Thursday, May 15, 2014

Vipshop Holdings Beats Estimates On Exponential Sales Growth, Raised Guidance

China’s leading discount online retailer, Vipshop Holdings Ltd-ADR (VIPS) went up 8.7% to $163 in extended trading yesterday after the company topped earnings estimates for the quarter and provided strong revenue guidance for the current quarter.
Vipshop Holdings operates on a flash-sale style, where a limited quantity of product is sold for a limited period of time to drive maximum consumer interest. This model ensures low operating and inventory costs for the online retailer. The flash-sale industry operates on a "get it before it's gone" mentality.

Quarterly Performance

Vipshop Holdings reported its financial results for the first quarter of fiscal year 2014 (1QFY14; ended March 31, 2014) after the closing bell yesterday. The company operating out of Guangzhou, China reported revenues of $701.9 million, increasing 125.9% year-over-year (YoY), and beat consensus estimates of $656.9 million by nearly 6.9%. The company has managed to beat revenue estimates for eighth consecutive quarters.
The increase in revenues resulted from an increase in the number of active customers along with a rise in total orders. Active customers jumped to 7.4 million at the end of 1QFY14 from 2.8 million a year ago. Total orders skyrocketed to 20.2 million compared to 8.8 million a year earlier.
The company’s gross margin expanded by 150 basis points (bps) YoY to 24.9%. This was because of an increase in revenues as well as effective margin management by the company due to improving bargaining power with suppliers as the scale of business grows.
The company reported a net profit of $26.6 million, an impressive increase of 359% YoY, translating into adjusted earnings per ADS of 63 cents, which excluded stock-based compensation. The company beat consensus earnings estimates of 46 cents by 17 cents. Vipshop Holdings has now beaten consensus estimates for earnings for the eighth consecutive quarter.


For the current quarter, the company expects revenues to fall between $780 million and $790 million, which would represent an increase of 122-124.9% YoY. The yearly growth in the topline is expected to be similar to what the company experienced during the first quarter. The revenue guidance provided by the company was stronger than analysts’ expectation of $688.3 million. For the first quarter of FY14, the company had expected to report revenues in the range of $640 million and $650 million, and blew past its own projections to generate revenues of $701.9 million.

The Street’s Outlook

Currently, Vipshop Holdings gets coverage from 18 analysts. 14 of them have given the stock a Buy rating, while the other four recommend holding onto the stock. The average of the 12-month target price given by these analysts is $182.94, which translates into an upside of roughly 22% from yesterday’s closing price of $150.
Among notable financial companies across the Street, JPMorgan Chase & Co. (JPM), Credit Suisse Group AG (ADR) (CS), and Deutsche Bank AG (USA) (DB) are all bullish on the stock. The 12-month target price given by these renowned financial services companies is $200, $178, and $177 respectively.
Vipshop is currently trading at a year’s forward price-to-earnings (P/E) multiple of 49.2x, a premium of 21.4% to its one-year average forward P/E of 40.6x. Going forward, Vipshop Holdings expects to see its earnings grow 109% during 2014.
However, the company is trading at a cheaper valuation compared to the largest online retailer in the US,, Inc. (AMZN), which has a forward P/E multiple of 67.9x. Amazon reported its earnings late last month and the stock price plummeted after the Seattle-based company provided weaker revenue guidance for the current quarter.
In the past one year, Vipshop Holdings’ stock price has increased 372%, outperforming the Chinese Internet ETF (KWEB) and the S&P 500 ETF (SPY) in the process. These securities increased 25% and 15.7%, respectively, during the same period.

Dangdang Preview

Chinese e-commerce retailer, E Commerce China Dangdang Inc (ADR) (DANG) will also report its earnings before markets open today. Following positive earnings results by Vipshop Holdings yesterday, the stock price of Dangdang also increased 4.85% during after-hours trading.
Analysts expect the company to report revenues of $284.2 million, an increase of 32.7% YoY, and break even in terms of earnings per ADS. Dangdang is currently covered by 16 analysts. Seven analysts have given the stock a Buy rating, while six recommend holding onto the stock. The 12-month average target price given by these analysts is $15.70, which translates into an upside of 36% from yesterday’s closing price of $11.54. Among notable names, JPMorgan and Barclays Plc ADR (BCS) have given Dandang an “Underweight” rating. A better-than-expected financial result by Dangdang could further fuel a rally for Chinese e-commerce retailers, and can have a favorable impact on the valuation of Alibaba Group Holdings Ltd., which is expected to go public later this year.
The Gap, Inc. (GPS) is also planning to enter the Chinese market by opening 35 stores in the country and plans to use them to fuel future growth for the company.
You can also go over our piece: 3 ways to Invest in China.

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