Vipshop Holdings (VIPS) Q4 2021 Earnings Call Transcript

Vipshop Holdings (VIPS -2.48%)
Q4 2021 Earnings Call
Feb 23, 2022, 7:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, good day, everyone, and welcome to Vipshop Holdings Limited fourth quarter and full year 2021 earnings conference call. At this time, I would like to turn the call to Ms. Jessie Zheng, Vipshop's head of investor relations. Please proceed.

Jessie Zheng -- Head of Investor Relations

Thank you, operator. Hello, everyone, and thank you for joining Vipshop fourth quarter and full year 2021 earnings conference call. With us today are Eric Shen, our co-founder, chairman, and CEO; and David Cui, our CFO. Before management begins their prepared remarks, I would like to remind you that the discussion today will contain forward-looking statements made under Safe Harbor provisions of the U.S.

Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our Safe Harbor statements in our earnings release and the public filings with the Securities and Exchange Commission, which also applies to this call to the extent any forward-looking statements may be made. Please note that certain financial measures used on this call such as non-GAAP operating income, non-GAAP net income and non-GAAP net income per ADS are not presented in accordance with U.S.

GAAP. Please refer to our earnings release for details relating to the reconciliations of our non-GAAP measures to GAAP measures. With that, I would now like to turn the call over to Mr. Eric Shen.

Ya Shen -- Chief Executive Officer

Good morning and good evening to everyone. Welcome and thank you for joining our fourth quarter and the full year 2021 earnings conference call. We are delighted with our solid business performance in 2021, despite a slow fourth quarter impact by the challenging external environment. For the full year, total active customers increased by 12% year over year to 93.9 million.

GMV grows by 16% to RMB 191.5 billion. Notably Super VIP active customers grew by 50% to six million and contributed 36% of online net GMV. Driven by steadily growth in both customer base and average revenue per customer, our total revenue for the year increased by 15% year over year to RMB 117.1 billion. Non-GAAP net income for the year exceeded RMB 6 billion and the net margin remained above 5%.

Our solid operational and the financial performance was led by continuous business upgrade based on our strategic position and as a discount platform for branded products at exceptional value. To further enhance our core competitiveness during the second half of 2021, we focused more on core brands and the high value customers to further strengthen our value proposition with them. Among many things, we rely and upgrade values, channels on our platform to better empower brand partners and enhance shopping experience for customers. We are encouraged by the business synergy generated from the initiative.

For example, multiple brands recorded their highest single day GMV in recent years during the Super Brand Day and today's top brand sales events. Many more brands came to us providing our customers with more unique and price competitive products. We are pleased to see that the contribution from core brands for the past year significantly improved from a year ago with the GMV growing faster than the overall GMV on our platform. Though they have deepened the relationship with our brand partners, we were able to better cope with core brands homemade for Vipshop products.

In addition to address the need of younger customers, we also consistently added new and trendy brands through our platform. As we brought in more quality brands and products, we were better positioned to leverage, integrate operations to improve customer stickiness and ARPU. In particular, Super VIP members outperformed in most of our operation metrics. They have a very high retention rate with the annual ARPU at around 8x than that of non-SVIP customers.

We expect this paid membership program to cover more high-value customer on our platform. Looking into 2022 and beyond, we will firmly execute on our merchandising strategy to secure and increasing share of quality products from carefully select brand partners. To achieve this, we will keep allocating more resource to accelerate the closing of the core brands, differentiate our offering further through Made for Vip products and introduce more popular and high-end brands. In addition, we will continue to optimize our operations.

We will improve the effective customer acquisition through personalized recommendation, enrich the shopping experience and effective target marketing for new and existing customers. We expect these efforts to collectively drive the quality and sustainable growth of our customers and revenue for the long term, while consistently delivering daily and the health profits. At this point, let me hand over the call to our CFO, David Cui, who will go over our financial results.

