Ladies and gentlemen, good day everyone and welcome to Vipshop Holdings Limited second quarter 2020 earnings conference call. At this point, I would like to turn the call to Ms. Jessie Fan, Vipshop's Director of Investor Relations. Please proceed.

Thank you operator. Hello everyone and thank you for joining Vipshop's second quarter 2020 earnings conference call. Before we begin, I will read the Safe Harbor statement. During this conference call, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations, assumptions, estimates and projections about Vipshop Holdings Limited and its industry. All statements other than statements of historical facts we may make during this call are forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as anticipate, believe, continue, estimate, expect, intend, is or are likely to, may, plan, should, will, aim, potential or other similar expressions. These forward-looking statements speak only as of the date hereof and are subject to change at any time and we have no obligation to update these forward-looking statements. Joining us on today's call are Eric Shen, our co-Founder, Chairman and CEO and Donghao Yang, our CFO. At this time, I would like to turn the call over to Mr. Eric Shen.

Good morning and good evening everyone. Welcome and thank you for joining our second quarter 2020 earnings conference call. We delivered robust financial and operational results in the second quarter of 2020. Due to our solid execution on the merchandising strategy, in the beginning of May we saw strong recovery in apparel demand and acted swiftly to help our suppliers destock their inventories after COVID-19. We launched a successful promotional campaign in June offering customers the best deal while helping our suppliers monetize their inventory more efficiently. During the quarter, total active customers grew by 17% year-over-year to 38.8 million from 33.1 million in the prior year period. In addition, our conversion rate and customer stickiness both improved. In the second quarter, conversion rate for our app increased by 10% year-over-year and repeat customers as a percentage of total active customers increased to 90% from 87% in the prior year period. Looking into the second half of the year and beyond, we will continue to focus on enhancing the product offering on our platform, providing our customers with a differentiated experience as compared to other marketplace platforms. We believe we are well-positioned to continue to gain share in China's discount retail market delivering solid shareholder return over time. Lastly, today we announced that our CFO, Donghao Yang, will step down from his current position in November. I want to take some time to thank Donghao for his years of hard work and the contribution to Vipshop. Our Board has appointed Donghao as a new Non-Executive Director, effective on the day of the change of his position. We are delighted that he will continue to be part of the Vipshop family as a member of our Board. Donghao has served as our CFO since 2011. In the past nine years, he made significant contribution to our transformation from a privately-held company into a publicly-listed company. He has helped the company build a solid finance team with effective internal control systems since our IPO on behalf of all of us at Vipshop. I would like to thank Donghao for his leadership, professionalism, and strong work ethics. I wish him better luck with his future endeavors. We have already started the search process for a new CFO.

Thanks Eric and hello everyone. As Eric noted, I will be stepping down from the CFO position in November for personal reasons, after we report results for the third quarter. I would like to open up by saying that it has truly been an honor to be able to serve as Vipshop's CFO and grow with the company in the past nine years. I have made many trusted friends along the way and will always cherish the experience we had together. I would like to thank Eric, Arthur and other colleagues for their support and friendship along this journey. I look forward continuing to serve the company in the capacity as a Non-Executive Director of the Board. I trust that the company is well-positioned to further fortify its leading position in China's discount retail market and have full confidence in Eric, Arthur and the team to continue to deliver outstanding results going forward. Turning to our results for the second quarter of 2020. We delivered solid topline growth coupled with year-over-year improvement in profitability this quarter, specifically non-GAAP net income attributable to Vipshop's shareholders increased by 24.3% percent year-over-year to RMB1.3 billion from RMB1.1 billion in the prior year period. Our non-GAAP net margin attributable to Vipshop's shareholders increased to 5.5% from 4.7% in the prior year period despite aggressive reinvestment in coupons and marketing expenses related to this year's June promotional campaign. We were able to achieve these solid results because of our focus on optimizing our product assortment and providing our customers with superior customer experience. In the second quarter, GMV contribution from apparel-related categories increased to 69% from 63% in the prior year period and GMV contribution from our Fengqiang and Kuaiqiang channel reached 50% of our online GMV. Going forward, we will continue to balance our…

[Operator Instructions]. We have the first question coming from Alicia Yap from Citigroup. Please go ahead.

