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Vipshop: Opening up the Source or Regulating the Flow?

►Vipshop overachieved its target net income of CNY 986 million (around USD 139 million) with a YoY increase of 20.8%.  ►Although cost control helped the company maintain profitability, it also brought difficulties in increasing the user numbers.     The O2O apparel platform, Vipshop (NYSE:VIPS), released its financial results for the first quarter in 2020 on May 27. The results showed that the pandemic had little to no effects on its profits. According to the National Bureau of Statistics, affected by the decrease from both supply and demand sides, the retail sales in clothing and cosmetic dropped by 32.2% and 13.2 % YoY, respectively. Of course, the clothing market downturn in Q1 made a significant impact on Vipshop’s performance, with the revenue down to CNY 18.8 billion (around USD 2.7 billion) from CNY 21.3 billion (around 3.2 billion) in the same period of last year. However, the company’s sales performed better than expected by Wall Street estimates (USD 2.54 billion).  Though underperformed in revenue, the resilience shown by Vipshop in turning against the market forces under the pandemic are striking. The company managed to generate an income of CNY 986 million (around USD 139 million) with a YoY  increase of 20.8%.  Resilience under the pandemic  The resilience comes from Vipshop’s cost control and business strategies. The expenditures related to heavy assets significantly reduced after the cooperation with SF Express. Execution costs, referring to expenses incurred during the lease term for using the leased asset, dropped by 21% in 1Q20 compared to 1Q19.  The marketing cost of Vipshop also reduced by 47%, amounting to CNY 410 million. Even though the sector took up 70% of the GMV, fortunately and wisely the company didn’t waste its resources on marketing on the clothing business in the first quarter.  Instead of trying to promote the sector to better compete with other clothing selling companies, Vipshop chose to cut costs to survive under the recession. Moreover, Vipshop’s choice of exploring the lower-tier market finally showed its advantages. When reviewing history, discount retail always bucks up during an economic recession, which shows a counter-cyclical resistance.  Likewise the largest discount store in the US, T.J. Maxx, has outperformed Macy’s in every downturn of the economy.  Vipshop – one of the largest discount retail companies, survived during the pandemic.  Wall Street: Promising future After the release of 10-Q, 23 analysts out of 28, tracking the company, gave it a ‘buy’ rating.  Also, the market believes the company has been underestimated. The P/S ratio of Vipshop is 0.78, which is way lower than the number from other discount stores in the US, such as TJX of 1.77 and Ross of 2.46. The lower the P/S ratio, the more possibilities of a company being undervalued.  A necessity of opening up the source  We can’t deny that Vipshop did a great job in the first quarter of this year. However, the secret behind the continuing profitability might be the over-focusing on the control of the expenditure under the pandemic.  The adverse effect on the cost reduction is the dilemma of the users’ growth. In 1Q20, the number of active users dropped to 29.6 million, from 29.7 million in 1Q19. Therefore, the company had to use discounts to maintain the user’s adhesiveness.  Being based solely on the control of regulating the flow cannot be a long-term strategy. Vipshop has to come up with plans to open the sources, further promote the growth in GMV and user growth.

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