David Cui -- Chief Financial Officer

Thanks, Eric. Hello, everyone. 2021 was a year of challenge and uncertainty. Despite this, we achieved a solid performance, thanks to our continuous efforts in executing the merchandising strategy and refining operations.

Our total revenue for 2021 increased by 15% year over year, driven by steady growth in both customer base and average revenue per customer, although the fourth quarter came under some pressure. Net margin attributable to Vipshop's shareholders for the year remain resilient with sequential improvement in the fourth quarter due to disciplined operation, evidenced by more prudent marketing strategy through integrated customer acquisition. Going forward, we remain committed to delivering steady profitability with quality topline growth and creating long-term value to our shareholders. Now, moving to our detailed quarterly financial highlights.

Before I get started, I would like to clarify that all financial numbers presented below are in renminbi and all the percentage changes are year-over-year changes, unless otherwise noted. Total net revenue for the fourth quarter of 2021 was RMB 34.1 billion as compared with RMB 35.8 billion in the prior-year period, primarily attributable to soft consumer demand for discretionary categories impacted by the microeconomy and COVID-19 pandemic. Gross profit was RMB 6.7 billion, as compared with RMB 7.8 billion in the prior-year period. Gross margin was 19.7% as compared with 21.9% in the prior-year period.

Total operating expenses decreased to RMB 5.0 billion from RMB 5.4 billion in the prior-year period. As a percentage of total net revenue, total operating expenses decreased to 14.6% from 15.2% in the prior-year period. Fulfillment expenses was RMB 2.2 billion, which largely stayed flat as compared with the corresponding period in 2020. As a percentage of the total net revenue, fulfillment expenses was 6.4%, as compared with 6.1% in the prior-year period.

Marketing expenses decreased to RMB 1.1 billion from RMB 1.7 billion in the prior-year period. As a percentage of total net revenue, marketing expenses decreased to 3.4% from 4.8% in the prior-year period, primarily attributable to more prudent marketing strategy. Technology and content expenses increased to RMB 443.0 million from RMB 272.4 million in the prior-year period. As a percentage of the total net revenue, technology and content expenses was 1.3% as compared with 0.8% in the prior-year period.

General and administrative expenses were RMB 1.2 billion, as compared with RMB 1.3 billion in the prior-year period. As a percentage of the total net revenue, general, and administrative expenses was 3.5%, which stayed flat as compared with the corresponding period in year 2020. Income from operations was RMB 1.8 billion as compared with RMB 2.6 billion in the prior-year period. Operating margin was 5.4% as compared with 7.2% in the prior-year period.

Non-GAAP income from operations was RMB 2.1 billion as compared with RMB 2.8 billion in the prior-year period. Non-GAAP operating income margin was 6.1% as compared with 7.9% in the prior-year period. Net income attributable to Vipshop's shareholders was RMB 1.4 billion as compared with RMB 2.4 billion in the prior-year period. Net margin attributable to Vipshop's shareholders was 4.1% as compared with 6.8% in the prior-year period.

Net income attributable to Vipshop's shareholders per diluted ADS was RMB 2.07 as compared with RMB 3.51 in the prior-year period. Non-GAAP net income attributable to Vipshop's shareholders was RMB 1.8 billion as compared with RMB 2.6 billion in the prior-year period. Non-GAAP net margin attributable to Vipshop's shareholders was 5.3% as compared with 7.2% in the prior-year period. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS was RMB 2.64 as compared with RMB 3.70 in the prior-year period.

As of December 31, 2021, the company had cash and cash equivalents and restricted cash of RMB 17.2 billion and short term investments of RMB 5.4 billion. Now, I will briefly walk through the highlights of our full year results. Total net revenue for the full year of 2021 increased by 14.9% year over year to RMB 117.1 billion from RMB 101.9 billion in the prior year, primarily driven by the growth in the number of total active customers. Gross margin increased by 8.6% year over year to RMB 23.1 billion from RMB 21.3 billion in the prior year.

