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.

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 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 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 extensively affected due to people leaving their home less often. Through this difficult time, we work closely with our suppliers and SF Express to continue to provide great product and reliable service to our customers. We also spend lots of effort in biomedical and sanitizing products, such as face masks and alcohol wipers that consumer needs during this time. We are glad that everyday life in China has returned to normal, and our business has been healthily recover as well. Our GMV has grown nicely in May, driven by the consumption recover in our core category. In addition, we will be launching our June promotion events soon. We think this year's June promotion event as a great opportunity to help our suppliers catch up on sales, while providing our customers with good deals in summer wear at the change of the season. Looking into the rest of the year and beyond, we stay positive about the outlook of our company. We believe now is a great time for ecommerce company 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 challenges with excess inventory. 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.

Thanks, Eric. And hello, everyone. We are glad to have finished the first quarter of 2020 with top line 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 selling more standardized product with lower take rate 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 shareholders increased by 20.8% year-over-year to RMB 986 million from RMB 816 million in the prior-year period. Our non-GAAP net margin attributable to Vipshop 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 apparel 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…

[Operator Instructions]. Your first question comes from the line of Han Joon Kim from Macquarie. Please ask your question.

Great. Thank you very much for the chance to ask a question. In your opening remarks, you guys talked about the fact that there's more business partnerships that you're doing with clients 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 the guidance is more a minimum target that you want to hit. And what kind of additional 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? Thank you. [Foreign Language]

[Foreign Language] 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, that apparel category specifically was still a bit soft then. So, the decision we made back in April was that we cancel April 19 promotional events, which traditionally was our semi-annual promotional event 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 e-consumption recovery in the discretionary categories as well. And if you look into June, in the June 18 or June 16 promotional period, which all the e-commerce companies will be participating, we are also planning to be investing into the June promotional period as our semi-annual commercial period in order to capture the growth online, especially as consumers are moving increasingly from offline retailers to online e-commerce players and we see great opportunities in the rest of the quarters.

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

Hi, good evening. Thanks, management, for taking my questions and congratulations on a 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? Thank you. [Foreign Language]

So, Thomas, regarding your first question on the second half outlook, we are quite confident with our second half outlook, given that we notice consumers are increasingly moving online after the pandemic. And also for brands, especially apparel brands, we notice that a lot of them are halting their offline store opening and incrementally investing more into their online channels. And we also see this as a great opportunity to gain share in our core category. So with that said, going forward, we will likely be more aggressive in investing into capturing more share in our core categories. And regarding your second question on the GMV mix of marketplace versus 1P, right now, we're seeing our marketplace contribution being around 67% of total GMV. And most likely, that trend will continue into the future as these are more standardized non-core category in our marketplace.

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

Hi, thank you. Good evening, Shen-zong, Donghao-zong and Jessie. Thanks for taking my questions. Also, congrats on the solid results. My question is related to user behavior. So, being a leading discount apparel platform, so post COVID-19 have you seen any meaningful shift or the change of the user behavior or the attitude towards 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? Thank you. [Foreign Language]

[Foreign Language] Alicia, after COVID-19, we notice 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. By now, 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, what's in demand on the customers end, 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 product at the lowest prices to our customers in order to capture the opportunities in the marketplace.

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. There will be small adjustments here and there, but our main strategy will not change. We will stick to it.

Your next question comes from the line of Andrew Chang from JP Morgan. Please ask your question.

[Foreign Language] So, my question is about margin in first quarter and the outlook. We noticed that despite COVID-19 impact, supposedly dragging down the high marginal apparel sales and deleveraging effect of the economies of scale, we still see the operating margin, net margin improve year-over-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 is the structural change to our current strategy to focus on merchandise will not require us to spend as much on marketing? And secondly, will we see the margin to improve sequentially based on more apparel sales and better category mix? Thanks.

Well, thanks for that question. Well, the reason why our marketing costs went down so much in Q1 was because, after the COVID-19 broke out, we decided it was probably not a good time to spend our marketing dollars to acquire more traffic and users, given back then most – almost entire country was locked down and most people just stayed 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 on 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.

[Operator Instructions]. Your next question comes from the line of Natalie Wu from CICC. Please ask your question.

Hi, good evening. Thanks for taking my question. Shen-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 a heavier sales and marketing expenses to attract new users for the rest of this year? Thank you. [Foreign Language]

[Foreign Language] Natalie, regarding your question on where we will invest, so since the second quarter, like we mentioned around late April, we have decided to really invest 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, but we are also starting to look into this field, for example, working with [indiscernible] 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 a deep discount. 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.

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

Thank you. Thank you, Shen-zong, Donghao-zong and Jessie. The 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 [indiscernible] channels or other channels, how do we see that playing in our leading position in discounted apparel retail? Thank you. [Foreign Language]

[Foreign Language] So, Ronald, yes, you're correct that after the COVID-19 pandemic, we're seeing increased levels of inventory in the market. And many platforms are also selling some of even 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 the field, especially in merchandising and we provide best-in-class customer experience as well in the offseason apparel segment. So, of course, competition will always exist. So, there is always 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.

Your next question comes from the line of Tina Long from Credit Suisse. Please ask your question.

Hi. Thank you, management, for taking my question. Just a quick follow-up on the margin question first. Because of the industry-wide very high inventory level, have we experienced a deeper discount than normal years from the suppliers? And if so, how that would benefit our margins and if we plan to reinvest some part of it? And another question is actually on offline operation. Can I follow-up because of the COVID? Were our offline operations 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? Thank you. [Foreign Language]

[Foreign Language] So, Tina, regarding your first question on the profit size, 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 intention, and what we have done is, we passed on the lower discount 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 our profits will remain to be very solid as well without having to increase the price of the products that we offer.

