversification. Another reason for the decline in ARPU is that consumer demand is weak due to reduced spending and traditional summer consumption is weak.

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