Gross margin was 19.7% as compared with 20.9% in the prior year. Income from operations for the full year of 2021 was RMB 5.6 billion as compared with RMB 5.9 billion in the prior year. Operating margin was 4.8% as compared with 5.8% in the prior year. Non-GAAP income from operations was RMB 6.6 billion as compared with RMB 6.8 billion in the prior year.

Non-GAAP operating income margin was 5.6% as compared with 6.7% in the prior year. Net income attributable to Vipshop's shareholders was RMB 4.7 billion as compared with RMB 5.9 billion in the prior year. Net margin attributable to Vipshop's shareholders was 4% as compared with 5.8% in the prior year. Net income attributable to Vipshop's shareholders per diluted ADS was RMB 6.75 as compared with RMB 8.56 in the prior year.

Non-GAAP net income attributable to Vipshop's shareholders was RMB 6.0 billion as compared with RMB 6.3 billion in the prior year. Non-GAAP net margin attributable to Vipshop's shareholders was 5.1% as compared with 6.2% in the prior year. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS was RMB 8.67 as compared with RMB 9.08 in the prior year. Looking forward to the first quarter of 2022, we expect our total net revenue to be between RMB 27.0 billion and RMB 28.4 billion, representing a year-over-year decrease rate of approximately 5% to 0%.

Please note that this forecast reflects our current and preliminary review of the market and operational conditions, which is subject to change. With that, I would now like to open the call to Q&A.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from the line of Thomas Chong from Jefferies. Please ask your question. 

Thomas Chong -- Jefferies -- Analyst

Hi. Good evening. Thanks, management, for taking on my questions. My first question is relating to the consumer sentiment that we are seeing right now.

Can we comment about how it is different in Q4 and so far right now in Q1? Because when I look at the guidance, it seems that it is a negative 5% to 7%, which is similar to the guidance in Q4. So just want to see if any changes in terms of our thoughts on macro headwinds? And, secondly, I also want to get a sense about how we should think about the recovery momentum in Q2 and coming quarters? And then, finally, that is more relating to competition, can management comment about live streaming online shopping competition in China and how it affects our business? Any thoughts on how -- whether we can separate out or quantify the impact on competition and macro headwinds to [Inaudible]?

Ya Shen -- Chief Executive Officer

In terms of your first question on consumer sentiment, actually we have seen that it's really weak in the fourth quarter because of the warmer weather as well as sporadic COVID-19 cases. And in the first quarter, it's getting slightly better because the weather is getting colder and -- but still we are naturally impacted by the COVID-19 cases here and there. So seasonalities still plays some role in our business performance, because we are a pretty much apparel category and focused platform. In terms of the recovery trend in the coming quarters, it's really hard to predict for now given the many uncertainties going on, especially we see that there are still cases of COVID-19 and it's still too early to tell whether the consumer trend is growing, whether -- when the consumption is coming back.

But, overall, we should see a relatively stable growth for 2022. We don't expect too much swings in our business performance. It's going to be quite stable. In terms of competition, we haven't seen too much change recently.

We believe it's getting relatively stable. I think -- we think that live streaming platforms, they have take what they can take in the past from shelf space to e-commerce platforms. We didn't see competition is getting worse. So we are actually not worried, because as long as we get the right merchandising -- merchandises for customers, they will always come to us.

In terms of the impact from macro and the competition, it's really hard to quantify, because you cannot predict reliably whether macro is going to play out. But on the competition side, we are pretty sure that the impact is already there.

Thomas Chong -- Jefferies -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Alicia Yap from Citigroup. Please ask your question.

Alicia Yap -- Citi -- Analyst

Hi. Good evening, management. Thanks for taking my questions. I have couple of questions here.

The first one is a question related to the inventory status for the Winter Olympics merchandising. So have you been discussing with your brand partners or maybe your merchandising partners regarding the demand and the inventory situation? Do you see any opportunity that Vipshop can get some of these product that is kind of leftover? And given the timing, do you think you will be benefit more for the fall and winter season later -- in late 2022, or do you think there could be some winter clearance activity that you can leverage later in March or the April promotion period?

