Vipshop Holdings' CEO Discusses Q1 2013 Results - Earnings Call Transcript

May.15.13 | About: Vipshop Holdings (VIPS)

Vipshop Holdings Limited (NYSE:VIPS)

Q1 2013 Earnings Conference Call

May 15, 2013 8:00 am ET

Executives

Millicent Tu – Investor Relations Director

Eric Ya Shen – Chief Executive Officer

Donghao Yang – Chief Financial Officer

Analysts

Andy Yeung – Oppenheimer & Co.

Caroline Li – Goldman Sachs

Gene Munster – Piper Jaffray

Operator

Thank you for standing by and welcome to the First Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode, there will be a presentation followed by a question-and-answer session (Operator Instructions). Please be advised that this conference is being recorded today May 15, 2013.

I’d now like to hand the conference over to your speaker today Millicent Tu, our Director of Vipshop. Please go ahead.

Millicent Tu

Thank you operator, hi everyone and thank you for joining Vipshop’s first quarter 2013 earnings conference call. Before we begin, I will read the forward-looking 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 fact that we made 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/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, Chairman, the company’s CEO and Co-Founder, and Donghao Yang, the company’s Chief Financial Officer.

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

Eric Ya Shen

Okay. Hello everyone. Welcome to our first quarter 2013 earnings conference call. This quarter we are very pleased with our strong momentum, which once again (inaudible) the strengths of our unique e-commerce model, fueled by rapid growth in both active customers and the total orders. We have more than tripled our revenues in this quarter to US$311 and outperformed our expectation, due to stronger post holiday rebound in demand which we will discuss later. Through [glorying] skill and the leverage in our business operation, we continue to extend our profitability and margins during this quarter, which our CFO Arthur Hong will explain shortly.

To begin with during the (inaudible) last year’s strong growth momentum and this year’s successful secondly our strategy and the success has changed the landscape in China’s B2C e-commerce market. This huge success has enabled us to quickly increase our profile with the major plans, as well as Chinese shoppers. As a result we continue to extend our leads over the competitions in China’s fast growing discount retail market. For customers, they come to our work site, because they wanted the best product selection at the lowest price available, in order to simplify them, we have a world class merchandizing team of over 300 experienced buyers dedicated to finding the best products from the best brands.

For the brands, the demand is capable and the program upon this to handle their excess inventory without searching their brand identity, we help over 6,000 brands by quickly liquidate this inventory and for over 800 orders, we have exclusive access to this merchandize in doing so we reduced brand dilution, further strength our mutual trust with this partners, as well as also providing customers exclusive access to products that are in high demand, but limited competitors, none of these advantages can be quickly copied by general e-commerce trades overnight. The network and the scale effects from our unique online discount retail model, offer our brand partners higher financial returns, faster turnover and most importantly reduced the brand dilution, further separate us from our existing or emerging competitors in China, these attribute provide us increasing confidence in our ability to continue our success.

At this point, let me hand over the call to our CFO, Donghao Yang, so that he may discuss this quarter’s achievements and our future strategies in greater detail.

Donghao Yang

Thanks Eric, and hello everyone. I like to further elaborate on the key areas over the course of today’s call prior to reviewing our financials. To begin with, we had another strong quarter of growth across the board. Total revenues increased by 207% year-over-year to US$311 million, despite seeing a typically slow quarter with the seasonality associated with the Chinese New Year holiday, we saw our customer activity and post holiday spending rebound much faster and stronger than previous years.

Helping our topline growth exceed both our expectations and consensus estimates by our strong margin, gross margin extended further to 23.4% while fulfillment expenses continued to trend out to 12.1% of total revenues, as a result of our increased scale and improved efficiencies in our logistics network. Moreover we continue to grow our GAAP net income which came in at US$5.8 million thus demonstrating our balanced strategy of maintaining a strong topline growth, while improving profitability at the same time.

Second looking at the huge growth potential of China’s discount retail market, (inaudible) estimate that this market will grow dramatically from only US$24 billion in 2012 over a $90 billion in 2015, we presenting a compound growth rate of 55%, as Eric mentioned by leveraging the inherent scale effect associated with our business we have been and continue to attract tens of millions of online shoppers as well as the brand aiming to target this group of online shoppers which as expected to almost double from 219 million in 2012 to over 423 million by 2016 according to eMarketer.

Lastly, I would also like to update you on our warehouse capacity expansion strategy we’re continuing to invest in our logistics centers and expanding our warehouse capacity. We expect to increase to 290,000 square meters by the end of this year to primarily accommodate the surging demand of our customers in China’s Northeast and Eastern regions.

