Ladies and gentlemen, good day everyone, and welcome to the Vipshop Holdings Limited's Third Quarter 2024 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.

Thank you, Operator. Hello, everyone, and thank you for joining Vipshop's third quarter 2024 earnings conference call. With us today are Eric Shen, our Co-Founder, Chairman and CEO; and Mark Wang, 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 the safe-harbor provisions of the US 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 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 US 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.

Good morning and good evening, everyone. Welcome, and thank you for joining our third quarter 2024 earnings conference call. Our third quarter results largely meet our expectations aimed at still cautioned customer segment. We moved quickly to adapt our merchandising and operation priorities to external challenges and took concrete measures to find the biggest opportunities for improvement. Consistent with recent industry trends, third quarter sales decline reflect softer results in our more discretionary categories as consumers are facing growing headwind, which weigh on their discretionary spend. On the positive note, SVIP membership growth remained strong and at double-digits. In the third quarter, active SVIP customers grew 11% year-over-year, results in 49% of our online spending. This reflects that our value proposition is well appreciated by our most valuable customers through the best combination of merchandise, value and service. So today, we remain focused on these longstanding factors that have made us a reliable place to shop, and also have been successful in driving topline growth in the past. We are pushing them forward in deeper way, being more relevant in merchandising portfolio, highlighting even more values throughout our assortment and increasing customer engagements through our wallet-free service. This area has been critical important to ensure we continue to differentiate our experience from others. Among the business highlights, we continue to emphasize merchandising capabilities. We believe it's the most impactful way to drive long-term growth. Our team demonstrates that they have the skill set to respond to changing customer behaviors and translate it into business results. Merchandising is in better shape. In the third-quarter, we built assortment more relevant to customer lifestyles and trend-right categories. We leaned into categories with still resilient demand, and we create a better mix of apparel and non-apparel product for family shoppers. As a result, we…

Okay. Thanks, Eric, and hello, everyone. In the third quarter, we maintained disciplined financial management throughout the organization that delivered solid profitability against a weak topline performance. Gross margin of 24.0% was driven by a small benefit from the increased contribution from the higher margin apparel categories as well as other revenues on a year-over-year basis. This was more than offset by the deleveraging impact of lower revenue and continued investment in our team. As a result, on the bottom line, non-GAAP net margin attributable to Vipshop's shareholders came in at 6.3%, which was lower year-over-year, but within our expected range, thanks to our team's meticulous efforts to identify efficiency opportunities. Looking at a still challenging environment, we are laser-focused on a long-term roadmap to bring the business back into positive territory. We continue to invest in our merchandising capabilities, delve deeper category by category to add quality and value that best satisfy customer needs, well reallocation of resource to maximum -- maximize impact on customer mindshare and engagement. And we're always capable of moving these initiatives with a clear picture of their financial implications. We believe we are more integrated in operations now to create a better balance of our focus on sales and the profitability. Turning to capital allocation. Our priority have remained consistent. In addition, to prudently invest in our own business and projects that meet our strategic and financial criteria, we look to support our shareholder return and build on our track record of consistency. In the first nine months of 2024, we have repurchased a total of nearly $500 million with $55.3 million left in the existing $1 billion share repurchase program. Also, we have a new two-year buyback program of up to $1 billion in place. And as a reminder, for 2025, we plan…

[Operator Instructions] The questions come from the line of Thomas Chong from Jefferies. Please ask your question.

[Foreign Language] Thanks management for taking my question. My question is about the recent consumer sentiment after recent government supportive measures. Can management share about the monthly GMV trends in Q4, as well as the expectation on 2025 outlook from the perspective of GMV and the margin? Given our solid margin profile seen in Q3, in particular, 24% of the GP margin, how should we think about the outlook in 2025? And when should we expect our GMV back to positive year-on-year growth trend? Thank you.

