Discount e-commerce platform Vipshop has gained approval to spin off two of its offline outlet mall projects into a real estate investment trust (REIT), with 18 additional similar projects currently in the pipeline.
Key highlights: - Vipshop reported a 1.2% year-on-year increase in first-quarter revenue, marking only the second quarter of growth in the past eight quarters. - The company's offline outlet business demonstrated robust growth, partially offsetting the weakness in its traditional discount apparel e-commerce segment.
As e-commerce becomes a mature narrative, major players are seeking new stories to sustain investor interest in their stocks. Alibaba (BABA.US; 9988.HK) is focusing on AI and cloud services, JD.com (JD.US; 9618.HK) is positioning itself as a diversified enterprise spanning healthcare and logistics, while Pinduoduo (PDD.US) is attempting to impress investors with the explosive growth of its overseas Temu business.
As for the veteran discount e-commerce firm Vipshop Holdings Limited (VIPS.US), it is still striving to move beyond the early success of its "daily deals" model. This model, which primarily involved selling branded apparel at low prices through group-buying formats, has seen its growth momentum gradually diminish in recent years, leading to a decline in the company's revenue starting in 2024.
In a sense, the company is undergoing a "back to the future" transformation. Its latest financial report released on Thursday indicates that its offline outlet business is achieving unexpected success. Although the company has not yet separately disclosed specific revenue for this segment, its strong performance appears to align with the recent trend of consumers increasingly favoring "experiential shopping." This shopping approach differs from traditional retail browsing; consumers often make special trips to outlet malls or places like Walmart's membership-based Sam's Club, viewing shopping as an experience that combines consumption with leisure.
Vipshop has not historically placed significant emphasis on this segment, with its offline operations primarily revolving around the Shan Shan Outlets. However, this business provided a few bright spots in the latest results, including the company's plan to spin off the property assets of the Shan Shan business into a REIT.
Vipshop indeed needs some new highlights, as its "daily deals" model is no longer novel. Despite stagnant revenue growth, the company maintains decent profitability. However, its stock trades at a price-to-earnings (P/E) ratio of only about 7 times, less than one-third of Alibaba's 21 times and JD.com's 24 times. Even Pinduoduo, the parent company of Temu which has faced pressure in multiple markets recently, currently trades at a P/E ratio of 10 times.
Vipshop's latest results show that its overall business remains weak, even though the company achieved revenue growth for only the second time in the past two years. Furthermore, the company forecasts a return to revenue decline in the second quarter, indicating a rather pessimistic outlook for the near term.
Founder and Chairman Shen Ya noted that performance was relatively strong during the Lunar New Year holiday in February, but conditions weakened rapidly afterward. "After the holiday, we saw a significant slowdown in sales in March," he said. "Entering the second quarter, April's figures were also not ideal, showing no improvement over March, and the situation in May so far remains very challenging."
**Shift in Focus**
Vipshop has indeed been attempting to improve its business, but most of its measures have been incremental adjustments, lacking the major strategic transformations that could excite investors about high-growth potential. Among these efforts, the company has recently allocated more resources to high-spending members, noting that its SVIP member count grew 9% year-on-year in the first quarter.
For this traditionally apparel-focused company, another bright spot has been its recent expansion into sportswear and outdoor products popular with younger consumers. The company stated that this segment continues to perform relatively well, helping to offset weakness in its core women's and men's apparel categories.
These factors, combined with the Shan Shan Outlets business achieving approximately 30% year-on-year growth during the quarter, contributed to Vipshop's first-quarter revenue reaching 26.6 billion yuan ($3.91 billion), a 1.2% increase from 26.3 billion yuan in the same period last year.
However, the company anticipates a return to revenue decline in the second quarter, forecasting revenue for the three months ending June to decrease by up to 5% year-on-year.
Vipshop's gross margin improved slightly in the first quarter, rising to 24.4% from 23.2% a year earlier, primarily benefiting from higher-margin products and cost-control measures. This drove the company's first-quarter net profit to 2.2 billion yuan, a 13.6% increase from 1.9 billion yuan in the prior-year period. However, excluding share-based compensation expenses, its adjusted profit was flat year-on-year at 2.3 billion yuan.
Vipshop's stock rose 2.1% on Thursday following the earnings release, reflecting a degree of investor optimism. However, the stock has been largely flat over the past year, indicating that investors still need to see better performance, particularly greater growth momentum and contribution from the outlet business, before they are willing to assign the company a higher valuation.
The outlet business itself is not new. Vipshop noted that its Shan Shan Outlets in Zhengzhou and Harbin have been operating for about a decade. However, the company appears to have recently increased its investment in this area, aiming to capture consumer demand for experiential shopping and high value-for-money products amid China's economic slowdown.
Chief Financial Officer Wang Yuhua stated that the company's application to spin off the property assets of the Harbin and Zhengzhou outlets was approved by regulators at the end of last month, with pricing completed this week. Upon completion of the spin-off, Vipshop will retain approximately 49% of the REIT and can deconsolidate the related business from its financial statements. Additionally, the company expects to recognize a one-time gain of 5.3 billion yuan in the second quarter.
Wang Yuhua noted that besides existing outlet projects, the company currently holds 18 additional outlet projects, "indicating strong potential for future expansion." This outlet model appears quite solid, allowing Vipshop to retain mall operation income while transferring heavy-asset property components to the REIT.
However, the company's continued lack of separate disclosure for outlet business revenue also suggests this segment still constitutes a relatively small portion of overall revenue. To further attract investors, the company will need to accelerate the expansion of new stores to highlight its potential as a major experiential offline retailer.
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