Ladies and gentlemen, good day everyone, and welcome to Vipshop Holdings Limited's first quarter 2022 earnings conference call. At this time, I would like to turn the call to Miss Jessie Zheng, Vipshop's Head of Investor Relations. Please proceed.
Thank you, operator. Hello, everyone, and thank you for joining Vipshop first quarter 2022 earnings conference call. With us today are Eric Shen, our Co-founder, Chairman, and CEO, and David Cui, our CFO. Before management begins their prepared remarks, I would like to remind you that a discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. 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 U.S. GAAP. Please refer to our earnings release for details relating to the reconciliation of our non-GAAP measures to GAAP measures. With that, I would now like to turn the call over to Mr. Eric Shen.
Okay. Good morning and good evening, everyone. Welcome and thank you for joining our first quarter 2022 earnings conference call. We had slower than expected quarter due to the resurgence of COVID-19 cases in China on top of already challenging macro environment, which dampened the general customer sentiment. Starting in March, with tightened controls and city lockdowns in many places, our warehousing and the logistic capacity has been undergoing serious delays or disruptions. This has undermined our fulfillment efficiency and further discouraged consumers from spending, especially on discretionary items. Despite great pressure on sales and consumption, we remain on track to execute on our merchandising strategy to further strengthen our competitiveness for the long term. We are delighted to see that our proven business model enabled us to sustain a healthy level of profits and achieve the resilient margins through disciplined operations.
In the first quarter, we continued to provide support for core brand, offering them more leverage to improve sales through our upgrade merchant platform. We also brought in many new and trendy brands, enriching product selection on our platform. Furthermore, we expanded our high-value customers. Our active Super VIP customers grew by 37% year-over-year and contributed about 38% of online net GMV in the first quarter. With the COVID-19 outbreak developing, we have responded quickly to changing consumer demands. By leveraging our merchandising capabilities, we added a range of product offerings in non-apparel categories, including products for everyday use. This helped in part offset the soft demand in apparel categories. While we remain cautious ahead amid ongoing COVID-19 flash-ups, we are strongly committed to our strategic position as a discount platform for branded products.
We will take this opportunity to look to create exceptional value for our brand partners and the consumers. At this point, let me hand over the call to our CFO, David Cui, who will go over our financial results.
Thanks, Eric, and hello everyone. In the first quarter, despite soft top- line performance due to macro headwinds, our margins held up relatively well, thanks to our initiatives to manage costs and expenses with greater discipline. Our gross margin showed resilience after we implemented a number of cost saving measures. For example, we were able to effectively improve the margin profile of many product categories after we became more focused on shifting traffic and resources to core brands, while deprioritizing low quality products, low quality brands. Our non-GAAP net margin also stayed well above 5% as we became more efficient in marketing spend. Looking ahead, we will continue to optimize operational efficiency and make every effort to deliver healthy and sustainable profitability. In addition, during the quarter, we had fully utilized the $500 million share buyback program that we announced last year.
On March 31st this year, we announced another $1 billion share buyback program, which we may execute from time to time over a period of 24 months. This demonstrates our confidence in our business potential and our commitment to creating shareholder value for the long term. Now moving to our detailed quarterly financial highlights. Before I get started, I would like to clarify that our financial numbers presented below are in renminbi, and all the percentage changes are year-over-year changes unless otherwise noted. Total net revenues for the first quarter of 2022 were RMB 24.2 billion as compared with RMB 28.4 billion in the prior year period, primarily attributable to soft consumer demand for discretionary categories and a worse impact on warehousing and logistics networks caused by COVID-19 resurgence in China.
Gross profit was RMB 5.0 billion as compared with RMB 5.6 billion in the prior year period. Gross margin increased to 19.8% from 19.7% in the prior year period. Total operating expenses decreased by 11.0% year-over-year to RMB 3.9 billion from RMB 4.4 billion in the prior year period. As a percentage of total net revenues, total operating expenses was 15.4%, which stayed flat as compared with the corresponding period in 2021. Fulfillment expenses decreased by 5.5% year-over-year to RMB 1.7 billion from RMB 1.8 billion in the prior year period. As a percentage of total net revenues, fulfillment expenses was 6.7% as compared with 6.3% in the prior year period.
Marketing expenses decreased by 41.3% year-over-year to RMB 759.3 million from RMB 1.3 billion in the prior year period, primarily attributable to more prudent marketing strategy. As a percentage of our total net revenues, marketing expenses decreased to 3.0% from 4.6% in the prior year period. Technology and content expenses increased to RMB 390.4 million from RMB 337.5 million in the prior year period. As a percentage of our total net revenues, technology and content expenses increased to 1.5% from 1.2% in the prior year period. General and administrative expenses were RMB 1.1 billion as compared with RMB 956.7 million in the prior year period.