Ya Shen -- Chief Executive Officer

In terms of the inventory related to Olympic,  Winter Olympics, we haven't seen a very strong buildup in such inventory. So we do see that sports companies have been growing their business on our platform very fast in recent years, but they do not provide any dedicated inventory in terms of -- such as the skiing, of sportswear, etc. We think that they have a normal level of inventory for sportswear. So there is no anticipation that we are going to benefit from any excess inventories related to Winter Olympics.

Alicia Yap -- Citi -- Analyst

Yes. Can I follow up one question on user growth strategy. So can you elaborate what are the current plans that you are thinking in terms of -- to help to boost your new user acquisitions later this year?

Ya Shen -- Chief Executive Officer

In terms of our user growth strategy, I think from the fourth quarter of last year we had been focused on acquiring quality users in a more efficient and effective way. We don't want to blindly spend money in all the channels to acquire low quality customers, instead we are trying to do it in a balance and a prudent way through integrated customer acquisition. This year, we're going to continue to invest a lot of efforts in acquiring new customers. But at the same time, we're going to improve the retention of our existing customers.

We will maintain a decent level of marketing spend in new user acquisition.

David Cui -- Chief Financial Officer

Alicia, I had a couple of more things. Number one is, we have seen a number of our Super VIP increase year over year so that's one of the key indicators that are the quality of our customer base is getting better and then we were also seeing that our ARPU stabilized and have a slight increase actually starting last quarter, so we're seeing that trend.

Alicia Yap -- Citi -- Analyst

I see. OK. Thank you.

Operator

Thank you. [Operator instructions] Our next question comes from Ronald Keung from Goldman Sachs. Please ask your question. 

Ronald Keung -- Goldman Sachs -- Analyst

[Foreign language] OK. Thank you. My first question is on gross margins. Fourth quarter is traditionally a higher -- high margin quarter with apparel -- higher apparel mix.

So given this year is not the highest kind of quarter, margin quarter, just want to hear how are we thinking about the gross margin trends and the implications for 2022? My second question is, as our business reaches a more mature stage, we have a very strong net cash balance sheet and a sizable earnings per share, we'd love to hear management's thoughts on whether there could be any potential plans even for rewarding shareholders like paying dividends?

Ya Shen -- Chief Executive Officer

In terms of the gross margins, although Q4 is a roughly lower level as compared to the full year in the same quarter of last year, it's really because of the promotions and the subsidies we did in -- during the quarter. But, however, because -- during the quarter, the weather was relatively warmer and it didn't effectively motivate consumers to spend more on winter clothing. So the return on the marketing spend is not desirable. But the current level of gross margin is not something that we want for the long term.

We will gradually bring our gross margin to more normal level in the coming quarters. You don't have to worry about the gross margin going ahead.

David Cui -- Chief Financial Officer

In terms of the cash used, as you know, we -- our board has approved a share buyback plan last year. So we have executed partially in the last year and given that, we made quite good profit in the year and then we still see a healthy profitability in the coming year, in this year 2020. So the Board and the management is considering alternatives among the share buyback and distribution of the dividend. So it's within the process, we are considering and evaluating the options right now.

Operator

Thank you. Our next question comes from the line of Natalie Wu from Haitong International. Please ask a question.

Natalie Wu -- Haitong International -- Analyst

Hi. Good evening. Thanks for taking my question. I have two here.

First one is following up with Alicia's last question about the user acquisition. Can management elaborate more on your latest user acquisition strategy? For last quarter, we can see that your sales and marketing is quite controlled, especially considering the seasonal pattern. Just wondering any particular spending channel has been typically changed branding performance based debt or whatever? And on kind of the sale and marketing budget you're preparing for this year, will it be more of an absolute number or fixed revenue ratio depending on the timing of the improvement of the economy of the consumer confidence. Just curious, how shall we see the change? And the second one is related with our Super VIP.