[Foreign Language] Okay. First of all, the recent business trends, quarter-to-date, I think we have been into the quarter for over 50 days, and October was really good. But that was apparently because of the much earlier Double 11 promotion, which lead to some frontload of consumption. And if we add October and November to date, we are still within the guidance. In terms of consumer sentiment, of course, the government-sponsored trading programs launched towards the end of September do give us some boost to our certain categories in electronics and home appliances. But since we are primarily focused on apparel categories, we are not very -- a key beneficiary of such programs. And overall, sentiment may have bottomed out following the recent stimulus package, but still, it's a rather rational environment to us. We are still seeing -- customers are still showing signs of being stretched. They're making trade-offs in family budgets, looking for value, focusing on essentials and delaying purchases until the need of moment. So, we haven't seen a very meaningful recovery in consumer sentiment as compared to prior quarters. And lastly, on 2025 outlook, we do believe that it's a -- we think it's pretty unpredictable. We're going to plan our business cautiously. It depends on a number of factors, whether macro is going to have better recovery, whether consumer confidence is going to pick up, and there are a lot of uncertainties. But -- so, we think probably the trend we are seeing in Q4 would be brought forward into part of 2025, but we are doing our best to get back to growth, especially in terms of GMV as compared to a small decline for GMV in 2024. And on margins, I think there are not too much to worry about. We are focused on growing profit dollars. I think in terms of absolute dollar amount and also on the margin side, we should be able to maintain relatively stable levels. And on cost and expenses, we are going to be -- continue to be very disciplined and there could be some changes as to certain, cost and expenses structure, but it should be not big swings from what we had done for 2024. That's all.

Thank you.

We are now going to proceed with our next question. The questions come from the line of Alicia Yap from Citigroup. Please ask your question.

Hi, good evening. [Foreign Language] So my questions is just to follow-up on overall the single-stage performance, and also the 4Q guidance. So just wondering during the single-stage period that 30-plus days, is that you're actually able to achieve a positive growth during the single-stage period? And then, in terms of your guidance, is that conservative because you want to -- not too sure about how the December trends? So that's why you're providing that 5%, 10% decline because the visibility in December, are not sure. And then also on the return rate, so if you can compare the return rate for these single-stage versus last year's single-stage and versus this year June 18? Thank you.

[Foreign Language] Okay. First of all, as to Double 11 performance, I think most of the platforms that comparing it on a full-cycle basis, basically, we did 28 days of promotions as compared to roughly 20 days last year. And if on this full-cycle basis, we are doing very well on -- we are also doing very well with GMV over 20% growth for sure, and also customer and revenue metrics are exceeding our expectations. But if we look at it on an apple-to-apple basis, just comparing the 20 days of the promotional campaigns, actually, it's just in line with our expectations. And we think Q4 is still a challenging quarter, and we give our guidance on a relatively conservative basis. And one factor is also -- is about weather, we do have a very high base of especially in last Q4, we had actually extended periods of cold waves, which benefited our business unexpectedly. So this year apparently is not going to be as cold as last year. And so, we base this net quite -- this weather factor into our guide -- Q4 guidance as well. That's why we think Q4 is going to be a little bit challenging. And lastly, on return rate, because we have a very stable return policy, and also services for like five to six years, and now return rate has been driven in our case, mostly structural factors like apparel contribution and SVIP contribution, et cetera. So basically, our return rate during the Double 11 is actually, are trending in line with our expectation, just adding 2 percentage points in terms of return rate, not as I -- not like in the case of other platforms who had a sudden change in their return policy which lead to extremely high return rate.

[Foreign Language]

You’re welcome.

We are now going to proceed with our next question. The questions come from the line of Ronald Keung from Goldman Sachs. Please ask your question.

[Foreign Language] Thank you, management. Just two questions. One is your gross margins reached record high in third quarter. Last year, fourth quarter gross margins were even higher. As we think about the apparel mix, which usually is good for gross margins and the outlook for gross margins for 4Q. Second is your unit profit decline was wider than operating profit and seemingly a 30% increase in tax expenses. Is that related to our transfer of cash onshore to offshore to finance shareholder returns? How should we think about this income line outlook? Thank you.

[Foreign Language] So, in terms of our GP margin outlook, I think for Q3, we had 24%, which was driven by a small benefit from apparel contribution and also higher other revenue. But looking into Q4, as you know, we continue to invest to grow. So, especially, given the current competitive environment, if we see an opportunity to invest a portion of our current profit margin to gain sustainable growth in dollars, we would do that. So, for GP margin in Q4, we expect it to be marginally lower than Q3, but it should be well within the range of 23%.

Okay. Okay. Thanks for your question. And regarding the first question, you talked about the gross margin. Let me give you some supplementary comments. For the third quarter, the gross margin expansion was primarily driven by the following reasons. The first one is the higher margin apparel categories, which had a higher contribution year-over-year. The second one is we have many cost saving initiatives to improve gross margin, including optimized merchandising portfolio, well-managed customer incentive and so on. The third is higher contribution from higher margin other revenues, that because the other revenues, we also put some of the, like sanction or less revenue, which is recognized as net revenue approach. That means we recognize the net -- recognize the rental income for the sanction or less income. So that means the gross margin is higher, which was booked in the other revenues, okay? So, that is main three reasons for the gross revenue higher than before. And for your second question, that's a very good question, it's regarding the -- with -- regarding the effective tax rate, non-GAAP expenses. Just you mentioned that we distribute some of the dividends from the entities in the China Mainland to the entities in Hong Kong. And the reason is that we need to do the share buyback as we mentioned before. Okay. This quarter we remit around RMB3.5 billion, so that means we have RMB175 million withholding income tax expenses, okay? So, exclude the factor, I mean, the withholding income tax expenses, the ETR would have been around 17% to 18%. I think for the long-term, exclude the withholding income tax impact, the ETR could be still around 17% to 18%. Thank you.