As a percentage of our total net revenues, general and administrative expenses was 4.2% as compared with 3.4% in the prior year period. Income from operations was RMB 1.3 billion as compared with RMB 1.5 billion in the prior year period. Operating margin was 5.1% as compared with 5.3% in the prior year period. Non-GAAP income from operations was RMB 1.5 billion as compared with RMB 1.7 billion in the prior year period. Non-GAAP operating margin was 6.0% as compared with 6.1% in the prior year period. Net income attributable to Vipshop's shareholders was RMB 1.1 billion as compared with RMB 1.5 billion in the prior year period.
Net margin attributable to Vipshop's shareholders was 4.3% as compared with 5.4% in the prior year period. Net income attributable to Vipshop's shareholders per diluted ADS was RMB 1.61 as compared with RMB 2.18 in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders was RMB 1.4 billion as compared with RMB 1.7 billion in the prior year period. Non-GAAP net margin attributable to Vipshop's shareholders was 5.6% as compared with 6.0% in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS was RMB 2.09 as compared with RMB 2.41 in the prior year period.
As of March 31st, 2022, the company had cash and cash equivalents and restricted cash of RMB 14.3 billion, and short term investments of RMB 5.0 billion. Looking forward to the second quarter of 2022, we expected our total net revenue to be between RMB 22.2 billion and RMB 23.7 billion, representing a year-over-year decrease rate of approximately 25%-20%. Please note that this forecast reflects our current and preliminary review of the market and operational conditions, which is subject to change. With that, I would now like to open the call to Q&A.
Thank you. To ask the question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question from Thomas Chong with Jefferies. Your line is open.
Hi, good evening. Thanks management for taking my questions. My first question is about the second quarter guidance. Can management comments about the impact of pandemic to our business performance in April and so far in the month of May? My second question is about the second half business momentum. Can management comment about the recovery momentum that we should expect as well as the margin outlook for the year?
晚上好，谢谢管理层接受我的提问。我的第一个问题是关于我们Q二的收入的指引的，管理层可不可以分享一下在疫情底下，我们在四月份，还有现在五月份，我们收入的情况，同比是一个什么样的情况？然后第二个问题是关于我们下半年的一个展望的，想问一下就是我们应该怎么看这个recovery，这个回暖的一个速度，还有就是我们全年的一个margin的情况呢？谢谢。
我回答那个第一个问题，第二个问题，就是我们其实在三月份的时候，大概是三月十几号，其实看到因为疫情在中国的迅速扩散，那么我们其实生意出现了蛮大的变化，原来都比较正常的，在三月十几号出现了很大变化。那么包括其实有两种，一种呢，就是说是因为疫情导致整个供应链出问题，仓库被关了，那么快递受阻等等，那个包括那个品牌发不出货等等，那么大量顾客取消订单等等，那么这是对我们是一个影响。那么这种情况其实一直延续到四月、五月，那么包括现在我们其实手里还有超过一百万的订单，其实还没发出去，因为比如说有上海的问题，那个供应链很多仓库还是锁在那里的问题，有的等于顾客下了订单还没有履约。那么所以说其实目前的情况是这样。那么我们其实预估大概在未来的，比如说在五月份、六月份，其实我们认为还应该会差不多。那么其中我认为其实疫情，因为我们知道中国也不会这么快马上结束，或者哪一些地方搞定了，因为我看最近北京又出现问题，譬如说我们在北京应该有大概百分之多少的订单又不能履约，因为北京在封控，在部分封控。那么包括我们也看到，其实消费者的信心，在三月疫情爆发后其实大受折扣。我们也看到统计局的数字，包括服装类的，整体的销售会跌得很厉害。所以说我们讲的未来五、六月份我们不看好，但是在下半年我们其实觉得也不会太乐观，就是我们认为。但是呢，比现在更差，我估计不至于，但是有可能会好，但是呢，也不会好到哪去。所以说我们这是对未来的预估。那么另外我们公司其实对利润方面呢，我们其实还是有把握的，因为我们认为现在虽然生意差了一些，那么但是因为我们自己公司本身利润比较稳健，那加上呢，我们讲的疫情期间我们也控制了一些没必要的投放，那么我们其实认为我们自己公司在今年假设半年或者未来的一年的其实利润还是有把握的。
The guidance for the second quarter actually reflects our current outlook for the uncertainties from the ongoing and potential restrictions to control the COVID outbreak, as well as the generally weak consumer sentiment. Our business has actually been quite abnormal until, in the middle of March w hen the Omicron outbreak had significantly impacted our business. Our warehousing and logistics capacity was disrupted or delayed, the whole supply chain faced a lot of problems. Some of our warehouses were closed down and our logistics got delayed. Also suppliers that also had constraints in terms of shipping and handling of parcels. Entering into April and then to now May, we actually have been facing continued pressure. I think till today, we still have over 1 million orders that cannot be delivered because of various reasons, including our suppliers were based actually in restricted regions and that actually undermined the fulfillment efficiency.
