There's big opportunity in the business of selling things in China.
In the world of flash-sales sites, China-based Vipshop Holdings (NYSE:VIPS) remains one of the largest: Last year, online shoppers purchased $1.7 billion worth of clothing, shoes, accessories and household products through the online retailer, often at steep discounts.
Its flagship site, VIP.com, more strongly attracts and holds the attention of its daily visitors than Vipshop's rivals, according to some trackers. Estimates by alexa.com recently relayed that visitors to VIP.com viewed on average 11.2 pages, higher than 8.09 pages at Dangdang.com (NYSE:DANG) and 7.2 pages at Jumei.com (NYSE:JMEI).
Vipshop stock is up more than 400% in the last year and 3,000% in the last two years, but there is still much more room to run.
Differentiated business model
I like Vipshop for many reasons, one of which is that it occupies a leading position in a niche segment that can benefit from rising e-commerce penetration and high inventory in the apparel market.
Vipshop's business model differs significantly from both local and foreign peers, which has important implications for its ability to scale revenue and maintain profitability. Some of these points of distinction:
- Mass-market versus luxury. Unlike many prominent flash-sales companies, Vipshop is positioned more in the mass-market segment, appealing to customers who are both brand- and cost-conscious. It intentionally diversified its product offerings away from the luxury segment to avoid sourcing bottleneck issues that others have experienced.
- Efficient supply chain. Vipshop's competitiveness is helped by its efficient supply chain and first-mover advantage: Vipshop has exclusive access to merchandises for over 800 brands; its gross margin rose from 0.1% in 2009 to 25% in the first quarter of 2014; and thanks to the economies of scale, the company's operational ratio dropped from 58% in 2009 to 21% in 2013.
- Brand differentiation. Vipshop offers customers a better shopping experience and solid customer service, including product insurance and seven-day unconditional free shipping and return services. By the end of 2013, it had established four major logistics centers, one each in the southern, eastern, western, and northern sections of the country.
The first quarter of 2014 demonstrated Vipshop's ability to fulfull potential: Active users rose to 7.4 million from 2.8 million just one year ago, while the percentage of customers who had purchased from the company before (repeat customers) had risen to nearly 64% in 2013.
Since the end of 2013, Vipshop has also ramped up marketing activities, such as brand ad campaigns and TV ads through its sponsorship of a popular talent show in China. Its cooperation with Tencent's WeChat should also result benefit its user growth.
Rapid increase in mobile sales
Mobile is increasingly a catalyst for e-commerce as smartphones and tablets play into frequency and engagement, personalization, and in-store price comparison. In fact, the traffic acquisition cost is typically lower on mobile than on a personal computer.
In this year's first quarter, mobile contributed 36% of total Vipshop revenue, way up from the 8% just a year ago. On a sequential basis, mobile revenue grew 71% in the fourth quarter.
Room for expansion
Vipshop's 9.4 million active customers make up only 4% of its target consumer base (urban population aged 25-44). Since Vipshop caters to the entire online shopping population in China, I believe there is much room for growth over the next one to two years.
Vipshop's recent move to acquire controlling interest in Lefeng.com, which specializes in selling cosmetics and fashion products in China, and minority interest in Ovation Entertainment Limited, which focuses on the development of cosmetic products, should offer enrichment in its product category and provide strong mid-to long-term synergy:
- Cross-selling opportunities. There are similar user demographics between female apparel, shoes, and bags (Vipshop) and cosmetics (Lefeng).
- User base expansion. Lefeng's user base, although smaller than Vipshop's, is concentrated in top-tier cities, while Vipshop's users are largely from lower-tier cities.
- Longer-term margin improvement. Stronger bargaining power with brand partners significantly increases the scale of Vipshop's cosmetics offerings.
I believe we will continue to see significant growth potential in both top line and margins. The company's $12 billion market cap is starting to get heavy, though, and is something to keep an eye on. And Vipshop trades at a high 171 times earnings, even though its five-year PEG ratio is only 0.92, which basically means the high P/E ratio is justified given that amazing revenue growth.
Is buying Vipshop stock the easy trade to make here? Definitely not. But don't jump off the bandwagon too early and miss the train.
Sophia Lee has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.