This Chinese retailer’s shares were recently upgraded by HSBC, to ‘Buy’ and Bernstein, to ‘Outperform’.
Vipshop Holdings (VIPS)
From Cabot Stock of the Week
The Chinese retail industry is an enormous playground, with a few giants and many smaller aspirants. Alibaba (market cap $470 billion) is the biggest name, a company that distinguishes itself by offering a marketplace where others can buy and sell, but not owning any merchandise itself. JD.com. (market cap $66 billion) is a more traditional online retailer, with a string of warehouses and an extensive delivery infrastructure that covers virtually all of China.
Many investors think that these two giants are the only choices in Chinese retail. But today, we’re looking at Vipshop Holdings (VIPS, market cap $11.9 billion), a company that’s finding a way to prosper in the shadow of the giants.
Vipshop’s big thing is big discounts and limited quantities, in other words, flash sales. The company focuses on name-brand apparel, shoes and handbags, but will sell almost anything that it can offer at a great price.
The company has cultivated relationships with over 20,000 brands, including many top names. And manufacturers see Vipshop as a way to introduce new lines, promote styles and liquidate inventory. After adding Diesel, Marc Jacobs, Sergio Rossi, Shanghai Tang and Peuterey to its list of brand partners in the third quarter, Vipshop scored alliances with Vera Wang and Jil Sander Navy in Q4.
One quirky highlight is that Vipshop recently announced that it has become a sponsor (and the exclusive Chinese e-commerce partner) for London Fashion Week. The company plans to use this sponsorship to introduce British brands and fashions to Chinese consumers.
In its latest quarterly report, the company increased its number of active customers by 22%, up from 49.6 million at the end of Q3 2016 to 60.5 million in 2017. The company’s customer base skews young, and customer loyalty is high, with 96% of orders coming from repeat customers and a 22% year-over-year increase in average revenue per customer.
The company is still primarily a Chinese retailer, but that has been changing, with Vipshop increasing its warehouse space in Australia, France, the U.S., the U.K. and Italy. 99% of Vipshop’s merchandise was delivered through its proprietary last mile network, up from 90% a year earlier. Returns collected directly by Vipshop last mile staff increased from 50% a year earlier to 72% in Q3.
The company made headlines in December when it cut deals with JD.com and Tencent Holdings, both of which are looking for ways to gain traction in the battle against Alibaba. The combined $863 million in outside investment will leave 7% of Vipshop stock owned by Tencent, with JD.com increasing its prior 2.5% equity position to 5.5%.
We got a good read on the development of Vipshop’s business when the company delivered its Q4 and full-year report on February 12. Analysts were looking for $3.7 billion in revenue and twenty cents per share in earnings. What the company delivered was revenue that hit expectations exactly and beat on earnings by two cents per share.
VIPS made a huge run from the middle of 2012 to April 2015, and then started a long decline, falling to 10 in early 2016 and trading sideways through May 2017, when it started another correction. The stock rebounded with unusual sharpness in December, gapping up from 8.4 to 12.6 on immense volume, and the rally that followed ran to nearly 18 by late January. The general weakness in Chinese stocks that began on January 29 brought a much-needed correction, taking the stock down to its 25-day moving average just under 15, but after the quarterly earnings report brought buyers back, who took the stock up to a high of 19 just last week.
Tim’s note: This stock is strong, but lower-priced and therefore volatile. You could buy on the current small pullback or wait for a deeper correction down to 17.
Timothy Lutts, Cabot Stock of the Week, www.cabotwealth.com, 978-745-5532, February 20, 2018