Vipshop Takes Defensive Posture As Headwinds Mount

Key Takeaways:

• Vipshop’s revenue fell 11% in the first quarter, and it forecast the decline would accelerate to as much as 25% in the current quarter
• Company last month authorized a new $1 billion share repurchase program after buying back $500 million of shares over the previous year

By Doug Young

Prepare for some turbulence.

That’s the message coming from discount e-commerce company Vipshop Holdings Ltd. VIPS, which has just released quarterly results showing its latest downturn looks set to intensify in the near-term. This kind of expectation management is critical for any good company, as it allows investors to feel like they can see what’s ahead in turbulent times.

In addition to regularly updating shareholders on the headwinds it’s facing, Vipshop is also doing a good job of launching counteroffensives to try to improve its performance, including a major new share repurchase and a belt-tightening that has seen it slash its marketing expenses.

Investors seem to appreciate the company’s efforts, bidding up Vipshop’s shares by 3% in the three trading days since it announced its first-quarter results last Thursday. That put the company’s shares up for the year by the same amount – something most China internet stocks can’t say these days. By comparison, shares of e-commerce rivals Alibaba BABA and Pinduoduo PDD are both down about 28% year-to-date.

Vipshop may also be steadier than its peers because it looks decidedly undervalued at its current price, though it has been profitable for every quarter since 2014. It currently trades at a forward price-to-earnings (P/E) ratio of just 7, compared with a similarly anemic, but still higher, 10 for Alibaba. By comparison, global peer Amazon AMZN trades at a forward P/E of 48, which used to be the norm for such high-growth companies.

Vipshop has managed to maintain its edge in China’s hypercompetitive e-commerce sector by staying laser-focused on its core business of buying excess inventory from major brands and selling it at a discount, similar to the traditional “outlets” business model. A large number of imitators have sprung up over the years, including names such as Fclub, Jumei, Mogujie and Juanpi. But most of those have either vanished or are struggling now.

Vipshop is well aware of the numerous headwinds it now faces, most notably from China’s slowing economy that is putting a big damper on consumer spending. Accordingly, it has gone into a sort of defensive mode focused more on maintaining its current customer base and catering more to big spenders rather than aggressively seeking out new customers.

As it does that, Vipshop slashed marketing spending – which accounts for 11% of its operating expenses – by a hefty 41% to 759 million yuan ($113 million) in the first quarter, according to its latest results.

The company’s other big defensive step is two massive share buybacks, the first announced in March 2021 for $500 million, and the latest announced in March this year for another $1 billion. In this case, the company is really putting its money where its mouth is, unlike other companies that sometimes announce buybacks with big quotas, only to actually exercise small portions of those amounts.

Vipshop said it completed its repurchase of the $500 million worth of its stock from the first program during this year’s first quarter. To put things in perspective, the $1.5 billion represented by both repurchase programs is equal to more than a quarter of the company’s latest market value of $5.7 billion, showing it’s quite serious about using its cash to defend its shares.

Shrinkage everywhere

Having detailed the defensive steps the company is taking, we’ll spend the rest of this space looking at why Vipshop is adopting such a posture. Put simply, all of Vipshop’s major metrics are in decline, and the rate of decline is accelerating.

We’ll begin with top-line revenue, which fell 11% year-on-year in the first quarter to 25.2 billion yuan. The company blamed “soft consumer demand for discretionary categories and adverse impact on warehousing and logistics networks caused by Covid-19 resurgence in China.” Indeed, China’s relentless pursuit of a “zero Covid” strategy has led to major disruptions for nearly all companies that rely on the movement of goods to do business, as major cities often experience partial or even total lockdowns and intercity transport is often restricted to prevent the virus’ spread.

The latest revenue decline represents an acceleration of the 5% drop Vipshop reported in the fourth quarter. Even more worrisome, it predicted the rate of decline would accelerate to another 20% to 25% year-on-year drop in the current second quarter.

The rest of the report is more of the same, though the rates of decline vary. The company’s number of active customers and gross merchandise value (GMV) of products sold over its platforms both fell 8% in the first quarter, roughly double the rate of decline in the previous quarter. The company’s operating margin also deteriorated to 5.1% from 5.3% a year earlier, with the result that Vipshop’s net profit sank 27% to 1.1 billion yuan for the quarter.

Despite facing such strong headwinds, the company is continuing to focus on a two-tiered strategy of diversifying beyond its core apparel business and also moving into brick-and-mortar stores, mimicking a mixed online-offline new retail strategy many e-commerce companies are pursuing.

In the first category, Chairman and CEO Shen Ya, who also uses the name Eric, said apparel products currently account for 70% of Vipshop’s business, with the remainder coming from other “standardized products” such as cosmetics and kitchenware. He added the company’s current aim is to bring such standardized products to about 33% of the total from the current 30%.

In the brick-and-mortar stores category Vipshop paid 2.9 billion yuan in 2019 for Shan Shan Outlets, a leading operator of brick-and-mortar outlet stores based in east China’s Zhejiang province. The company currently has about 10 such Shan Shan outlet malls around China and plans to open several more in the near-term.