Okay, let me take your second question. Offline business accounted for about 4% of our GMV in Q1 this year and less than 2% of net revenue. So, it's a very small part of our overall business. More on our offline business, we have basically two models. One is Shan Shan outlets, the other one is just regular offline store. 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 hadn'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.

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

Congrats on very solid this quarter and thanks for taking my question. My question is actually a more of a strategic one because Shen-zong previously – you just mentioned, actually, Vipshop shop would like to – just like a period of time which those suppliers' actually high inventory probably can offer us both deep discount and also better inventory and greater selections to actually extend our strength in discounted retail. So, just want to have a full picture, from Shen-zong's perspective, like you guess, how long period of time we actually will enjoy this kind of balances and what type of strategy we are actually executing and what kind of trends 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 extend more supplier relationships or we want to extend – sorry, probably strengthen our business model to even some inventory, just like more qualitative colors will be good. Thank you. [Foreign Language]

So, Joyce, we believe that the benefit 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, seeing this opportunity, we have communicated earlier that we will be ramping up marketing expenses 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.

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

[Foreign Language] Thank you for taking my question. My question is also related to the user and marketing expense. So, if you look at 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 that sales and marketing is also kind of in the first quarter, do you think it's any – the impact from the reduced marketing spending? And on top of that, as you mentioned that you have increased 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 the second quarter? So, is the growth actually come back to the growth of second quarter of last year, close to around 20%? And last one is, given the intense competition in e-commerce, have you seen any increased the cost of customer acquisition in the second quarter? Thank you. [Foreign Language]

So, Eddy, regarding your question on the marketing expenses and customer acquisition, we are seeing that COVID-19 impacts were quite big in the first quarter. And, therefore, we stopped marketing investment entirely for a little while. What surprised us positively was that our customers actually remained quite loyal, and our customer number year-over-year remains flattish even though we didn't invest much into customer acquisition or older customer reactivation. Since the second quarter remission, 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 is a good opportunity for us to get more customers to come and visit us and see that we are a discount retailer offering great brands and deep discount. And regarding your last question on the customer acquisition costs in the market, we haven't seen much change before or after the pandemic. So, our customer acquisition cost remains flattish per customer.

Your next question comes from the line of Jin Yoon from Newstreet Research. Please ask your question.

Good evening, guys. Thanks for taking my question. I think on your prepared remarks, Donghao,, you mentioned that gross margins trend a little bit lower given the contribution of the mix on the standardized products. I apologize if this question was asked before. I dropped off for a few minutes. But related to the standardized products, with COVID-19 largely – the spread largely behind us and with more availability across the board of 3P 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 mix on the standardized product as we kind of move away from the spread of COVID-19 in China? Thanks, guys.

Yeah. 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 product. 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.

Got it. Thanks, Donghao.

Yeah, thank you.

Your next question comes from the line of Jialong Shi from Nomura. Please ask your question.

Thanks for taking my question. Good evening, Shen-zong, Donghao and 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 the entire deliveries to ShunFeng Express. Just wonder if we should extrapolate this per order fulfillment expense in 1Q to future quarters. Or else, just wonder if there is more room for this metric to trend even lower in your future quarters.

Thanks, Jialong, for your question. Well, in our fulfillment expenses, actually, there are two 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 was 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 – there's room for us to reduce our warehousing-related costs. So, yes, there is room for us to continue to reduce the per order fulfillment cost in terms of absolute RMB.

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

Hi. Good evening, management. Thank you for taking my question. I actually have a follow-up question on this dip in margin. So, for the first quarter, the margin only fell very slightly, 1 percentage point year-on-year. So, I'm wondering if you can help us think about how we should think about the gross margin trend in 2Q. Because from my calculation, in the first quarter, we should have some benefit, maybe 1 to 2 percentage points on the discontinuation of Pinjun. And then, also have some one-off drivers, like you mentioned on the lower apparel contribution. So, I'm wondering if you could tell us roughly how has the apparel position changed on a year-on-year basis? And then, were there some one-off or some 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 customer. Thank you very much.

Okay, thank you very much for your question. Well, again, we do not provide guidance on gross margin or on margins in general for the second quarter – or for the next quarter. But, in Q1, understandably, gross margin was negatively impacted by the COVID-19 pandemic. We had to sell a lot – not a lot more, 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, people start to go back to work, as people's life 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. Our gross margin will also improve.

Your next question comes from the line of Hans Chung from KeyBanc. Please ask your question.

Hi, good evening. Thank you for taking my question. I have a question about the average order value. In Q1, it is down 16%, decelerating from Q1. I think that's partly because of the mix shift. As we have a recovery in apparel into Q2 and I suppose the rest of the year, how should we think about the trend for the average order value because as we see more and more apparel mix [ph] should be a positive impact. But in the meantime, we may also see more discount from the platform are emerging and that could be a negative impact for the average order value. And also, we also implement that lower shipping, the threshold initiative last year. So, just wonder the trend for the average order value. Thank you. [Foreign Language]

[Foreign Language] To answer your question on ticket size, yes, the ticket size in the first quarter decreased due to various reasons that existed. For example, higher standardized product mix. And another reason is, we also – as we focus on deep discounted products, even within our apparel category, certain SKUs is also becoming cheaper. And the third factor is the RMB 88 free shipping threshold. And it's our intention to get customers to buy as easily as possible, so that even if they only buy one item, they can most likely get it from our platform for free shipping. So, from that perspective, [indiscernible] may continue to see the decreasing trend in the future. But from our perspective, what we really care about is the ARPU. As long as the average revenue per customer continues to be strong, we're not concerned about ticket size. As long as we're exceeding the fulfillment, then we'll cover incremental costs.

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.

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

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