We expect, for May and June, we haven't seen clear signs of a recovery. We actually don't expect that the COVID impact will, you know, disappear very soon. Especially, we have seen other places like Beijing faced restrictions or controls, and also consumer sentiment, consumer confidence has not come back. We've also seen that the latest NBS data point to a very, you know, sluggish performance for discretionary items, including apparel. Generally speaking, we don't feel very optimistic for the momentum for the second half. We don't expect it will be significantly worse as well.
On the margin side, I think we are pretty confident in maintaining a healthy level of profits and margins. While we face a lot of challenges and uncertainties, we also maintain a very high level of discipline in our operations. We manage our costs and expenses much more carefully. We scaled back a lot of low ROI spending. We are pretty confident that we will deliver healthy and sustainable profitability for this year.
Thank you.
Our next question is from Alicia Yap with Citigroup. Your line is open.
Hi. Thank you. Good evening, management. Thanks for taking my questions. I have a question related to the expansion into the non-apparel products. Can management elaborate a little bit more detail the various kinds of the products, you know, on this category? And can you remind us, is this a strategy, you know, strategic change or the strategic business model shift? Or it is just a temporary approach, so that we can navigate through the soft demand for the apparel business? Second question is, any colors in terms of what are some of the current inventory level for the apparel brand? Can we get any kind of like leverage, or is it just because consumption is so weak? Even though there's a lot of inventory, we can do some promotion discount, but there's still lack of the demand. Any color you can share would be good. [Foreign language].
在最近的过程中，我们发现其实我们的消费者有比较强的标品的购物需求，可能我们在这块如果做得不好的话，消费者其实会衣服在我们这儿买，标品在别的地方买。所以说我们其实做了一些改进，就是我们希望把我们的标品做得更有特色，更有性价比，那么我们不需要太多的SKU，但是我们在常用的这些SKU都要有特色。所以说这是我们现在的标品策略。另外，我们其实标品的话，有包括尤其是夏天，夏天的时候，其实用户对标品的需求会增加。所以说我们其实这是我们整个公司的策略，希望我们标品能做得更强一些，能满足消费者的需求，另外适应这些季节性的需求。另外，尤其在疫情期间，又是另外一码事，就是我们其实看消费者对生活日用品还是增加的。所以说我们其实在疫情期间，我们因为已经有做了一些准备，那么我们继续做一些准备，支持消费者，他可能疫情期间不会买这么多衣服，但是他生活日用品我们还是能补上的。所以说我们其实对整个穿戴类，我们是一个长期的策略，那么希望是提高它的比例。另外，其实主要是提高用户的ARPU，那么这是我们在标品那边的回答。那么刚刚你问的第二个问题，就是关于货品的库存增加。那么因为我们确实看到，因为疫情的原因，其实很多品牌确实遭受到蛮大的打击，包括线下门店的关闭，包括消费的低迷，其实对我们而言，会有更多的货品供给。但是有些还不行，比如说在上海的供应商现在急着要开仓库发货，但是仓库还没解封等等。所以说我们其实希望是对我们而言，我们尽可能地完成这种需求，尽可能地拿更多好的货品。那么我们因为现在对商家而言，可能他们不要求说要卖到多少，就是说希望能快速出清，那么我们其实也在配合他们做一些准备。虽然说市场低迷，但是我们说的就是说低迷没有低迷到这么惨的程度。所以说理论上如果有货品供给那么多的话，其实对我们还是有些帮助的。
Okay. First on standardized products. Actually, I think as a company, we still focus on apparel categories. Currently, we still have 70% generally from apparels and the rest, 30% are from standardized products. Standardized products are a very good complement to our overall platform. They can help us to cater to a diverse range of customer needs, which actually vary depending on season and a lot of other factors. For example, in summer, typically, customers would like to buy a lot of standardized products in addition to summer clothing. Also, we approach standardized products very carefully.
