Why Vipshop's (VIPS) Shares Advance On Q3 Earnings Results

Shares of Vipshop Holdings Ltd. (NYSE:VIPS) advanced almost 3% since Nov 21 when the company posted its third-quarter 2016 results.

The Chinese online discount retailer reported adjusted earnings of RMB1.00 or 15 cents per share (in U.S. dollar).. Earnings also increased 31.6% on a year-over-year basis in local currency, driven by higher sales. ($1.00 = RMB6.6685)

Amid a challenging macro environment, revenues surged 38.4% to RMB12.00 billion or $1.80 billion in the quarter that marginally falling short of the Zacks Consensus Estimate of $1.84 billion. Accelerated growth in active customers, repeat customers and total orders in the quarter led to the growth.

During the quarter, the number of active customers increased 43% from the prior year period to 20.8 million. The number of total orders increased 34% to 60.1 million.

Margins

Although cost of goods sold increased, gross profit surged 36% in local currency to RMB2.93 billion (or $439.7 million) primarily due to higher revenue. However, gross margin contracted 50 basis points (bps) to 24.4%.

Adjusted operating income increased 24.8% to RMB732.0 million (or $109.8 million). However, operating margin declined 70 bps to 6.1% in the third quarter.

Fourth-Quarter Guidance

For the fourth quarter, the company expects its total net revenue to increase in the range of approximately 30% to 33% on a year-over-year basis.

Other Financial Details

As of September 30, 2016, the Company had restricted cash and cash equivalents of RMB4.88 billion ($731.3 million) compared to RMB3.57 billion (US$554 million) in the previous quarter. Held-to-maturity securities stood at RMB71.3 million (US$10.7 million) compared to RMB704 million (US$109 million) in the previous quarter.

Our Take

We are impressed by the fact that Vipshop has delivered impressive results in a tough economic backdrop. The superior user-experience provided by the company to its customers led to a strong 49% year-over-year increase in repeat customers during the quarter.

Vipshop now anticipates expanding its internet business, which is increasingly contributing to its core business. Further, the company aims to continue to expand user base and gain additional market share from China's highly fragmented discount retail market.

However, the ongoing macroeconomic slowdown in China and increasing competition in the retail space are concerns.

Vipshop carries a Zacks Rank #4 (Sell).

Stocks to Consider

Some better ranked stocks in the broader retail wholesale industry include:

Asure Software, Inc. (NASDAQ:ASUR) sports a Zacks Rank #1 (Strong Buy) and has an expected earnings growth rate of 27.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

RetailMeNot, Inc. (NASDAQ:SALE) carries a Zacks Rank #2 (Buy) and has an expected earnings growth rate of 15%.

Target Corporation (NYSE:TGT) also carries a Zacks Rank #2 and has an expected earnings growth rate of 8%.

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