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Edited Transcript of VIPS earnings conference call or presentation 27-May-20 11:30am GMT

Q1 2020 Vipshop Holdings Ltd Earnings Call

Guangzhou Jun 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Vipshop Holdings Ltd earnings conference call or presentation Wednesday, May 27, 2020 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Donghao Yang

Vipshop Holdings Limited - CFO

* Jessie Fan

Vipshop Holdings Limited - Head Of IR

* Ya Shen

Vipshop Holdings Limited - Co-Founder, Chairman & CEO

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Conference Call Participants

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* Andre Chang

JP Morgan Chase & Co, Research Division - Analyst

* Eddy Wang

Morgan Stanley, Research Division - Research Analyst

* Han Joon Kim

Macquarie Research - Analyst

* Jialong Shi

Nomura Securities Co. Ltd., Research Division - Former Research Analyst

* Jin-Kyu Yoon

New Street Research LLP - Analyst

* Lixin Ju

BofA Merrill Lynch, Research Division - VP & Research Analyst

* Mon Han Chung

KeyBanc Capital Markets Inc., Research Division - Research Analyst

* Ronald Keung

Goldman Sachs Group Inc., Research Division - Executive Director

* Sally Chan

CLSA Limited, Research Division - Research Analyst

* Thomas Chong

Jefferies LLC, Research Division - Equity Analyst

* Yik Wah Yap

Citigroup Inc, Research Division - MD & Head of Pan-Asia Internet Research

* Yuanyuan Long

Crédit Suisse AG, Research Division - Director & Co-Head of China Internet

* Yue Wu

China International Capital Corporation Limited, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Good day, everyone, and welcome to Vipshop Holdings Limited First Quarter 2020 Earnings Conference Call.

At this point, I would like to turn the call over to Ms. Jessie Fan, Vipshop's Director of Investor Relations. Please go ahead, ma'am.

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [2]

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Thank you. Thank you, operator. Hello, everyone, and thank you for joining Vipshop's First 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'll 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, estimates, 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 and Chairman, CEO; and Donghao Yang, our CFO.

At this time, I would like to turn the call over to Mr. Eric Shen.

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [3]

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Good morning and good evening, everyone. Welcome and thank you for joining our first quarter 2020 earnings conference call. We are pleased to have delivered resilient results in the first quarter of 2020, despite the negative impact from the COVID-19 pandemic. The retail industry was meaningfully impacted by the pandemic, and the apparel category was especially affected due to people leaving their homes less often.

Through this difficult time, we worked closely with our suppliers and, as such, express to continue to provide great product and reliable service to our customers. We also spent a lot of effort in buying medical and sanitizing product, such as face masks and eco wipers that consumers need during this time. We are glad that everyday life in China has returned to normal, and our business has been healthily recovered as well.

Our GMV has grown nicely in May, driven by the consumption recovery in our core categories. In addition, we will be launching our June promotion event soon. We see this year's June promotion event as a great opportunity to help our suppliers catch up on sales while providing our customers with great deals in summer wear at the change of the season.

Looking into the rest of year and beyond, we stay positive about the outlook of our company. We believe now is a great time for e-commerce companies to gain share from offline retailer, and we are especially well positioned to expand our market share in China's discount retail market.

Looking ahead, we will continue to improve on our merchandising capability as our brand partners are facing challenge with excess inventories. We are committed to working with them more effectively while offering the best deals to our consumers, creating a win-win situation for all parties.

At this point, let me hand over the call to our CFO, Donghao Yang, so that he may discuss our strategy in more detail and go over our operational and financial results.

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Donghao Yang, Vipshop Holdings Limited - CFO [4]

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Thanks, Eric, and hello, everyone. We're glad to have finished the first quarter of 2020 with (inaudible) growth that exceeded our expectations and solid profitability even amidst the COVID-19 pandemic. Although our gross margin was impacted during this quarter as a result of having more standardized products with lower take rates during the pandemic, we delivered solid bottom line through the execution of effective cost control. Therefore, in the first quarter of 2020, non-GAAP net income attributable to Vipshop's shareholders increased by 20.8% year-over-year to CNY 986 million from CNY 816 million in the prior year period.