For example, we want to make sure we have the unique supply from top brands and with very competitive pricing. We try to meet customer needs, especially when they shop for clothing. They will have something else to choose from to provide them with a one-stop shopping experience. This is our overall strategy on standardized products. Given the COVID-19 outbreak, I think we proactively added some non-apparel product offerings, especially including products for everyday use to meet customer needs. This is in line with our overall strategy to set on standardized products.
We will gradually improve the contribution from these standardized products to improve the overall customer experience on our platform and also to improve their overall output. On brand inventory, apparently a lot of our brand partners are very hard hit by the COVID breakouts. They faced a lot of store closures, and they have a lot of supply. Generally speaking, I think we have the ability to secure a lot of quality inventory from brands and help them to sell through these inventories very efficiently.
At the same time, some of the brand partners are also facing continued pressure, especially when they are based in restricted regions, including Shanghai. This is a positive to our online business. I think, although generally speaking, the market is in a downturn, but it's not that bad as long as we can help brands to sell through their inventory. I think we will be providing a valuable proposition for them.
Can I have a quick follow-up on the margins for the standardized product given the mix, how should we think about the total gross margin trends, you know, going forward or in the near term?
Okay. For the standardized items, we carefully choose what product we will carry. Generally, we will not accept the product that's with very low margin. Overall, the impact of the margin is not that bad. Also, the apparel product still represents 70% of our total carrying. We are committed to the overall gross margin stability.
Okay. Thank you.
Our next question comes from Ronald Keung with Goldman Sachs. Your line is open.
Thank you, Eric Shen, David, our team. Now, [Foreign language].
Thank you, management. My first question is on your second quarter revenue guidance, whether that assumes a similar growth rate for May and June, of what we've seen in the April run rates, and some expectations on June, 16th for us. Any expectations on that that we're assuming some of the stronger growth, especially into the month of June and some of the cancellation rates that we're seeing. Second is on free cash flows, you know, reduction of that. I wanna hear what were the reasons behind, and besides the buyback program that we've enlarged, I wanna hear any dividend policies that... Any updates on, any of those, any potential, and also for Hong Kong listing. Thank you.
[Foreign language]
Okay. The second quarter guidance actually already factored in the April and the May run rate. I think it's the latter half of May. And we, from our observation, we have had similar downside trend as we saw in April and we expect June will continue this momentum for sure. It's going to be down on a year-over-year basis. And coupled with COVID-19 cases with related restrictions and controls are still going down and the consumption sentiment has not come back yet. So that's creating the reality for this quarter to date. So our second quarter guidance is just a reflection of that reality.
In terms of the cancellation rate, absolutely. Actually from the middle of March, we've seen our cancellations have been going up due to logistics delays, and our cancellation rate actually went up 6 percentage points year-over-year, and it has caused a very significant losses to us. We see increasing cancellations of orders from customers. It actually has dampened the general sentiment to the e-commerce sector. I think we for sure hope that, with the restrictions gradually lifted, well, we expect cancellation rates to normalize over time.
Well, we have been profitable for consequent, over like 38 quarters. We are confident that we will continue to making profit, even though we encounter a difficult time and softer business. In general, the free cash flow should mirror our profitability. In Q1, our operating cash flow turned negative because we made a lot of payments to suppliers and for other miscellaneous expenses. The decrease in accrued expenses and accounts payable is the main reason for the negative cash flow. In the long run, the cash flow should mirror our profitability. Then in terms of the Hong Kong listing, so that is still on our radar.
Our Board and the management team are still evaluating the options and we still got some time to execute the plan and execute the Hong Kong listing plan.
Got it. Thank you.
For dividends... Sorry, Ron. The dividends. We currently don't have a plan to pay out dividends, but we are committed to our share buyback program.
Understood. Thank you.
Our next question comes from Natalie Wu with Haitong International. Your line is open.
晚上好，管理层，谢谢接受我的提问。我想要问一下，就刚刚咱们提到的，沈总您刚刚提到的，咱们要增加标品的这个比例，这个标品具体是指的是哪些品类？和这个19年之前咱们也扩大过一次品类，转向更多标品，这次这个标品品类的这么一个比例增加，里头的这个标品和上次的是不是有区别？然后如果我们转向更多的一个标品的一个销售的话，那和其他的电商平台相比起来的话，那咱们会在这个消费者面前打算如何区分我们自己呢？那我简单翻译一下。
Good evening, management. Thanks for taking my question. My question is regarding with the product mix shift. [ Shen, you've] mentioned that you decided to shift the product mix towards the standardized goods in the coming future. I'm just wondering, can you give us more color on exactly which categories of the standardized products you are referring to? 'Cause back in 2018 and 2019, you've also tried some category expansion. Just wondering if there's a difference compared with last round of standardized product shift. Also, how should we differentiate ourselves from other general e-commerce platforms if we shift the way to standardize the products? Thank you.