Hi. Good evening, Eric, Donghao, Jessie. Thanks for taking my questions, and thank you, Donghao, for your service and best wishes to you. So my question is related to the sell-through rate. So I think, remember in the past, management noted that the sell-through rate for most of the fashion sales merchandise is about 50%. So wonder if there has been any change on the sell-through rate now? Any difference by the product categories? Can also remind us the rough percentage of the merchandise that currently store or utilize our warehouse versus those that you have to ship back to the suppliers after the sales end? Thank you.

[FOREIGN LANGUAGE] So Alicia, we no longer actually track the sell-through rate as closely given that we are largely connected with the inventory systems of that of our suppliers and our logistics model has changed from before the fact that's been tapped up to JIT and JITX. So the just-in-time model and the single supplier order shipping directly from the supplier's warehouse to the end-consumer model. And therefore, except for the products that we purchased outright, we no longer have the concept of a sell-through rate. And regarding your question, first-in, first-out, that's a very small percentage because the majority of our products are now in JIT and JITX.

Okay. Thank you.

Thank you. We have the next question coming from the line of Thomas Chong from Jefferies. Please go ahead.

Hi. Good evening. Thanks management for taking my questions. I have a question about the business trend in the month of July and August. Can you comment about how the GMV is trending and our expectations in terms of the user and GMV in the second half? We noted that in Q2, the quarterly net add is quite solid. I just wanted to see how we should think about the second half outlook? And then a very quick question is about the competitive landscape and our thoughts on live streaming online shopping? Thank you.

[FOREIGN LANGUAGE] So Thomas, after COVID-19 impact, we still saw quite positive trends in July and August, given that more people are moving online to make their purchases as opposed to before. Therefore, we have seen quite positive trends. But the third quarter is traditionally a light season without promotional events and is also a light season for the apparel category. We have higher and better expectations for the fourth quarter where apparel ticket sizes are much larger and the ticket sizes as well as the promotional events in the fourth quarter that we will run as well as industry-wide promotional events gain market share. So we are quite positive about the second half outlook. [FOREIGN LANGUAGE] So Thomas, regarding your second question on competition and our views on live streaming, after the COVID-19 outbreak, there is a lot more inventory in the market as compared to before and a lot of brands are looking to expand channels including brands that didn't work with us and that are now working with us. So the key is, which channel can monetize the inventory for the brands more efficiently. And therefore, we will also be executing on our merchandising strategy to gain share. Regarding your question on live streaming, we have tried live streaming e-commerce for about four months now. We have seen some positive trends. We are still in the early stages to explore this concept, and we will continue to explore different formats, for example, short videos and live streaming.

Thank you.

Thank you. We have the next question coming from the line of Binnie Wong from HSBC. Please go ahead.

Hi. Good evening management. And hi, Donghao. So sorry to see you go. It has been a great pleasure to work with you for all these years. So the question here is that, if you look at the gross margin, it seems to be slightly lower on a Y-on-Y basis, about two bips, two points lower. I am just wondering, any category mix change? And then if you look at the marketing cost ratio, it seems to be quite high since basically, higher since 3Q 2018 to around like 4% or so. So how do we see the full year sales and marketing cost ratio should trend? And then if we can understand better in terms of sales and marketing, how much of that is related more as to user acquisitions, how much is it related to couponing, it will be great? Thank you.

Okay. Well, thanks, Binnie. Yes, you are right. I mean I have been with the company for nine years and I really love this company. But I think it is probably the right time for me to move on. But as I will be still stepping down as the CFO of the company, I think that at the same time, I will be appointed as a new Non-Executive Board Director; and in that capacity, I will still be doing my best to try to contribute to the prosperity and growth of Vipshop. So no need to worry about that. So back to your question about the business. So gross margin, yes, you are right. On a year-over-year basis, gross margin for Q2 was like about 2 percentage points lower than Q2 of last year. And the reason behind that is because if you look at our operating expenses, total operating expenses as a percent of revenue, it was down by 2.7% compared to Q2 last year. So our strategy is to try to grow the company as fast as possible while maintaining a healthy margin level. So now that we are able to save costs and drive down the operating expenses as a percent of revenue, we want to use some of that savings to reinvest in the topline growth of the company. So one of the things that we did was to offer more coupons, rebates and discounts to our customers to drive, first, topline growth and second, new customer and total customer growth. So if you look at our customer growth in the past, Q2 this year it was like 17% year-over-year which was quite impressive. And marketing, yes, you are right. I mean marketing expenses as a percent of revenue went up slightly in Q2, partly because in Q1 due to the Coronavirus pandemic crisis we made a decision not to spend too much on marketing. But in early May, we saw the market was quickly recovering, the demand was coming back very fast. So we decided, all right, it's clearly the time for us to spend on marketing again to drive traffic, customer growth and eventually topline growth. And for this whole year, we do not expect the marketing expenses as a percent of revenue to be significantly higher than last year. It will probably be slightly higher but not significantly higher. Again, so our strategy is to grow as fast as possible while maintaining a healthy margin level.