Our non-GAAP net margin attributable to Vipshop's shareholders increased to 5.2% from 3.8% in the prior year period. During the first quarter, our number of active customers remained stable year-over-year, and our total orders increased by 4% year-over-year to 121.7 million from 116.5 million in the prior year period.

We see these metrics as strong results during such a turbulent time, especially since we invested very little into customer acquisition this quarter. In the current environment, we believe the countercyclical nature of our business positions us well for opportunities to gain market share in our core category. Desirable clients that don't currently work with us will be more open to partnering with us to clear their inventory through our platform. At the same time, as offline retail and in-season apparels are facing challenges, our existing suppliers will work with us even more closely and give us more desirable products at deeper discounts.

Going forward, we will continue to balance our top line growth and bottom line, supporting our brand partners where we can to drive more sales for both parties.

Now moving on to our quarterly financial highlights. Before I get started, I would like to clarify that all the financial numbers presented today are in renminbi amounts and all percentage changes refer to year-over-year changes, unless otherwise noted.

Total net revenue for the first quarter of 2020 decreased by 11.8% year-over-year to CNY 18.8 billion from CNY 21.3 billion in the prior year period, primarily attributable to soft consumer demand for discretionary categories, delayed logistics services and slow response from the supply chain during the COVID-19 pandemic.

Gross profit for the first quarter of 2020 was CNY 3.6 billion as compared with CNY 4.4 billion in the prior year period. Gross margin was 19.2% as compared with 20.4% in the prior year period, primarily attributable to higher revenue contributions from standardized products with lower gross margin during the COVID-19 pandemic.

Total operating expenses for the first quarter of 2020 decreased to CNY 3 billion from CNY 3.6 billion in the prior year period. As a percentage of total net revenue, total operating expenses decreased to 15.9% from 16.9% in the prior year period, primarily attributable to strict cost control.

Fulfillment expenses for the first quarter of 2020 decreased to CNY 1.4 billion from CNY 1.8 billion in the prior year period. As a percentage of total net revenue, fulfillment expenses decreased to 7.4% from 8.3% in the prior year period, primarily attributable to the change in fulfillment logistics arrangement.

Marketing expenses for the first quarter of 2020 decreased to CNY 412 million from CNY 781 million in the prior year period. As a percentage of total net revenue, marketing expenses decreased to 2.2% from 3.7% in the prior year period, primarily attributable to reduced spending during the COVID-19 pandemic.

Technology and content expenses for the first quarter of 2020 decreased to CNY 338 million from CNY 383 million in the prior year period. As a percentage of total net revenue, technology and content expenses remained stable at 1.8% year-over-year.

General and administrative expenses for the first quarter of 2020 were CNY 839 million as compared with CNY 669 million in the prior year period. As a percentage of total net revenue, general and administrative expenses were 4.5% as compared with 3.1% in the prior year period, primarily attributable to operating expenses related to our offline stores and share options granted to our co-founders.

Our income from operations for the first quarter of 2020 was CNY 782 million as compared with CNY 863 million in the prior year period. Operating margin increased to 4.2% from 4% in the prior year period.

Non-GAAP income from operations, which excluded share-based compensation expenses and amortization of intangible assets resulting from business acquisitions, was CNY 1 billion as compared with CNY 1 billion in the prior year period. Non-GAAP operating income margin increased to 5.6% from 4.9% in the prior year period.

Our net income attributable to Vipshop's shareholders for the first quarter of 2020 was CNY 685 million as compared with CNY 872 million in the prior year period. Net margin attributable to Vipshop's shareholders was 3.6% as compared with 4.1% in the prior year period.

Net income attributable to Vipshop's shareholders per diluted ADS was RMB 1 as compared with RMB 1.27 in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders, which excluded share-based compensation expenses, impairment loss of investments, amortization of intangible assets resulting from business acquisitions, tax effect of amortization of intangible assets resulting from business acquisitions, investment gain and revaluation of investments, excluding dividends, tax effect of investment gain and revaluation of investments, excluding dividends and share of gain or loss in investment of limited partnership that is accounted for as an equity method investee, increased by 20.8% to CNY 986 million from CNY 816 million in the prior year period.