Now moving on to our quarterly financial highlights, net revenues for the first quarter of 2013 increased by 207% year-over-year to US$310.7 million, this tremendous growth was primarily driven by 170% increase in the number of total active customers to 2.8 million and 187% increase in the number of total orders to $8.8 million. Like we highlight earlier, this increase was primarily due to our continued efforts to optimize brands and products selection, increase the number of sales events and increase the number SKUs available on our website as well as mobile platform.

In addition, we’ve been able to fully utilize the three logistics centers in Shanghai, Chengdu and Beijing and regional sub-sites, which enhanced our ability to accommodate and target the increased demand in specific markets, further increasing our market scale and footprint. As our business continues to scale, we are able to skew our more premium inventory from brand suppliers with gradually larger discounts, further decrease in product acquisition costs. As a result, this led to gross margin further improving to 23.4% from 21.2% in the prior year period, and gross profit increasing by 240% to US$72.8 million.

Moreover as we discussed earlier we continue to see improvement in operating margins as a result of improved economies of scale and increased operational leverage with our business operation, more specifically, fulfillment expenses increased by 123% year-over-year and US$37.7 million for the first quarter of 2013.

This primarily reflects an increase in sales volume and number of orders fulfilled, as a percentage of net revenues, fulfillment expenses decreased to 12.1% from 16.7% in the prior year period. As we discussed over the last few quarters this improvement is very noteworthy in that fulfillment expenses are not the only the largest component of our operating expenses, but also critical to the customer experience.

This cost reduction was primarily due to the successful implementation of our distributed warehouse strategy, and the strategy of shifting towards using regional and local delivery services.

Also we continue to expand our capacity to four warehouses which are strategically located in Shanghai, Beijing, Chengdu and Guangzhou. In addition, we continue to shift more fulfillment needs to high-quality regional and local couriers, lowering our fulfillment cost, while shortening delivery times to our end customers.

Marketing expenses increased by 124% year-over-year to US$13.1 million, as a percentage of net revenues marketing expenses decreased to 4.2% from 5.8% in the prior year period. As discussed previously, by maintaining customer satisfaction and high repeat customer demand, we’re able to realize significant cost benefits associated with word-of-mouth referrals. Going forward, we expect to further improve our marketing efforts through active sales marketing and (inaudible) campaign.

Technology and content expenses increased to US$7.9 million from US$2.4 million in the prior year period. As a percentage of net revenues, technology and content expenses remained stable at 2.6% compared with 2.4% in the prior year period. This is a part of our continued efforts to invest in our IT system and mobile, e-commerce capabilities to better support future growth.

General and administrative expenses increased by 70% to US$9.8 million year-over-year, as a percentage of net revenues, general and administrative expenses decreased to 3.2% from 5.7% in the prior year period. The cost reduction reflected our company’s continued cost-control efforts and increased operational leverage, driven by the growing scale of our company’s operations.

Improved gross margin and cost-control we realized US$5.5 million in income from operations for the first quarter of 2013. This is compared to a loss from operations of US$8.7 million in the prior year period. Operating income margin was 1.8% compared to an operating loss margin of 8.6% in the prior year period.

Non-GAAP income from operations which excludes share-based compensation expenses, was US$8.6 million, compared to a non-GAAP loss from operations of US$6.6 million in the prior year period. Non-GAAP operating income margin was 2.8%, compared to a non-GAAP operating loss margin of 6.5% in the prior year period. Our net income attributable to ordinary shareholders for the first quarter of 2013 was US$5.8 million, compared to a net loss of attributable to ordinary shareholders of US$8.6 million in the prior year period.

Net income margin was 1.9%, compared with a net loss margin of 8.5% in the prior year period. For the first quarter of 2013, we recognized US$1.9 million income tax expenses as a result of the Company's growing profitability. Net income attributable to ordinary shareholders per diluted ADS was US$0.11, compared to a net loss attributable to ordinary shareholders per diluted ADS of US$0.33 in the prior year period.

Non-GAAP net income attributable to ordinary shareholders was US$9 million compared to a non-GAAP net loss US$6.5 million in the prior year period. Non-GAAP net income margin was 2.9% compared with a non-GAAP net loss margin of 6.4% in the prior year period. Non-GAAP net income attributable to ordinary shareholders per diluted ADS was US$0.17 in the first quarter of 2013, compared to a non-GAAP net loss attributable to ordinary shareholders per diluted ADS of US$0.25 in the prior year period.