Just wondering, what's the current percentage of your Super VIP and also the related gross profit margin profile conbributed by them because they have -- obviously have a higher ARPU, which is, I think, favorable to the cost of the margin maybe, but in the meanwhile they enjoy a deeper discount. So just it'd be great if management can share some color on that? [Foreign language]

Ya Shen -- Chief Executive Officer

In terms of the latest update on user acquisition strategy, I think what we do differently from the fourth quarter is that we strictly follow the LTV model to evaluate the marketing efficiency of our spending and as well as how many days to recover in terms of new customers as well as existing customers. In the past, we tend to see it takes longer time for us to recover the spend on new customers, so we do less. And for the existing comers we tended to send out to many coupons and did a lot of advertising, but it turns out not to be very effective, so we also did less on that front. In general, we apply this LTV model in all the channels, including our branding as well as TV drama sponsorships as well as advertising on short videos, etc.

So we actually did see some positive results from the fourth quarter. This year, we are continue -- we will continue to use the LTV model to manage all our marketing spend in across different channels. We do not look at a certain absolute number of marketing spend as well as certain percentage of the -- as total net revenues as long as the LTV model shows this is a healthy way to do to acquire customers, we will keep doing so. So we are going to take this balance in the prudent approach to our marketing strategy.

In terms of the margin profile for SVIP members, we've just mentioned the SVIP already accounted for roughly 36% of our online net GMV last year. In the future, we are going to continue to convert more high value customers into SVIP members. In terms of the gross margin, SVIP members have a slightly lower gross margins than the overall level of our gross margin for the company and a slightly higher return rate, but SVIP proves to be spent much more than a non-SVIP member. So it is definitely a very profitable model for the company and we expect as long as more high value customers are successfully becoming SVIP members, they tend to come to shop more and spend more.

Operator

Thank you. Our next question comes from Eddy Wang from Morgan Stanley. Please ask your questions.

Eddy Wang -- Morgan Stanley -- Analyst

[Foreign language] Thank you for taking my question. My first question is also about the inventory defaulting. So Shen, you mentioned that for the non-sports apparel, there is no inventory issue. But I just want to ask if there is any inventory issue for the women's apparel or branded apparel given the weak sentiment of the apparel in China since the second half of last year? And if that's the case, do you have any opportunity for destocking in the coming quarters? The second question is about if there is any plan for the category expansion on top of the apparel given that apparel sentiments is quite weak and if we have more SVIP on our platform, so we can meet their demands of different category, not just about apparel.

If that is the case, what the impact on the margin profile as a whole?

David Cui -- Chief Financial Officer

Among our sale, the first question, among our sales, our business model is a sales over consignment inventories. So majority of our business were done through consignment. So on our balance sheet, we -- the inventory balance is quite small as compared to our total annual GMV. And you can also see the inventory balance is decreasing, thanks to our effort to clear some of our aged inventory.

And to add some color to this and among the inventory balance, quite big portion of that is coming from both our shops and Maxx offline stores. So they have to carry some inventories. So take out that and then the real inventory we carry for our online business is quite immaterial, I would say. Yes.

Eddy Wang -- Morgan Stanley -- Analyst

OK.

Ya Shen -- Chief Executive Officer

Adding to David's point in terms of the inventory from non-sportswear apparel, we do see some [Inaudible] inventory from the fourth quarter because of the weather conditions as well as COVID-19 cases. So it's going to be interesting for us. But on top of clearing excess inventories for brands, we also customer product offerings with some of the core brands, so we are trying to secure the best supply from our brand partners. In terms of the category expansion, in the past winter, really were in the power-related categories, but it's not enough to meet the diversified needs of range of our consumers.

So we are really investing additional efforts in bringing more standardized products to our platform, such as -- for example, we've already built up SVIP special store. We have a dedicated channel for standardized products, so we have a very good cosmetic channel. We have the [Inaudible] channel to attract lot of the consumers to come to us, to us, to look for a unique offering with competitive pricing, to look for blockbuster standardized products. So we are definitely going to increase our efforts on this front in terms of gross margin for standardized products.