Non-GAAP net margin attributable to Vipshop's shareholders increased to 5.2% from 3.8% in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS increased to RMB 1.44 from RMB 1.19 in the prior year period.

As of March 31, 2020, the company had cash and cash equivalents and restricted cash of CNY 5.8 billion and short-term investments of CNY 3.4 billion.

For the first quarter of 2020, net cash used in operating activities was CNY 1.7 billion.

Looking at our business outlook for the second quarter of 2020, we expect our total net revenue to be between RMB 22.7 billion and RMB 23.8 billion, representing a year-over-year growth rate of approximately 0% to 5%, primarily factoring in the continued impact from the COVID-19 pandemic. These forecasts reflect our current and preliminary view on the market and operational conditions, which is subject to change.

With that, I would now like to open the call to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Han Joon Kim from Macquarie.

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Han Joon Kim, Macquarie Research - Analyst [2]

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In your opening remarks, you guys talked about the fact that there's more business partnerships that you're doing with brands and that you're doing a lot more promotions into the June quarter. Yet, when I look at your guidance for the second quarter, it's kind of the normal 0% to 5% that we've been giving for the past several quarters. So can you just let us know how you're thinking about the process here, whether it's just the guidance is more a minimum target that you want to hit? And what kind of additional kind of opportunities actually do you see to the June quarter that fundamentally changes your relationship with brands and your opportunity to provide better benefits to consumers?

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [3]

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Thank you, Han Joon. (foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [4]

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Okay. (foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [5]

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[Interpreted] So Han Joon, regarding your question about the trend in the second quarter, so if we didn't have the COVID-19 pandemic in the second quarter, we would have delivered better results, of course. But given that COVID-19 still has some impact in the second quarter, especially in April, even though China was largely recovering in April but apparel categories specifically were still a bit soft then, so the decision we made back in April was that we canceled April '19 promotional events, which traditionally was our semiannual promotional events, due to the softness in apparel in the month of April. But since May, we've seen full recovery in the business, and we've seen really good recovery in the apparel category, driven by the consumption recovery in the now -- in the discretionary categories as well. And if you look into June, in June 18 or June 16 promotional period, which all the e-commerce companies will be participating in, we are also planning to be investing into the June promotional period as our semiannual promotional period in order to capture the growth online, especially as our consumers are moving increasingly from offline retailers to online e-commerce players, and we see great opportunities in the rest of the quarter.

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Operator [6]

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Your next question comes from the line of Thomas Chong from Jefferies.

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Thomas Chong, Jefferies LLC, Research Division - Equity Analyst [7]

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Congratulations on the solid set of results. My question is about the second half outlook. Given the fact that it's recovered fully in the month of June. How should we think about the second half business trends in terms of the user and GMV? And with that, can management also provide some color about the GMV by categories or 1p or 3p in Q2 this year versus Q1?

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [8]

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Thank you, Thomas. (foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [9]

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Okay. (foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [10]

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Okay. (foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [11]

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(foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [12]

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[Interpreted] So Thomas, regarding your first question on our second half outlook, we are quite confident with our second half outlook, given that we know that consumers are increasingly moving online after the pandemic. And also for brands, especially apparel brands, we noticed that a lot of them are talking their offline store openings and incrementally investing more into their online channels. And we also see this as a great opportunity for this year in our core categories. So with that being said, going forward, we will likely be more aggressive in investing into capturing more share in our core categories.

And regarding your second question, the GMV mix of marketplace versus 1p. Right now, we are seeing our marketplace contribution being around 67% of total GMV. And most likely, that trend will continue into the future as these are our non -- our more standardized noncore categories in our marketplace.

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Operator [13]

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Your next question comes from the line of Alicia Yap from Citigroup.