As of March 31, 2013, the Company had cash and cash equivalents of US$231.1 million and held-to-maturity securities of US$141.6 million. For the first quarter of 2013, net cash from operating activities was US$71.1 million.

Looking at our business outlook, for the second quarter of 2013, we expect our net revenues to be between US$330 million and US$335 million, representing a year-over-year growth rate of approximately 144% to 148%. These forecasts reflects our current and preliminary view on the market and operational conditions, which are subject to change.

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

Question-and-Answer Session

Operator

(Operator Instructions). And we have a question from [Jong Sang].

Unidentified Analyst

[Foreign Language]

Operator

Jong?

Unidentified Company Representative

Operator, we can’t hear the question.

Operator

And you have a question from Caroline.

Unidentified Company Representative

Operator, we can’t hear the questions.

Operator

One moment. And we have question from the line of [Mcharis].

Unidentified Company Representative

Something is wrong with the line.

Operator

And we have a (inaudible).

Unidentified Analyst

Thank you for taking my question. And good evening, Shen and Donghao Yang and mainly, firstly, covering on public relations on the third and fourth quarter, we’ve recorded that in the last quarter earnings conference call. Mr. Shen mentioned new customer acquisition is one of your strategic targets in 2013. Could you please give us some color on new customer acquisitions, achievements and new customer’s sale contribution in the first quarter, as well as how to include old customers shopping frequency?

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

Okay, so to answer the first question, for new customer acquisition costs, actually, the first quarter of this year was the lowest in our operating history, this once again demonstrate our network effect and scale effect and also as we continue to work with more high-quality brands and this will contribute positively to our acquisition of new customers reduction.

Unidentified Analyst

My second question is regarding on the marketing and advertising planning in the 2013, as we know Vipshop have some (inaudible) advertising and offline marketing in the first quarter, at the same time, you informed in the first quarter the active customers reached a record high in the low presence of e-commerce, could you talk about your marketing strategy in this year or will you continue to have some branding and marketing activity in the next few quarters?

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

Okay. As you recall in 2012, we explained in our marketing strategy which primarily rely on word-of-mouth referral strategy and we evaluate a marketing campaign of FX to ROI. So this year, in terms to continue to drive a new customers and new traffic, we would spend more in terms of increasing Vipshop branding among our consumers in China. So obviously, the absolute dollars in terms of marketing will go up, but in terms of percentage to net revenue we would get it within a manageable and reasonable level.

Unidentified Analyst

Thank you. I have a follow-up question about marketing and promotions, we know in April 19, the Vipshop initiated very successful promotional activities which lasted for two days, were this promotion brought out from neighboring ones or do let us know your comment on the branding achievement margin, the performance in the promotions and the management attitude on the [quadrant] promotion. Thank you.

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

Okay. So obviously given that we have been disclosed second quarter results, we are not in a position to comment specific on numbers, but one thing Eric, would like to comment is we achieved significant percent during the biggest promotional effort that we ever did since the founding of the company. And obviously, the sales, the net revenues, the orders we generated historically high numbers. So this gives us a lot of encouragement and going forward depending on the timing and the conditions the company might launch similar kind of campaigns selectively.

Unidentified Analyst

Thank you.

Operator

And our next question is from the line of (inaudible) with J.P Morgan.

Unidentified Analyst

Thanks for taking my question, could you comment on recent entries of other B2C into the flash sales market and how do your other suppliers react to more flash sales channels in the space and do you see any pressure on your take rate due to this?

Unidentified Company Representative

Okay. So let me just translate that question to Eric

[Foreign Language]

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

Okay. So we are not concerned about competition because we believe we have deal with really high entry barriers and we have our own competitive advantage. First of all, Vipshop is a dedicated special offer discount retailer. As of now we have over 5,000 employees committed to discount retailing. So what we do on a day-to-day basis is to offer our customers the best product selection at the lowest prices available. And as of March 2013, we have over 6,000 brands monetize inventories quickly and cost effectively. And just to point out that we have over 800 exclusive contracts with brands. And in doing so, the beauty is we can reduce the brand dilution significantly further strengthen our mutual trust with these department.

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

Okay. And another thing to point out is we have really a dedicated and a world class merchandizing team of over 300 experienced buyers. Meanwhile, I think the introduction of the company will have accumulated a lot of experience, we have run lot of sales events and developed really a good qualities business intelligence departments obtain a lot of detail on customers. So in a way our analysis on these shopping behaviors we enable our merchandizing team to continue to secure popular and high-quality products for shoppers and these advantages is not easy for other general e-commerce players to replicate that within a very short period of time.

