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China's Vipshop Eyes Flashy Sales of Discounted Goods

By: Investor's Business Daily
Posted: 8/2/2013 5:27:00 PM
Referenced Stocks: DANG;TJX;VIPS

One advantage of operating in an emerging market like China is that many sectors of the economy are just getting their feet wet, so you have much less chance of bumping up against established players.

That's the case with discount retail. Unlike in the U.S., where the biggest chains have had decades to build their brands and consolidate their leads, discount retailers in China haven't been around that long.

The field is thin and scattered, especially in second-tier cities. Companies that want to grab up market share in a hurry have ample opportunity to do so.

One of those companies isVipshop Holdings ( VIPS ), a China-based online discount retailer that sells apparel, household goods, cosmetics and other branded lifestyle products.

'Flash Sales'

The company specializes in "flash sales," in which a set number of goods are sold over a limited period of time, often during the retail off-season.

It has exclusive rights to sell selected products from more than 700 brands and boasted about 27 million registered users at the end of last year.

Vipshop helps manufacturers reduce overstocking by selling merchandise to customers who might not otherwise have access to it.

Because the company operates in a category without much history or entrenched competition in China, analysts give it high marks for growth potential.

"Unlike the discount retail market in the U.S. where strong offline players such asRoss Stores (ROSS) andTJX Cos. ( TJX ) are well-established and control sizable off-season inventories, China does not have a significant presence of offline discount retailers," JPMorgan analyst Dick Wei noted in a March report initiating coverage on Vipshop.

China does have some brick-and-mortar outlet malls in first-tier cities for branded goods, he says. But outlet malls don't have a big presence in lower-tier cities, where Vipshop gets most of its revenue.

"Without a strong presence of offline discount retailers in lower-tier cities, we believe Vipshop has the opportunity to consolidate the market quickly," Wei noted.

The company is already well on its way. Citigroup analyst Muzhi Li notes that Vipshop's relationships with more than 3,000 apparel manufacturers and 7,000 brands make it China's largest aggregator of discounted apparel.

Vipshop hosted more than 29,000 sales events and handled 5.1 million stock keeping units (SKUs) in 2012, Li noted in a recent report initiating coverage on Vipshop.

The company logged sales of $692 million last year. As recently as 2010, its annual revenue was only $33 million.

Though it will be difficult to sustain triple-digit sales gains as Vipshop gets bigger, analysts reckon the company still has plenty of room to grow.

"To improve its revenue growth, we expect Vipshop to not only expand its vendor base, but also to have more sales events to reduce premium-brand overstock," Li said.

JPMorgan's Wei estimates that Vipshop accounted for 7.7% of China's total discount retail market at the end of 2012. By comparison, TJX has about 38.2% of the total U.S. discount retail market.

"Considering China has no comparable offline discount retail chains, we believe Vipshop has decent room for growth in terms of dominance within the China discount retail segment," Wei said.

Rivals Large And Small

Much of Vipshop's competition comes from either smaller players or large online retailers trying to branch out into different areas.

Among the latter group is Tmall, formerly Taobao Mall, an online business-to-consumer and retail business operated by China's Alibaba Group. Tmall launched a "Brand For Sale" business in September 2011 that competes against Vipshop.

Another company,Dangdang.com ( DANG ), recently launched a channel to sell discounted inventory and named it "wei pin hui," which Li notes is "pronounced in the same way as Vipshop's Chinese name."

Although rising competition is always a concern, most analysts say Vipshop is in a good position to fend off rivals.

"Vipshop's success largely reflects the company's brand positioning, operational efficiency and industry experience of the management team," Li noted.

He says existing online retailers can't easily duplicate off-season sales channels "because destocking sellers need different skill sets to sell general merchandise."

In addition, he adds, "flash sales players lag behind Vipshop in the off-season apparel market."

Capital Advantage

Vipshop also has a lot more financial might than most of the competition. The company's stock debuted on the NYSE in March 2012 at an opening price of 6.50. Shares have been on a steady rise since then and currently trade near 39.

Financially, Vipshop has delivered three straight quarters of profit after previously losing money.

During the first quarter it logged earnings of 17 cents per American depository receipt vs. a loss of 25 cents the previous year.

Sales more than tripled to $310.7 million. The number of orders nearly tripled to 8.8 million, while the number of active customers rose to 2.8 million from 1 million a year earlier.

Vipshop is due to report third-quarter results in early August, though an exact date has not been set. Analysts polled by Thomson Reuters expect earnings of 18 cents per ADR, up from a loss of 8 cents the prior year.