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Yik Wah Yap, Citigroup Inc, Research Division - MD & Head of Pan-Asia Internet Research [14]

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Also, congrats on the solid results. My question is related to user behavior. So being -- sorry, being a leading discount apparel platform, so post to COVID-19, have you seen any meaningful shift or the change of the user behavior or their attitude towards the apparel purchase that might be either positive or negative to Vipshop? And how would you leverage on the positive trend and tackle the negative shift? And how will your strategy change if any effect on your growth rate and margin profile going forward?

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [15]

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Thank you, Alicia. (foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [16]

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Okay. (foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [17]

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[Interpreted] Alicia, after COVID-19, we noticed that consumers still have a very high demand for the apparel category. One trend that we noticed during the pandemic was that sportswear is becoming increasingly popular, and the growth was very fast. But now, since social activities in China are largely back on track, we are seeing women's apparel is also growing quite nicely. And from our perspective, we are making some adjustments based on our popular works in demand from the consumers and giving them the best assortment of products that they are looking for. But other than that, we're seeing a lot of inventory in the market, and we will continue to work with our suppliers to offer the best mix of products at the lowest prices to our customers in order to capture the opportunities in the market.

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Donghao Yang, Vipshop Holdings Limited - CFO [18]

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And one thing to add to that comment. Generally speaking, we will stick to our main strategy, which is focusing on merchandising and apparel, which is a core category. So there will be small adjustments here and there, but our main strategy will not change. We'll stick to it.

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Operator [19]

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Your next question comes from the line of Andre Chang from JP Morgan.

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Andre Chang, JP Morgan Chase & Co, Research Division - Analyst [20]

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(foreign language) So my question is about margin in first quarter and the outlook. We noticed that despite the COVID-19 impact supposedly dragging down the high-margin apparel sales and the deleveraging effect of the economies of scale, we still see the operating margin and margin improve year-on-year in the first quarter. And also, it's already above the level in the second quarter last year. So my question is, while the marketing spending has been cut aggressively in the first quarter, are we going to see, first of all, the marketing spending picking up meaningfully in second quarter? Or has the structure changed our current strategy? To focus on merchandise will not require us to spend as much on marketing? And secondly is that, will we see the margin to improve now sequentially based on more apparel sales and better category mix?

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [21]

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(foreign language) Thank you.

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Donghao Yang, Vipshop Holdings Limited - CFO [22]

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Well, thanks for the question. Well, the reason why our marketing costs went down so much in Q1 was because after the COVID-19 broke out, we decided, right, it was probably not a good time to spend our marketing dollars to acquire more traffic in users given back then most -- almost entire country was locked down and most people just stay at home. Just no matter how hard you try to make them buy any apparel, they will not anyway. So that's why we cut back on our marketing spend dramatically back in Q1. And we started to spend our marketing in early April, and I think we returned back to our normal level of marketing spend as of now. And we do expect to spend -- continue to spend on marketing through the rest of the year and in the foreseeable future.

And as to your second question, we do not provide guidance for margins for the next quarter, but we remain very confident about the long-term prospect of our profitability and margin level.

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Operator [23]

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(Operator Instructions) Your next question comes from the line of Natalie Wu from CICC.

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Yue Wu, China International Capital Corporation Limited, Research Division - Analyst [24]

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Yang-zong, when you mentioned that you are planning to invest heavily to seize the offline-to-online opportunity, can you elaborate more details on that? Will you give more discount to the consumers by offering lower price? Or are you planning heavier sales and marketing expenses to attract new users for the rest of this year?

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [25]

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Thank you, Natalie. (foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [26]

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(foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [27]

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(foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [28]

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(foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [29]

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[Interpreted] Natalie, regarding your question on where we will invest, so since the second quarter, like we mentioned, around late April, we have planned reinvest into marketing again, introducing Vipshop to new customers as well as getting existing customers to come back more frequently. So we are making some changes to our investment strategy. We have invested into some short videos as well as some TV endorsements, and we have seen quite positive customer acquisition, especially from new customers. And also in the past, we said we didn't essentially invest into live streaming, so we are also starting to look into this field, for example, working with lean a little more and so on. But at the end of the day, what attracts customers to come to us and repeatedly come to Vipshop is our merchandising strategy. So continuing to offer customers good brands, high-quality SKUs at deep discounts. So it wouldn't be marketing that attracts customers to us, but we do want to invest in a certain level of marketing so that customers know about us and are frequently reminded of Vipshop.

