Vipshop Holdings (VIPS) is trading modestly lower today but is off its lows after reporting Q2 earnings last night. In case you're not familiar, VIPS is a Chinese online discount retailer that specializes in selling luxury brand name products via what are known as "flash sales," which are events where VIPS will offer deeply discounted merchandise for a short period of time.
VIPS' largest category is apparel but they also focus on fashion items, shoes and cosmetics. Smaller categories include home goods, leisure travel packages and other lifestyle products.
VIPS prices products on its website at significant discounts, typically ranging from 30-70% off the original retail price, which is one of the key elements in the "thrill and excitement" shopping experience that VIPS creates. Its attractive pricing is made possible by cost savings achieved through volume discounts, in particular for off-season or slower-moving inventory. The absence of physical retail space and related overhead costs also helps to keep costs low.
VIPS uses mostly a consignment business model so they do not purchase most of the merchandise they sell. By not purchasing inventory upfront, this allows VIPS to use very little working capital. Its customer breakdown is 75% female and 25% male.
The company has been capitalizing on the lack of large online discounters in China, as this is a fairly new concept there. The stock made its IPO debut in March 2012 and was a huge mover in 2013-2014 and peaked at just above $30 in early 2015. However, the stock has been trending lower since then.
Turning to the Q2 results, non-GAAP EPS came in at RMB 1.18, which was below market expectations. Revenue rose 30.3% year/year to RMB 17.52 bln, which was above the high end of prior guidance of RMB 17.0-17.5 bln. For Q3, VIPS expects revenue to come in around RMB 14.9-15.4 bln, which is in-line with market expectations.
In terms of operating metrics, non-GAAP operating margin decreased to 5.1% from 6.2% in the prior year period. The number of active customers in Q2 increased by 22% YoY to 28.1 mln. Total orders increased by 23% to 84.8 mln. Its total active customers for the trailing 12 months reached 58.8 mln, representing a 32% increase.
VIPS also noted that in Q2 it made significant strides in the expansion of its logistics footprint and logistics capabilities. It currently has approximately 27,000 last mile delivery staff and approximately 3,500 delivery stations.
In sum, VIPS has experienced some up and down quarters over the past year and a half. While revenue was actually quite good, EPS came up shy of market expectations. That tells us that margins were not as strong as the market was expecting. The 110 bp operating margin decline was quite large.
It's not entirely clear why margins declined so much, but it sounds like VIPS spent heavily boosting its logistics capabilities with four local warehouses added in Q2 bringing the total to 11. VIPS also added 19,000 sq meters of warehouse space in Japan and Korea for its cross-border business.