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

Okay. And another three points to highlight, unlike other e-commerce players to offer apparel products via (inaudible) platform, we provide one-stop integrated customer service and of processing capability of consolidating orders which typically consist of multiple items and so the advantages that we mentioned just now cannot be quickly replicated by a general e-commerce overnight and again, if they win or take our market, we continue to benefit from the global effect and network effect inherited in our business model.

Unidentified Company Representative

[Foreign Language]

Unidentified Analyst

Thanks for the answer. I have another question, is the increase in the average size of function of more items sold per order or is it the higher price tag per item for, from the high-end brands?

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

Sorry, we couldn’t quite get your question, could you please repeat that?

Unidentified Analyst

Sure. The increase in the average order size is it more because of more items sold per order or is it because of a higher price tag for item for the high end brands?

Unidentified Company Representative

Okay. [Foreign Language]

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

Well, we see a very small increase in terms of the number of items within an order, we do see that a reasonable level of increase in the higher price of the brands that we offer, because as you recall Q1 this year. The winter was longer than previous year, so that contributed nicely to our average ticket size.

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

Okay, so the items within an order increased around 5%.

Unidentified Analyst

I didn’t get the last part, could you please repeat?

Unidentified Company Representative

Yeah, just to go back to the question, in terms of the items or the number of pieces of the products within an order increased by 5%, that’s what we saw in Q1 this year.

Unidentified Analyst

Okay, thank you.

Operator

And your next question is from Andy Yeung with Oppenheimer.

Andy Yeung – Oppenheimer & Co.

Hi good evening Eric and Donghao. Congratulations on another good quarter and also thank you for taking my question. So my first question is actually about your use of cash (inaudible) follow-on recently, your net cash and equivalents position have increased to almost $217 million. So can you give us an update on your expansion plan, also your operating plan for this year and next year?

Unidentified Company Representative

Well, thank you Andy for attending our conference call. To your question, as we said to our investors during the follow-on offering, we are going to use our cash to invest in our warehouse expansion and IT infrastructure going forward and this year, we are going to spend some of the cash in purchasing land and building company’s own warehouses and now we are in negotiations with the few local governments in China, try to secure a piece of land and start building the company owned warehouses. And IT system, as you may already have noticed in Q1 IT and technology content expenses went up slightly compared to Q4 which actually reflected our focus in our investment in our IT infrastructure including our mobile technologies and platforms.

Andy Yeung – Oppenheimer & Co.

Okay, got it. And there is a follow-up question on that. Obviously, you guys have done a wonderful job achieving significant operating leverage over time, but given your investment plan for the warehouse and fulfillment operations as well as some of the IT investments, so can you help us quantify what the potential impact from this investments and maybe, potentially also give us a timeline of how we should takes [numerous] expenses in the model?

Unidentified Company Representative

Well, again we’re not providing detailed guidance for the metrics, but you were asking about, again, our strategy and our focus is very clear, we’re going to keep investing in our warehouse expansion and IT infrastructure build out.

Andy Yeung – Oppenheimer & Co.

Yeah, I understand that, I appreciate it for taking my questions, thank you.

Unidentified Company Representative

Thank you, Andy.

Operator

And your next question is from the line of Caroline Li with Goldman Sachs.

Caroline Li – Goldman Sachs

Thank you. Hi, Eric. Hi, Donghao, thank you for taking my question and congratulations on the very strong quarter. I have a follow up question on the competitive landscape. I understand that you’ve talked about your competitors actually using more like a third-party business rather than principle business, if we have to turn the table around this and pretend to we are a brand supplier, what kind of cost to structure do we face by partnering with your competitor because the common knowledge is the third-party business will come under only 5% commission rate, does that mean in your supplier may benefit from a lower commission rates by partnering with those smaller players. So, that’s my question number one.

My question number two is on the customer acquisition costs, previously, you discussed that how effective the new marketing efforts on the new customer, so more specifically, could you describe to what extend the percentage of traffic you are getting from leading website such as [TaoBao or Jing Tong] and what kind of commission you pay to them. Last but not least, I want to talk about the brand concentration because at certain point, I think management mentioned, the top 800, 900 brands are probably contribute them both lying on share of your overall sales. Could you give us an update in terms of what brands maybe contributing those top sales and recently we are seeing increased pressure from brands like Nike in China to clear channel inventory. So to the extent you can discuss any specific brand performance that would possibly be very helpful?