And as for the last bit, our marketing expenses are all in customer acquisitions whereas the coupons and the discounts are accounted for in our gross margin. So it's separate.

Thank you. Thank you Donghao and Jessie. So is that the reason also why gross margin has been trending down a bit because that we have also been giving out more coupons? Or is it by any reason for category mix?

The what? I am sorry, Binnie.

Yes. Sorry. Hi Donghao, Sorry, I was just thinking that is that also the gross margin trending down right around twp percentage points lower than last year? Is it also because of like the coupons? Or is it because of category mix change?

What change? A category change. All right. Okay. So for this past Q1, I think the main reason for the decline of our gross margin was a change in our category mix. But for Q2, I think it was mostly because of our reinvestment efforts to provide more coupons and discount for our customers.

Thank you sir. We have the next question from the line of Joyce Ju from Bank of America. Please go ahead.

Thanks management. Congrats on the solid result this quarter. And Donghao, thanks for all your [indiscernible] efforts and help. Yes, my question is actually regarding the user growth and also the sale and marketing. For the user growth this quarter, we have seen the user growth actually reaccelerate from the 1Q and the growth rate is actually similar to the second half last year. Just want to just make sure the company will continue to invest in this front and shall we expect a user growth like similar to this quarter's growth rate? Because we know this quarter we have like bit promotions and industry-wide the user growth seems like all pretty strong. Should we expect a seasonality in user growth as well or we believe this will be more consistent? And the second question is, we are currently actually Vipshop doing a lot of like branding marketing like advertising on Hunan TV or like sponsor a lot of TV shows. May we have a breakdown for our sales and marketing, like what percentage of them are actually doing the branding? What percentage of them is actually using as online acquisition for traffic? Yes. Thanks a lot.

[FOREIGN LANGUAGE] So Joyce, regarding your question on the customer growth, we actually started to invest in marketing again towards the end of April because before April, due to the pandemic, we were quite cautious about investing into marketing. And after the situation has come, in late April and early May, we started to invest heavily into both TV show endorsement as well as digital advertising. Because people were staying home a lot, watching TV, on the iPad, we have seen quite positive results from the TV show endorsement as well. We actually saw a pretty solid result in terms of both new customer acquisitions as well as spending money in reactivating, what we call, old-old customers, so people who have shopped with us a long time that haven't really shopped with us in awhile. And we have seen positive trends in both. In the back half we will continue to invest into marketing and we expect new customer growth trends to be positive going forward as well. [FOREIGN LANGUAGE] Joyce, regarding your second question on the division between targeted advertising and branding, if we were spending $3, then $2 of them will be spent on digital advertising, so very targeted. And then about $1 will be spent in terms of branding. The branding results show up slower, not as immediate. But we do see that it does remind a lot of new customers to download our app as well as old customers to revisit our platform. So we are actually quite happy with the distribution between the marketing budget right now.

Thank you. We have the next question coming from the line of Eddy Wang from Morgan Stanley. Please go ahead.

Hi. Management, thank you for taking my question. And best wish to Donghao. So all my question is about the brand inventory level. So I think you mentioned last time that you expected the inventory issue of brands will sustain through the end of this year. But if you look at the June and July, the apparel demand in China is actually quite strong and we all understand that a lot of platform, including what we are actually doing quite a bit of promotion during the June and July period. So I just want to understand that your view on the inventory issue pertaining to the end of this year? Is there any change in your view? Or you still kind of hold this view? Thank you.

[FOREIGN LANGUAGE] Eddy, we are still seeing high inventory levels in the market as a lot of brands are coming to us to monetize on our asset inventory. So we believe that this trend will continue into the second half of this year and into next year. For example, before we did not clear inventory that's over two years for our suppliers, but now that we have opened an inventory clearance channel on our platform to help our suppliers clear the older inventory as well. So we do believe that there is plenty of inventory in the market for us to clear in the coming years.

Thank you. We will move to the next question. The next question comes from Han Joon Kim from Macquarie. Please go ahead.

