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For Vipshop Holdings, Single Digits Are the New Normal

By Rick Munarriz - May 23, 2019 at 11:30AM

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After 11 quarters of slowing top-line growth, it's OK to appreciate the Chinese online apparel discounter for what it has become.

Vipshop Holdings (VIPS 7.16%) is initially moving higher after posting better-than-expected financial results, even if it's growing at a pace that would've seemed brutally unacceptable just a couple of quarters ago. The Chinese online discounter of brand-name apparel saw its net revenue grow by 7% in Wednesday night's first-quarter report. That was its weakest top-line spurt as a public company, but comfortably ahead of the 0% to 5% gain that it was targeting three months ago. 

This is the second time that Vipshop has failed to achieve the double-digit growth that made it a market darling a few years ago. The stock itself had more than doubled for three consecutive years through 2014, making it one of the market's hottest stocks at the time. Life in the single digits is the new normal for Vipshop, and we're not just talking about revenue growth. The stock has been stuck in the single digits since last July.

Vipshop homepage promotion for Forever 21 apparel.

Image source: Vipshop Holdings.

Moving ahead while retreating

Year-over-year revenue growth has decelerated for what is now 11 consecutive quarters, and this will inevitably be Vipshop's ninth consecutive year of slowing top-line growth. As bad as things may seem for the former high flyer, the stock's higher open on Thursday is a sign that investors were bracing for things to be even worse. 

Vipshop stock had been slumping in recent days, plummeting 14% through the four previous trading sessions. Trade tensions between China and the U.S. have been weighing on Chinese stocks, even one like Vipshop that relies largely on selling China-sourced apparel to folks within the country. However, it was also clear that investors were trying to steer clear of Vipshop ahead of earnings, especially after the shares took a 14% hit the day after its poorly received fourth-quarter results in late February. 

Things are far from perfect despite the bulls getting a chance to exhale on Thursday. Vipshop's active customers rose 14% to 29.7 million, and the number of orders placed soared 29% to 116.5 million for the quarter. But gross merchandise volume (GMV) rising just 11% reveals that folks are spending a lot less per order. Vipshop's revenue rising a mere 7% to $3.2 billion -- less than GMV -- is another problematic sign. 

The good news is that Vipshop's bottom line continues to expand. Adjusted earnings rose 12% to $121.6 million, or $0.18 a share. The online discounter doesn't offer bottom-line guidance, but analysts were settling for an adjusted profit of $0.15 a share. This is the fourth quarter in a row that the company beat Wall Street's earnings targets.

Vipshop's trailing earnings figure of $0.61 a share finds the stock fetching less than 12 times its profit multiple based on Wednesday's close. Look out to next year, and its P/E ratio -- like its stock price and top-line growth -- is also in the single digits. In short, it's not just the marked-down brand-name apparel that's cheap when it comes to Vipshop these days. 

There's a lot of work to do at Vipshop, and it's disappointing to see that growth is decelerating despite the partnership it landed with two of China's e-tailing giants last year. It's also disheartening to see the company eyeing 0% to 5% in net revenue growth for the current quarter, even if that exact guidance worked out brilliantly last time out.

But with net margin finally growing again after two years of contracting while it was in a phase of heavy promotional activity and costly fulfillment initiatives, Vipshop looks better now as a slow-growing e-tailer than it did just a few quarters ago. 

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