Following the 4Q13 earnings release on March 4, 2014, Vipshop's (NYSE: VIPS) stock price increased by more than 30%. The company beat consensus estimates on both the top-line and the bottom-line, and management's revision of its 1Q14 guidance also exceeded consensus estimates. This makes people wonder: Is VIPS capable of maintaining its growth in the future? What are the company's plans for expansion?
Recapping 4Q13, a very strong quarter. VIPS reported 4Q13 revenues of $651mm USD (above consensus of $588mm), Non-GAAP net profit of $28.8mm USD (above consensus of $22.9mm), and EPS of $0.49 USD (above consensus of $0.42). Strong top-line growth was attributed to a more than two fold increase in active customer base (5.7mm compared to 2.6mm from the previous quarter) and order volume (17.7mm compared to 8.8mm from the previous quarter), and strong gross margins were attributed to decreases in S&M, R&D, and G&A expenses as a percentage of total revenue.
An underdeveloped offline retail market in China. As a starting point, VIPS has chosen a favorable environment to operate its business. Compared to U.S. and Europe, the offline discount retail market in China is highly underdeveloped: the Chinese retail market is fragmented, with no large off-price retailers and only 6 offline outlet stores (compared to 105 outlets in the U.S.). Furthermore, consumers located in China's lower-tiered cities have difficulty accessing branded discount products. To address these issues, VIPS has created an online shopping platform which allows consumers to purchase branded discount products through its website. Not only does this address consumers' demand for superior product value proposition, but it also brings freshness and convenience to the consumers' shopping experience. With a first-mover advantage and a large un-tapped market, VIPS is expected to maintain its impressive growth.
Preferred flash sales retailer. VIPS' ability to monetize large volumes of suppliers' inventories in relatively short periods of time makes it an attractive flash sales channel for popular brands. Through maintaining strong relationships with suppliers, VIPS is able to obtain well-known branded products at deeply discounted prices for a limited time, in limited quantities. On the one hand, VIPS can help reduce its suppliers' excess inventories while, simultaneously, increasing brand awareness in under penetrated low-tiered cities; on the other hand, consumers' demand for superior product value proposition will be satisfied. As a large part of this business revolves around supplier relationships, the threat of new competitors is low, at the current moment.
Expansion through acquisitions. The acquisition of Lefeng.com (an online cosmetics retailer) is possibly the first step to a series of acquisitions that VIPS will make to expand its business. With the right acquisitions, VIPS will be able to expand its user base and geographical market, which will drive bottom-line growth in the long-term. Aside from strengthening the cosmetics product segment through the deal, VIPS also has access to Lefeng.com's customer base in top-tiered cities, allowing it to provide its services to both top-tiered and lower-tiered cities in China. Some people suspect that VIPS is trying to branch out as an all-round female focused platform. If so, what would be VIPS' next acquisition target?
Going forward... Although VIPS is currently trading at a valuation of 70x+ P/E, the stock is only trading at its 3x EV/Sales which is cheap relative to a 120% grower and justifies this sort of premium, especially as peers like Asos (LSE:ASC LN) and Amazon (NYSE: AMZN) are trading at 100x and 195x P/E respectively. The company is a first-mover in the under penetrated Chinese discount sales market that operates a negative working capital business with a 40% ROE and has immense growth opportunities.
Disclosure: I am long VIPS.
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