Great. Thank you for the chance to ask a question. Can management just kind of help us understand perhaps the TAM for our business? And this is asked within the context of recognizing that if, within discount and retailing, I think our vip.com kind of tends to focus a little bit more on premium mass segmentation, kind of Shan Shan initiative where we are focused a little bit higher than that and Vipmaxx a little bit lower than that. But the bulk of what I think investors or shareholders of VIP kind of get to see and monitor is really the premium mass segment effectively. So just as we grow our user base, I don't know how you guys think about what the number long term might be for you guys in terms of active user base? Thank you.

[FOREIGN LANGUAGE] So Han Joon, we are a discount retailer and a lot of customers actually do like to buy things on discounts. And therefore, we believe that our customer base can be very wide. On a large picture, we believe that our addressable market can be as high as 300 million customers.

Yes. And to add to that, we are not just any discount retailer. We are discount retailer as a brand. So this is what's unique about our business model. So we sell plenty of products at steep discounts to our customers. The size of the channel for our business, we believe, is very, very high. But it's hard to imagine why anyone just wouldn't like to have a brand product at deep discount. So we think that the TAM is going to little big. And also, if you look at the largest discount retailer in the world, TJX. For the North American market, the total population is over like 300 million, but one-fourth of the population size of China. But they do like $40 billion of sales a year. And Vipshop this year, we only do like one-third, like around one-third of that. So the growth potential for our business model and for Vipshop, I think, is so huge.

Thank you. We have the next question coming from Jerry Liu from UBS. Please go ahead.

Hi. Thank you management. And Donghao, all the best in the future, I would like to go back to some of the earlier questions about competition. And my main question is, if we look at June, roughly you know maybe June, July, May as well, when demand has started to recover. In this period, what does competition look like? Were there any areas that surprised to be more positive or more negatively, particularly promotions during the 6/18 shopping festival? Was that more intense or expected or less intense than you thought? And given all that, what should we expect for 11/11 shopping festival this year? Thank you.

[FOREIGN LANGUAGE] So Jerry, regarding competition, we always see competition everywhere. It's always been quite fierce in the e-commerce space and there's always more players entering. But we do believe that the market is big enough and continues to grow. And therefore, the key is for the platforms to execute on their strategy and gain share and gain customers from their strategy and execution. So from that perspective, it's not just May, June, July, but rather that for the rest of this year and beyond, we expect different platforms to continue to find different ways to sell more products and gain more customers. And we, of course, will continue to actively work with our suppliers to help them monetize their inventory and execute on their merchandising strategy.

Thank you. We have the next question coming from the line of Veronica Shen from China Renaissance. Please go ahead.

Hi management. Thanks for taking the question. And all the best to Donghao. Well, my question is regarding your ticket size, the order size. Since we have lowered the free shipping threshold for more than half a year, how should we anticipate the order size going forward? Will it stabilize at a certain level? Or if we will have down trend pressure? Thanks.

I am sorry. Are you talking about the RMB88 for free shipping?

Yes. I am thinking about the order size since we have lowered the free shipping total to RMB88 from RMB288. So I am thinking about how should we anticipate the order size going forward?

[FOREIGN LANGUAGE] Veronica, after we announced the lower free shipping threshold to RMB88, ticket size came down slightly but also customers are buying more frequently. In the first quarter, the ARPU and ticket size trends were clouded by the COVID-19 impact. But since the second quarter, we have seen healthy trends as we have acquired a lot of new customers as well as reactivated a lot of, what we call, old-old customers. They shop less frequently and buy less than very loyal existing customers. And therefore, it dragged down the average ARPU. But in the second half, we believe that we can continue to increase these customers' shopping frequency and increase ARPU over time as well.

Thank you. We have the next question coming from the line of Alex Yao. Please go ahead.

Thank you management for taking my question. And Donghao, best wishes to your next journey. I have a question regarding the user growth trends. What drove the 17% year-on-year growth of active customers? And what was your user acquisition strategy into second half? What are the financial investment you need to prepare for the new user growth in second half? Thank you.

[FOREIGN LANGUAGE] So Alex, regarding user acquisition, in the second half we will continue to increase marketing expenses as compared to the first half. In the second quarter, we have only actually invested into marketing expenses in May and June and did not invest in April. But we still see very positive user growth trends. And therefore, we do expect that the second half trend should be better than what we see right now given that our new customers actually decreased year-over-year in April.

