Increase investment and strive for 3Q user growth and 4Q revenue growth (Vipshop conference call minutes)

The following is the minutes of the Vipshop Q2 conference call, for financial results analysis please see "Give Up, Vipshop's Countercyclical is Just a Story without Capability".

1. Management comments:

2. In Q2, we successfully converted more high-value customers into paying members. Active super VIP customers increased by 21% YoY, contributing 38% of online net GMV.

3. In this quarter, the sales momentum of our joint brands continued to be stronger than that of other brands.

4. Given the future recovery's high dependence on macroeconomic development, we will continue to focus on locking down discount retail as a long-term strategy.

2. Analyst Q&A:

Q: Is the SVIP strategy performing well even during COVID? What is the key driver of growth? Secondly, my second question is about the recent weather's impact on the company's strategy, including consumer behavior and product sales. How was the sale of winter clothes?

A: SVIP customers contributed 38% of our online product transaction volume, and we expect this contribution to grow in the next few quarters. We offer them multiple SVIP member privileges to encourage high-value customers to become SVIP. For example, we offer an extra 5% discount, we have Super VIP Day on the 28th of each month, and we have a Super VIP Member Store.

Regarding the recent weather conditions, in fact, we have purchased a large amount of autumn and winter clothes from our brand partners. For example, we have been working with down jacket brands to reserve winter clothes in case the weather gets even colder than expected.

Q: Considering the company's Q2 performance, the Q3 performance guidance seems a bit conservative? Secondly, in terms of profit, the profit margin this quarter has actually improved a lot, is there further room for improvement?

A: The Q3 guidance is negative growth of 10%-15%, and it considers many factors. For example, we expect that the epidemic may have some ups and downs, and the gradual recovery of consumer confidence will also take time. Finally, we are not sure about the weather in July and whether it will be cold enough for us to carry out autumn marketing activities, so it's better to be conservative.

We did cut some marketing expenses in the Q2, which improved our profitability. However, in the long run, our goal is still to work hard to bring our customers back to positive growth over the next few quarters.

Q: When should we expect to switch to positive growth? The second question is, will it be mainly driven by user growth?

A: Our goal is to try to achieve customer growth from Q3, so starting this quarter, we will increase advertising spending as needed to achieve positive user growth.

A: As far as our customer acquisition strategy is concerned, we will increase our spending on acquiring new customers in the third quarter. In the past few quarters, we have stopped acquiring new customers in some regions due to COVID restrictions. We are now restarting our investments in these areas. Our strategy remains pre-installed app stores and targeted marketing for new customers. At the same time, we are working hard to re-engage old customers from the past year or first quarter.

As for the outlook for the fourth quarter, we are actually quite confident that if we can bring customers onto a growth trajectory in the third quarter, we will see an increase in performance in the fourth quarter, as that will be our peak season. In the past few quarters, we have been able to optimize our product mix and increase customer impression of discount retail using the opportunity presented by the economic recession. Therefore, if everything goes well, we are confident that we will see some upward movement in the fourth quarter.

Q: The first question is about the seasonal impact on gross margin and product mix. Historically, the second quarter is the peak season for clothing sales, with higher gross margins. Has anything changed this year? Also, does this mean that the seasonal decline in gross margin in the third quarter will be less mild than usual? The second question is related to capital expenditures. Capital expenditures in the second quarter appear to have doubled, what is the driving force behind this? In the current macro environment, will we continue to invest at this pace?

A: Regarding gross margins, we believe that the seasonal impact on gross margins is not significant. In the second quarter, due to promotional activities and weak clothing demands, gross margins are usually lower. There will be less promotional activities in the third quarter and our clothing may sell less.

We have taken many cost-saving measures this year to stabilize and improve our gross margin. For example, we are cautious about giving customers extra coupons. Secondly, we have stopped investing in channels. Finally, we have taken many measures to optimize our cost structure and gross margin. For example, we are working hard to handle customer returns in a better way without sacrificing our interest.

This quarter's capital expenditure is mainly for our Dolphin location. Many times, land use rights are prepaid and cash outflows are not necessarily consistent with the opening of the location. This year we will invest in three or fewer locations.

Q: When it was mentioned earlier that user growth was increasing, does it mean a year-on-year increase in the number of active customers in the third quarter? If the answer is yes, this means an increase of 2.2 million active users. If the cost of adding users remains the same, this also translates to an additional sales and marketing expense of RMB 200 million to 400 million. I want to know how this aligns with the profit margin. Secondly, in terms of bargaining power, given the worsening inventory problems of suppliers affected by COVID, will this improve your bargaining power?

A: We spend RMB 200-400 million each quarter on marketing expenses and may spend even more money to attract new users. However, attracting old customers, especially active customers from last quarter, is not so expensive. We will combine excellent brands, high-quality selection and pricing, and better personalized recommendations to achieve our goal of customer growth.

In terms of inventory, we work closely with our brand partners to ensure we offer the best unique and high-quality products, most of which are still on consignment. In fact, we want to provide certain support for our core brands, so we won't reduce our ordering speed from them, as these core brands can help deliver value to our customers and enhance their impression of Vipshop as a discount platform. This is how we cooperate with brand suppliers. We can support them and create a win-win situation for both parties.

Risk Disclosure and Statement for this article: Dolphin Disclaimer and General Disclosures for Dolphin Analyst