我们其实像标品，比如说是像这种美妆啊，居家用品啊，厨房用品啊，包括生活超市啊，包括精品等等啊，比如说保健品啊等等。我们意思是说我们公司的标品跟非标品的，其实就是标品，相对的是没有尺码的这些我们就认为叫非，嗯，那叫标品。那么我们其实像这种品类呢，这个其实跟我们原来的说要做的品类基本差不多，我们也没有说特别要在哪一些品类上一定要冲上去。那么但是呢，我们是有个均衡的发展。那么我们的假设的目标，比如说因为我们认为像目前我们的标品做得如何更有特色，包括尤其是也是极致的性价比。另外呢，非常好的质量，好的品牌，极致性价比，也不排除有品牌给我们专供和定制。我们希望是我们不想用很多的SKU，就是用一些非常特别的商品做出我们的特色，极致性价比。那么这样的话呢，我们来吸引我们的用户，而且呢，他们认为，譬如说在唯品会买这类的标品，其实也是物超所值的，因为唯品会已经帮他们精选过了，所以说我们是这个理念啊。那么我们自己呢想，因为我们的主力那个生意还是穿戴嘛，穿戴是
In terms of strategy on standardized products, actually all the categories are already on our platform, including beauty products, home goods, kitchenware, life and grocery, and healthcare products, et cetera. These non-assigned products are standardized items that we're looking at. We will manage the product offerings very carefully in each category, not necessarily as many SKUs as you see on other platforms. We want to make sure that we can have you know very quality supply from brands and sometimes it may be unique supply from the top brands. It has to be to provide very competitive pricing and a very reasonable gross margin.
We will approach standardized items very carefully. Currently, we have 30% from standardized items. Our goal is to gradually improve the contribution to, let's say, 33% over time, increase of 10% on the current basis. Standardized items are not going to be a drag on the overall gross margin. It actually improves approval from our customers. Over time, we think we will have a more balanced customer experience for our platform.
Got it. Thank you.
Our next question comes from Robin Leung with Daiwa. Your line is open.
Hi. This is Robin asking on behalf of John Choi. Thanks, management for taking my questions. This quarter, the gross margin is slightly higher than our expectation. Is it because of the change in the category mix? Because I remember the SVIPs, the members, they carry lower margins, but the mix this quarter is also higher. Wonder what is the reason that this quarter we see a more better than expected gross margin? Also the trend in the second half, if the SVIP continues to increase the mix, are we going to see any impact on the gross margin? The second question is, could management comment on the user growth trend in the second half?
Okay. This year, we have taken many cost saving measures to improve our margin. That includes the selection of the products and the brands carried on our platforms. For example, we were able to improve the margin profile of many categories, you know, after we shift our resources to the core brands that we selected and deprioritize some of the non-core brands. So that helps improve our margin. For the coming quarters, we will continue to be disciplined and then make sure that we have a healthy margin and eventually achieve a healthy bottom line and net margin.
On the category mix, the apparel still representing 70% of our total GMV, right? Supplemented by the standardized products. As we talked about it earlier, the standardized products, we also carefully choose what to carry to make sure that our overall gross margin will remain stable and potentially we could improve the gross margin also. In terms of the impact of the Super VIP, we know the Super VIP have slightly lower gross margin because of the benefits we provided to the group. Since they spent a lot more, their frequencies, their output are much higher.
Overall, it's just a matter of time when they can contribute it positively to the overall gross margin. It's kind of a balance. In summary, we are committed to the overall improvements of the gross margin. And that...
[Foreign language]
In terms of customer growth for the second half, I think our customer growth has been relatively in line with our overall business performance. Given that our ARPU has actually been not quite stable over time. We will evaluate our marketing spend from time to time, especially as given the many uncertainties going on, we are apparently facing a much less favorable customer acquisition environment. Instead of just throwing money away, we will focus on acquiring high quality customers. We don't want to invest too much on low ROI, you know, customers. We will evaluate their lifetime value very carefully to ensure that they will be a valuable customer to our platform.
We are committed to customer growth, and we will believe that for the quarters ahead, we will maintain a relatively stable customer base.
Thank you.
Due to time constraints, that concludes today's question and answer session. At this time, I will turn the conference back to Jessie for any closing remarks.
Thank you for taking the time to join us today. If you have any questions or follow-ups, please don't hesitate to contact our team. We look forward to speaking with you next quarter.
This concludes today's conference call. Thank you for participating. You may now disconnect.