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Operator [30]

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Your next question comes from the line of Ronald Keung from Goldman Sachs.

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Ronald Keung, Goldman Sachs Group Inc., Research Division - Executive Director [31]

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So question is on competitive landscape. With a larger-than-usual backlog of inventory where brands would like to clear, do you see a chance that they would like to expand their online channels this year? And so looking into, for example, the channels or other channels, how do we see that playing within our position -- leading position in discounted apparel retail?

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [32]

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Thank you, Ronald. (foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [33]

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Okay. (foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [34]

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[Interpreted] So Ronald, yes, you're correct that after the COVID-19 pandemic, we are seeing increased levels of inventory in the market, and many platforms are also selling some off-season discount retail products. Over the years, many new platforms tried to enter this field. So this is not something new. But what keeps customers and suppliers on continuing to work with us is our first-party model. So we actually have a buyer team that chooses the brands and the SKUs and negotiates with our suppliers the kind of prices we'd like to offer on our platform. So we have a lot of experience in this field, especially in merchandising, and we provide best-in-class customer experience as well in the off-season apparel segment. So of course, competition will always exist, so there is a lot of excess inventory but also a lot of players trying to enter this field. But at the end of the day, we believe that it depends on the core competency of Vipshop company to continuing to gain share in this market. And it is our goal to be a major player or a major partner that our brands work with in order to clear their inventory.

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Operator [35]

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Your next question comes from the line of Tina Long from Crédit Suisse.

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Yuanyuan Long, Crédit Suisse AG, Research Division - Director & Co-Head of China Internet [36]

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Just a quick follow-up on the margin question first. Because of the industry-wide very high inventory level, have we experienced like a deeper discount than normal years from the suppliers? And if so, how that would benefit our margins? And if we plan to, like, reinvest some or part of it? And another question is actually on the offline operation. Can I follow up? Because of the COVID, I mean where our offline operations, like, severely impacted in the first quarter, how much revenue is actually generated from those offline? And also, whether things actually have been already returned to normal?

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [37]

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Thank you, Tina. (foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [38]

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(foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [39]

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[Interpreted] So Tina, regarding your first question on the profit side, yes, we are noticing that suppliers are giving us a lower discount than usual as a result of excess inventory in the market. But it is our definition, and what we have done is we passed on the lower discounts to our customers. And in addition to that, we are actually also investing in some areas to lower the prices that we offer to customers with our suppliers. So if we can continue to gain share in this market, then the profit will remain to be very solid as well without having to increase the prices of the products that we offer. (foreign language)

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Donghao Yang, Vipshop Holdings Limited - CFO [40]

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(foreign language) Okay. Let me take your second question. Offline business accounted for about 4% of our GMV in Q1 this year and about -- or less than 2% of our net revenue. So it's a very small part of our overall business. And among our offline business, we have basically 2 models. One is Shan Shan Outlets. The other one is just regular offline stores. Shan Shan has done much better. They have almost come back to its normal level in terms of daily revenue, GMV, and it was profitable. And the other offline business store hasn't done nearly as well. They haven't returned fully to its normal operations. And again, it was not profitable in Q1. But again, the impact on our overall profitability was limited because of its small size.

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Operator [41]

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Your next question comes from the line of Joyce Ju from Bank of America.

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Lixin Ju, BofA Merrill Lynch, Research Division - VP & Research Analyst [42]

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Shen-zong, Yang-zong and Jessie, congrats on a very solid result this quarter and thanks for taking my question. My question is actually a more strategic one because Yang-zong previously just mentioned like actually, Vipshop would like to do, like, a period of time which those suppliers' actually high inventory probably can offer us both deep discounts and also better inventory and greater selection to actually extend our strength in discounted retail. So just want to have actually (inaudible) perspective. Like you gave how long time -- period of time we actually will enjoy such kind of balances and what type of strategy we are actually executing and what kind of strength we want to use throughout this period of time. I.e., like is this -- we want to grow more active customers? Or we actually want to expand more supplier relationships? Or like we want to expand -- sorry, probably strengthen our business model to even some inventory buyouts? Just more qualitative color will be good.