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

So, Caroline, to answer the first question actually, we’re looking at the [day] rate in two different angles. Now first of all, for, in terms of discount retailing is not so, the top priority is not day rate. it’s all about volume, just to give an example, if we take day rate of 20% and within one day we are able to monetize 50,000 SKUs versus a, another e-commerce player with a day rate of 5% and who is able to monetize 500 pieces within a day.

So, obviously, the answer is very clear, the brand we definitely do well with the e-commerce player who can monetize the biggest volume within the short period of time. And another thing is although for third-party e-commerce players, for e-commerce players to offer on a third-party platform although this is a, for example 5% concession rate, but for brand, they have to depend on their own fulfillment then they have to do the photo shooting and modeling, so adding all these up it will be very much similar to the day rate that we get from a brand.

Caroline Li – Goldman Sachs

So, Caroline, sorry, could you please…

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

Okay. So, to answer Caroline’s second question, I’ll just give a brief translation. In terms of traffic, because we do not corporate with (inaudible) so, we do not have any traffic from them, so that’s a very brief answer. And in terms of, as a customer acquisition cost actually is on a declining trend. So going forward we continue to expect the similar pattern in terms of new customer acquisition cost.

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

So, in terms of the brand concentration for the top 150 brand, if we look at the trend in 2011, 2012, we can conclude that we are able to double the sales of the, we are able to double the net revenues that we work with the partnership. So we have for example in 2012, let’s say we were able to monetize 15 million for this 150 brands in 2012, we were able to double that to a 100 million. So for 2013 we expect the similar kind of growth rate of it to increase the sales volume per brand.

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

The top 20 brands generated less than 20% to our total net revenues.

Caroline Li – Goldman Sachs

If I may ask a different question that beat my last question is you mentioned the sales and investment in mobile technology, can you discuss just strategically, how do you see mobile as a opportunity or risk to existing business model one thing, I guess, I’m thinking is because PC you are having a bigger screen and your shoppers could presented with a large collection of available flash sales, while mobile is typically a much smaller screen. So the available eyeball share if you may could be smaller, so will that be have a negative impact on the virtual shelf space you have available for sale at any given time?

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

Okay

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

So although you mentioned some disadvantages of mobile channel, but in fact, mobile applications speeds our business model very well because we won flash sales, so we would like to, and the consumer find brands and buy products anytime, anywhere and if Q1 the mobile generated customers less than 10% of our total revenue and so we expect that rates will continue to grow in Q2 and especially so in the second half of this year. The mobile channel is very important because a lot of consumers use the mobile to shop more these days especially younger generation, so its not that what we want to do with the mobile channel it is the trend its catching up with that. We need to really take advantage of this technology advancement.

Operator

And our next question is from Gene Munster with Piper.

Gene Munster – Piper Jaffray

Yes good evening, and my congratulations. Follow-up on the previous question in terms of mobile is there a difference in terms of customer acquisition on mobile versus desktop and any trends that might be helpful for us to know on the expense side as mobile becomes a bigger part of your business. Thanks.

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

Okay. So the acquisition cost for our new asset customers on mobile is slightly high compared to that for PC. And the conversion rates on the mobile channel, is a little bit lower compared to that from the PC end.

Gene Munster – Piper Jaffray

Is it you say slightly that something that, its still small that we shouldn’t really factored into our model or something that we should considered, when we think about our longer-term model?

Donghao Yang

Hi, Gene thank you for coming. And this is Donghao Yang. Well, to your question in first quarter of this year mobile traffic was about 8% of our total. So really, it’s really up to you whether it’s significant enough to be put it into your model. But the trend is very obvious, that more and more of our customers are trying to get access to our sales events through mobile. So the trend is very significant last year, well not last year, but last quarter the fourth quarter of last year about 5% of the traffic came to our website through mobile. And Q1 of this year that number went up to 8%. So the trend is pretty obvious.

Gene Munster – Piper Jaffray

Okay, then just one follow-up question on the, I guess on the fulfillment expansion first margin question I know that you don’t want to give a specific guidance on that, but is there any like percentage increasing capacity you could outline that might be helpful for us to think about the expense side is they are going to increasing capacity by 20%, the next year is there any sort of metrics along that. Thank you.