Thank you. We have the next question coming from the line Hans Chung from KeyBanc Capital Markets. Please go ahead.

Good evening. Thank you for taking my question. And best wishes to Donghao. So my first question would be just I wanted to follow-up on the gross margin. So obviously, we have some promotion and coupons stuff in the second quarter. And then I just wonder how should we think about the second half, especially the first quarter? Should we think about the promotion activity will be even stronger than second quarter? And then, second question will be a broader question about the longer term outlook. So can management share your view on medium term growth outlook for the, let's say, two to three years/ Are we able to get back to the top of the CAGR while continue to maintain a stable margin or even greater margin profile? And to achieve that, what kind of strategy we need to do? And then just hope to hear some thoughts from the management team. Thank you.

All right. Well, thanks for the question. Well, as we said earlier, our overall strategy is to grow our business as fast as possible while maintaining healthy margin level. So while we do not provide any guidance for our Q3, Q4, for gross margin, but what I can tell you is as we continue to be able to say, our operating expenses such as fulfillment cost, we will be able to be having room to provide more discount coupons to drive topline growth and customer user growth. So that is our strategy. And two to three years forecast, well, of course, we will be doing our best to drive our topline growth as fast as possible and obviously we will be very happy to see if we can have like double digit growth, as we mentioned. But again, we do not provide guidance for topline growth beyond the next quarter. But we will do our best to achieve the fastest possible topline growth.

Thank you. We have our next question coming from the line of Tian Hou from T.H. Capital. Please go ahead.

Yes. Good evening management. And best wishes to Donghao. So the question is on the product category mixture. So we started just focusing on apparels. So I wonder what's the current product mixture? And going forward, what are some other categories that management wants to add in more weight to the product portfolio? So that's the number one question. Number two is regarding our technology and content expense. I see that item as a percentage of revenue is coming down. I wonder going forward, how this like is going to look like? Thank you.

[FOREIGN LANGUAGE] So regarding your first question, Tian, our core capability like in the wearable apparel related category which contributes to over 70% of our GMV. And that's where our expertise ism especially in the merchandising side. Therefore we will continue to expand our market share and grow our share in these core categories. We are not looking to enter any new categories aggressively at the moment as we believe there is plenty of market share to gain and plenty to grow in the apparel category. [FOREIGN LANGUAGE] Regarding technology expenses. We expect it to be rather stable going forward as we a very mature setup already and we are investing incrementally a little more into personalization. But if technology expenses increases in the future, it will not be meaningful. It will be a very slight increase.

Thank you. We have the next one coming from the line of John Choi from Daiwa. Please go ahead.

Thank you very much for taking my question. And all the best wishes for you Donghao. My first question is just on your new user acquisition. Can you kind of, management, give us color about the breakdown between lower tier cities? And also if you could share with us some metrics for the past, I would say, couple of quarters of the user, spending behavior of these new users including the old users that you mentioned? Are you seeing a nice gradual increase of the average spending? And my second question is just a quick follow-up. I think about on the prepared remarks, you guys mentioned that Fengqiang and Kuaiqiang are now 50% of the overall GMV. As this continues to grow, how would this impact our gross margin? Thank you.

[FOREIGN LANGUAGE] So our new customers come from across the board. But lately, we have noticed that slightly more come from Tier 4, Tier 5 and Tier 6 cities. And new customers are also younger on average, a lot of post-90s and post-2000. [FOREIGN LANGUAGE] Regarding the ARPU trends for new customers, it's always been the case that when new customers first come in, they will not spend a lot. But as they become more active and stickier to the platform, their ticket sizes and their shopping frequency will also improve. So we continue to see these healthy trends. [FOREIGN LANGUAGE] And the last question, to answer your question regarding Fengqiang and Kuaiqiang. These channels will not impact our gross margins. We plan our gross margin as whole and Fengqiang and Kuaiqiang are not especially a margin drag as compared to other platforms.

Yes. Just to add to that, Fengqiang and Kuaiqiang, the prices are really cheap, but our take rate aren't very much different from other channels. So it won't be a drag on our gross margin.

Thank you. I will now like to hand the conference back to our host. Please go ahead.

Thank you all for taking the time to join us today and we look forward to speaking with you next quarter. So please keep in mind, next quarter, it will still be me. Thank you. Bye, bye.

Thank you. Ladies and gentlemen, that concludes our conference call for today. Thank you all for your participation. You may disconnect your line.