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [43]

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Thank you, Joyce. (foreign language)

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Donghao Yang, Vipshop Holdings Limited - CFO [44]

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Okay. (foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [45]

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[Interpreted] So Joyce, we believe that the benefits from the excess inventory will at least last until the end of this year. And very likely, it'll be much longer than that. So seamless opportunity. We have communicated earlier that we are stepping up marketing slightly to get new customers and existing customers to both come to visit us more frequently and buy more from us because we have a lot of supply. So therefore, what we actually need is more customers to come, both new and existing customers. So it is our goal to expand our customer base in the next few quarters.

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Operator [46]

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Your next question comes from the line of Eddy Wang from Morgan Stanley.

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Eddy Wang, Morgan Stanley, Research Division - Research Analyst [47]

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My question is also related to the user and the marketing expense. So if I look at the user in the first quarter, actually flattish year-over-year, and I think -- I understand it's mainly because of the COVID-19. But given the sales/marketing is also kind of in the first quarter, do you think it's ending the impact from the reduced sales/marketing spending? And on top of that, as you mentioned that you have increased the marketing spending in the second quarter to drive the user growth, can you give us some color in terms of how the user growth has been so far in second quarter? So has the growth actually come back to the growth of second quarter of last year, close to around 20%? And the last one is given the intense competition in e-commerce, have you seen any increased cost of customer acquisition in the second quarter?

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [48]

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(foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [49]

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Okay. (foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [50]

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[Interpreted] So Eddy, regarding your question on marketing expenses and customer acquisition, we are seeing that COVID-19 impact was quite big in the first quarter. And therefore, we stopped marketing investments entirely for a little while. What surprised us positively was that our customers actually remained quite loyal, and our customer number year-over-year remained flattish even though we didn't invest much into customer acquisition or the customer reactivation.

Since the second quarter, we mentioned that we have started to invest into marketing again, and we're seeing quite positive trends in terms of customer growth. So we do believe that right now, there's a big opportunity for us to get more customers to come and visit us. And you can see that we are a discount retailer offering great brands and deep discounts.

And regarding your last question on the customer acquisition cost in the market, we haven't seen much change before or after the pandemic. So our customer acquisition costs remained flattish per customer.

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Operator [51]

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Your next question comes from the line of Jin Yoon from New Street Research.

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Jin-Kyu Yoon, New Street Research LLP - Analyst [52]

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I think on your prepared remarks, Donghao, you mentioned that gross margins trended a little bit lower given the contribution and mix on the standardized products. I apologize if I -- if this question was asked before I dropped off for a few minutes. But related to the standardized product, with COVID-19 largely -- the spread largely behind us and with more availability across the board of PPE products in the marketplace, should we expect the standardized product mix to reverse as we approach the second half of the year and so gross margin should reflect back to plus 20% mark that we saw this time last year? So how should we look at the contribution and mix on the standardized products as we kind of move away from the spread of COVID-19 in China?

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [53]

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Yes. Well, actually, you're absolutely right. So in Q1, we sold a lot more standardized products than we used to, including facial masks and other sanitizing products. And going forward, as our apparel business continues to come back, return to its normal mix level, we do expect our gross margin to recover and to improve and go back to its normal level.

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Operator [54]

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Our next question comes from the line of Jialong Shi from Nomura.

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Jialong Shi, Nomura Securities Co. Ltd., Research Division - Former Research Analyst [55]

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Shen-zong, Yang-zong, Jessie, congratulations on a very solid quarter. My question is about your fulfillment expense. Based on my calculation, your fulfillment expense per order was slightly over RMB 11 per order in 1Q as 1Q was the first full quarter since you outsourced your entire delivery to Shunfeng Express. Just wonder if we should extrapolate this order fulfillment expense in 1Q to future quarters. Or else, just wonder if there is more room for this metric to trend even more in your future quarters.

