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Vipshop Enters A Slower Stage Of Growth

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Financial Alphas


  • After enjoying strong and stable growth, I believe Chinese ecommerce firm Vipshop is facing numerous headwinds.
  • Client growth and profit margins are declining as competition in the industry ramps up.
  • I don't believe this can change; Vipshop seems to have hit a ceiling as to how large it can grow.

Discount fashion ecommerce platform Vipshop (NYSE:VIPS) will report its second quarter earnings later this month. There are two key areas to watch for: I have concerns about its user growth and how long it can maintain its already-low profit margins.

Hiding the slowdown of user growth

Call me a cynic but when a firm, which consistently reported quarterly active users, decides to only report yearly active users, it suggests that user growth might be declining. That’s exactly what Vipshop did in 3Q16. Although quarterly active users can still be backed out, to me it is a form of deception. These concerns are supported by the trend of quarterly active user growth: it becomes notably more volatile and seems to have hit a ceiling of 30m users since the company stopped reporting the figure.

The volatility in quarterly active users began in late 2015, and it's clear that instead of the smooth and stable growth from before, the user base grows in the second and fourth quarter, and declines in the first and third. Unsurprisingly, the second and fourth quarter of every year have China's biggest ecommerce sales events. It suggests that Vipshop's user base is more fickle than before, swayed by prices available as opposed to user experience.

Two stages of active user reportingVipshop’s quarterly active users (users that make a purchase in the period) before and after the company stopped reporting the figure in quarterly earnings calls. Units: millions of users. Source: Vipshop investor relations.

There are reasons why user growth would be slowing, based on the demographics that the company has targeted. Vipshop is popular in Tier 2, 3 and 4 cities, which are relatively poorer, more rural and less served by brand names than larger (Tier 1) cities like Beijing and Shanghai. Therefore, selling off-season, unsold branded fashion apparel at a discount is attractive to this user base.

This article was written by

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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