Probably some of them may have relatively lower gross margin, but it's really helping to expand our brand portfolio and especially improve customer stickiness and the repeat orders. So the increase in the proportion of standard products, if any, will have limited impact on the overall level of gross margin. And adding to that, actually the conversion for standard products is actually higher than that of apparel related-tariff categories for the same amount of traffic. So that's something we'll look at this year.

Operator

Thank you. Our next question comes from Andre Chang from J. P. Morgan.

Please ask your question.

Andre Chang -- J.P. Morgan -- Analyst

[Foreign language]

David Cui -- Chief Financial Officer

I will answer the first question. So in this year, 2021, our capital expenditure is about RMB3.5 billion, so a little bit over the half of that are actually for Shan Shan and then we also have some payments for completion of our existing warehouses, which is in the work-in-progress. And then also some upgrade of our technology and servers and the like. So that's pretty much the ballpark, but there is no additional other expenditures.

Yes.

Ya Shen -- Chief Executive Officer

In terms of our expansion and for Shan Shan Outlets, actually the Shan Shan business is really doing very well, although last year same-store performance was relatively weaker because of the COVID-19 pandemic, but excluding that impact the same-store performance is actually trending very healthy. We believe that offline outlet is going to present a large addressable market and is going to grow very fast in the next couple of years. So we're going to continue our expansion plan, trying to add two to three offline outlets each year to capture the increasing consumer demand offline. We think this offline outlet business model is very solid, sustainable and very healthy for the long term.

Operator

Thank you. Our next question comes from the line of Ashley Xu from Credit Suisse. Please ask your question.

Ashley Xu -- Credit Suisse -- Analyst

[Foreign language] The first question is about our strategy shift to focus on the core brands. Is there any impact on some user stickiness and purchasing frequency? And my second question is related to the shipping and handling expense. We are seeing that the per order expense is increasing both Q-on-Q and year-on-year. Should we take this new level as a future reference? Is it driven by the structural trend in the industry? Thank you.

Ya Shen -- Chief Executive Officer

In terms of the customer behavior things, actually the second half of last year, especially from the fourth quarter, we began to focus more on core brands. We provide the core brands with certain support in a time of a lot of uncertainties. So we do see many positive developments. For example, customers who attended the sales event in our Super Brand Day sales or Today's Top Brand sales, they tend to have much higher retention rate than those customers who didn't have the opportunity to join this event.

So that actually gave us very strong confidence to continue to focus on the core brand to provide our customers with good high quality merchandises with competitive pricing as long as we have the right brand supply for our customers as they will come more and spend more.

David Cui -- Chief Financial Officer

Yes. So we have been trying to improve our efficiencies over our fulfillment expenses over years. So the more volume we can achieve and then the more efficiencies we can get. So as you can see the number of orders in 2021 has increased as compared to year 2020.

So also we try -- that includes -- we try to find ways to improve our efficiency in the warehouses and then try to reduce the number of returns in exchanges. Those who will all will affect the efficiencies. Having said all this, we have been trying this for years and then we believe that we pretty much achieved the optimized efficiency and we should be able to find ways, but it's going to be limited in future. Yes.

Operator

All right. Now that concludes today's question-and-answer session. At this time, I will turn the conference back to Jessie for any closing remarks.

Jessie Zheng -- Head of Investor Relations

Thank you for taking the time to join us today. If you have any questions or follow-up, please don't hesitate to contact me. We look forward to speaking with you next quarter.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

Jessie Zheng -- Head of Investor Relations

Ya Shen -- Chief Executive Officer

David Cui -- Chief Financial Officer

Thomas Chong -- Jefferies -- Analyst

Alicia Yap -- Citi -- Analyst

Ronald Keung -- Goldman Sachs -- Analyst

Natalie Wu -- Haitong International -- Analyst

Eddy Wang -- Morgan Stanley -- Analyst

Andre Chang -- J.P. Morgan -- Analyst

Ashley Xu -- Credit Suisse -- Analyst

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