Donghao Yang

Okay. Well, the increase of capacity does not necessarily have a pretty big impact on our margin. Well it’s actually to have the company owned warehouses versus leased warehouses meaning the big savings in terms of rental dollars, was going to have a pretty big impact on our bottom line. According, to our own estimate over time, if we fully execute our current warehouse expansion strategy, we’re going to able to save like between 1% to 2% of our net revenue in fulfillment expenses, but that’s going to happen over time.

Gene Munster – Piper Jaffray

That’s very helpful, thank you.

Unidentified Company Representative

Thank you.

Operator

And your next question is from [John Wolff] from Macquarie.

Unidentified Analyst

Hello. Hi, can you hear me okay, this time?

Unidentified Company Representative

Sure, loud and clear.

Unidentified Analyst

Okay. Great. Thank you for taking for my question. I have a question on your gross margin that record in the past you may have talked about your business model perhaps the supports about the 25% gross margins, and I think in the last quarter you already were at 23% I was wondering can you talk about to the further margin expansion opportunity particularly in light of some of the new entries into this particular business model as you may know players like (inaudible) recently launch a flat sale sort of business model as well, so that’s my first question.

Unidentified Company Representative

Hi. Let’s answer your question one by one. All right, so in terms of long-term sustainable gross margin level, I did say in the past that I believe it’s going to be around 25%, but it’s long-term sustainable gross margin it’s a goal that we’re working very hard to achieve as soon as possible over time. And you mentioned other e-commerce platform trying to enter in our space and you also named a (inaudible) and of course we’ve already, we’ve also noticed that a few other potential competitors are trying to get into our flat sales model, but we’re not overly concerned about those new entrances, because competition is not a new thing in our business.

Starting from day one, Vipshop is growing by competing against other competitors in the business. So a new entrance, first of all new entrance is not a new thing or competition is not a new thing for us. And then as Eric explained earlier our business may look easy or simple to some competitors but actually the entry barriers are very, very high, for example to succeed in our business you have to have a very experienced and capable buyers team.

And so far Vipshop has by far the largest buyers team professional buyers team in the entire e-commerce space in China, and second of all we are primarily selling fashion apparel products that require a very unique capabilities in terms of logistics. I’m not sure if you have ever been to our warehouses, our processes are warehouse floor plan layout and the equipment that we use. And the warehouse management software that we use are totally different from other traditional e-commerce companies. And then customer service is also very different for example we have over 300 people in our call center and as you may already know we have about 20% of return rate which is quite different from other commodity type of e-commerce business like electronics or book or retailers.

So we have a very unique set of operational challenges and over time we have developed capabilities to address those unique challenges and those capabilities have become high entry barriers as we understand, and if you look at our financials for Q1 2013, facing those new entrance in the business. Our top line and bottom line and all the other operating metrics have improved.

So we will take those new entrance seriously as we always did. But we are not overly concerned about them. We’re pretty confident about our ability to win the competition and become a dominant player in our business.

Unidentified Analyst

Thanks Donghao. And now, just one quick follow-up, you just mentioned having very experienced buyers group, and I think you have mentioned in the past that particular element has sustainable advantage or with competitive advantage. I was just wondering and I think you have about 200 people in a group. Do you have a target using the number of the buyers importing if it is, what do you have a target for the end of the year? Thank you.

Donghao Yang

We don’t have a specific target for how many buyers that have been hired by the end of this year. Because this is a business that you can feel a lot of operating leverage, and as our buyers first of all we hire experienced buyers in the first place. And as our buyers get more experienced with our, with growth of our business. I think we can the productivity of our buyers is going to get higher and higher. So it’s not like, yeah it’s not like for example if we want our business grow a 100% we need. You need to double our buyer’s team no it’s not like that. And also quality in terms of buyers team the quality is much more important than quantity. For example, most of the buyers have come from fashion magazine industry or traditional fashion industry, a lot of them were use to be magazine editors or store managers, a lot of them are already very experienced.

An in addition to buyer’s teams that we have, we have been able to build a very sophisticated business intelligence system. So with the help of that system we can analyze the numerous sales events that we’ve already had in the past. Which enable us to profile our customers to be able to predict the preference of our customers and to enable us to do marketing more accurately, more precisely to our customer base, so all that has been our competitive advantage?

Unidentified Analyst

Sure. Thank you very much.

Operator

I will now turn the call back over to Donghao Yang for closing remarks.

Donghao Yang

Well, again thank you guys for taking your time to join us. And we look forward to speaking with you next quarter. Thank you.

Eric Ya Shen

Thank you.

Operator

Thank you for joining us today’s conference call. You may now disconnect.

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