Holdings (VIPS 12.410. -2.680, -17.76% ) is trading sharply lower today after reporting Q1 earnings
results last night.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. The company has been capitalizing on
the lack of large online discounters in China, a fairly new concept there.
The largest category at VIPS is apparel but they also focus on fashion items, shoes, and cosmetics. 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. Its customer breakdown is 75% female and 25% male.
VIPS had some big news in December 2017: Tencent and JD.com bought a stake in VIPS at a price of US$13.08 per ADS, which was above where the stock was trading at the time. Also, Tencent granted VIPS an entry on the interface of Weixin Wallet enabling Vipshop to use traffic from Tencent's Weixin platform, and JD.com granted VIPS entries on both the main page of JD.com's mobile app and the main page of its Weixin Discovery shopping entry. In March 2018, VIPS launched its JD flagship store and opened up its entry on the homepage of JD's app to all customers.
Turning to the Q1 results, VIPS reported non-GAAP net income of US$0.17 per ADS. Revenue rose 24.6% year/year to RMB19.9 bln (US$3.2 bln), at the high end of prior guidance of RMB 19.1-19.9 bln. VIPS guided to Q2 revenue of RMB 20.5-21.3 bln, representing year/year growth of +17-22%. In terms of metrics, the number of active customers on a LTM basis was 56.6 mln, up from 55.5 mln in the prior year period. While VIPS reports big revenue, this is a thin margin business and VIPS saw some margin compression in Q1. Non-GAAP operating margin declined to 4.4% from 6.3% in the prior year period.
Of note, Vipshop's JD flagship store attracted approximately half a million followers within the first two months of launching. The majority of customers from the JD channel are new customers, and male apparel is the strongest category. The company opened access to its WeChat wallet entry to all traffic on April 8 and conducted a round of promotions with red dots prompting users to click into Vipshop's WeChat mini-program in mid-April, 2018. Customers from its mini-program are younger and more male-concentrated.
Overall, management says its Q1 results were solid as demonstrated by the continued improvement in customer stickiness and loyalty. VIPS made further progress with its strategic collaboration with Tencent and JD.com, opening up the entry on JD's app homepage in mid-March and the WeChat wallet entry in early April. Looking ahead, VIPS will work closely with Tencent and JD.com in order to improve the traffic flow and conversion rates.
In sum, the stock reaction today shows that investors are disappointed in the Q1 results. After a big result in Q4, VIPS was unable to follow that up in Q1. EPS in Q1 came up light and the revenue guidance was just in-line. This follows a good size EPS beat and upside revenue guidance when VIPS reported Q4 results in mid-February. The bottom line miss seems to stem from disappointing margins as non-GAAP operating margin declined by a sizable amount compared to last year.
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