Thank you. Mark.

We are now going to proceed with our next question. The questions come from the line of Roger Duan from Barclays. Please ask your question.

[Foreign Language] I'm going to translate myself. Thank you management for taking my question. I have two questions. First, for third quarter, can management share in terms of different product categories, do we see any -- do we see any difference in terms of performance because it looks like apparels have grown in terms of GMV contribution in third-quarter? And my second question is on SVIP users. Can management share whether we have seen any changes in consumer behavior during the quarter in terms of shopping frequency or average bucket size? Thank you.

[Foreign Language] Okay. First on Q3, category wise, we see apparel have a small decline in terms of GMV while standardized items had a bigger decline, but it's not worsening as compared to prior quarters. And still it's because of the competitive -- competition on price advantage by other platforms. And with that, we are making a series of adjustments, and especially, we are giving out some limited and targeted incentives for example, for family of shoppers to increase their chance of up to -- increase their chance of doing shopping across different categories, especially in daily essentials. And we are seeing some early results from that, and we hope that we would gradually narrow the loss from standardized items. And on SVIP, it -- we are seeing a very solid momentum. We had 7.5 million active Super VIP customers in Q3, which accounted for roughly 49% of our online spending. In terms of customer base, so, that was 11% growth year-over-year. And apparently, new SVIP customers for the quarter, it takes time for them to ramp up their frequency and therefore ARPU. So, they have, to some extent, a dilutive effect on the whole SVIP base. But if we look at the same cohort, for example, the two-year SVIP customers, we see their performance are actually relatively stable. We do see a small decline in ARPU, but that was primarily driven by frequency -- less frequency, and average ticket size remained relatively stable. Apart from that, we actually don't see any additional loss of consumer health as to SVIP customers.

We are now going to proceed with our next question. The questions come from the line of Jialong Shi from Nomura. Please ask your question.

[Foreign Language] So I have two follow-up questions. The first question is about the decline in the ARPU for SVIP member, just try to get more color from management, what were the possible reason for the decline in the ARPU for average spending for the -- for SVIP member? The second question is about the trading subsidies funded by the government, just wondering if any of VIP's -- VIPS' business have benefited or will likely be benefited from this trading subsidy scheme. Thank you.

[Foreign Language] So, for SVIP customers, we do realize that they have a small decline in frequency, even for the same cohort of customers. We are making a lot of efforts to increase engagement with SVIP customers. For example, we're planning to lower the bar for SVIP customers in terms of membership privileges, for renewal and for new customers who first become an SVIP member for the first time. And we are also planning to cover the additional 5% of discount to more brands and merchants. We are launching a lot of online and also ground events, such as the private sales and the special offers, to reinforce the trust and loyalty from our SVIP customers. And I think the essence of this SVIP enhancement program is intended to one, is to increase their retention and also repeat orders. And second is to find more opportunities for cross-category purchases, especially for family shoppers. Because majority of -- most of the SVIP customers actually do have very strong trust and loyalty in Vipshop. And if we provide a great combination of product, value, and series, they wouldn't hesitate to shop with us more often. And that's for SVIP customers. And for trading programs for our offline outlets, actually we -- the primary business too, apparel categories. So we barely benefit from the trading program. And for online business, we expect there should be a couple -- few hundred million, ranging from RMB400 million to RMB500 million additional sales from trading programs. This is not meaningful enough to drive our GMV or revenue. It could be that our platform is still more recognized by customers as a great place to shop for apparel and accessories instead of electronics and home appliances. Having said that, we are moving -- we are trying to cooperate with the government departments to see whether they would be willing to extend the trading programs to other categories. Of course, it hasn't expanded to apparel categories for now, but we do see opportunities if the trading program extends to additional categories. We should be benefiting from that.

Due to time constraint, this concludes today's Q&A session. At this time, I'll turn the call back to Jessie for any closing remarks.

Thank you for taking the time to join us today. If you have any questions, please don't hesitate to contact our IR team. We look forward to speaking with you next quarter.

This concludes today's conference call. Thank you all for participating. You may now disconnect your lines.