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Donghao Yang, Vipshop Holdings Limited - CFO [56]

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Thanks, Jialong, for your question. Well, in our fulfillment expenses, actually, there are 2 main components. One is the last mile delivery cost. Since last December, we started working with Shunfeng, and we paid them a predetermined fixed amount per order for their last mile delivery service. So that part is mostly fixed. But in Q1, we also had another component, which is the warehousing component. Since our business was negatively impacted by the COVID-19 pandemic, a lot of the warehousing costs were fixed costs.

So back to your question, going forward, as we continue to grow our business, as, in general, the economy recovers from the pandemic impact, we do expect the -- there is room for us to reduce our warehousing-related costs. So yes, there is room for us to continue to reduce the per order fulfillment costs in terms of absolute RMB.

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Operator [57]

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Your next question comes from the line of Sally Chan from CLSA.

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Sally Chan, CLSA Limited, Research Division - Research Analyst [58]

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I actually have a follow-up question on this GP margin. So for 1 -- for the first quarter, as margin only fell very slightly, like, 1 percentage point year-on-year, so I'm wondering if you can help us think about how we're thinking about the gross margin trend in 2Q. Because from my calculation, like in the first quarter, we should have some benefit, maybe 1 to 2 percentage points, from the discontinuation Shunfeng. And then you'll also have some one-off drivers, like you mentioned, on the low apparel contribution. So I'm wondering if you could tell us roughly how has the apparel contribution changed on a year-on-year basis. And then were there some one-offs or some also other factors like subsidies level changes in the first quarter? I recall we just mentioned we are investing more to offer lower pricing for the customers.

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Donghao Yang, Vipshop Holdings Limited - CFO [59]

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(foreign language) Okay. Thank you very much for your question. Well, again, we do not provide guidance on gross margin or margins in general for the second quarter or for the next quarter. But in Q1, understandably, our gross margin was negatively impacted by the COVID-19 pandemic. We had to sell a lot -- not a lot but substantially more standardized products than we used to with lower margins. So that was one of the biggest reasons why our gross margin in Q1 was lower from a year-over-year comparison perspective. And going forward, as people start to -- so start to go back to work and people's lives starts to go back to normal, people will buy more clothes. And as we explained earlier on the call, we're going to be one of the main beneficiaries of that trend. So we do expect in our future business apparel will go up substantially compared to standardized products, so will -- our gross margin will also improve.

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Operator [60]

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Our next question comes from the line of Hans Chung from KeyBanc.

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Mon Han Chung, KeyBanc Capital Markets Inc., Research Division - Research Analyst [61]

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So I have a question about the average order value. In Q1, it's down 16%, I mean, decelerating from Q1, but I think that's part, I guess, of the mix shift. And then -- but as we have a recovery in apparel into Q2 and suppose the rest of the year, how should we think about the trend for the average order value? Because, I mean, as we see more and more apparel mix, that should be a positive impact. And -- but in the meantime, we also -- we may also see more discount from the platform or merchant, and that could be a negative impact for the average order value. And also, we also implemented that lower shipping threshold initiative last year. So I just wonder the trend for the average order value.

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [62]

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Donghao, Shen-zong, (foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [63]

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Okay. (foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [64]

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[Interpreted] So Hans, to answer your question on ticket size, yes, the ticket size in the first quarter decreased due to various reasons, as you just said. For example, higher standardized product mix. And another reason is we also -- as we focused on deep discounted products even within our apparel categories, our SKU is also becoming cheaper. And the third factor is we immediate our free shipping threshold. It is our intention to get customers to buy as frequently as possible so that even if they only have one item, they can most likely get it from our platform for free shipping. So from that perspective, that may continue to be a decreasing trend in the future. But from our perspective, what we really care about is the ARPU. As long as average revenue per customer continues to be strong, we're not too concerned about ticket size as our CPC fulfillment will cover incremental costs.

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Operator [65]

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Thank you, ladies and gentlemen. Unfortunately, we have run out of time for any further questions. I would like to hand the conference back to today's presenters. Please continue.

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Donghao Yang, Vipshop Holdings Limited - CFO [66]

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Thank you all for taking the time to join us, and we look forward to speaking with you next quarter.

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Operator [67]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]