The discount e-commerce company has been approved to spin off two of its brick-and-mortar outlet stores into a REIT, with another 18 similar projects

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Key Takeaways:

  • Vipshop reported its revenue rose 1.2% in the first quarter, representing only its second growth in the last eight quarters
  • The company recorded strong growth for its brick-and-mortar outlets business, which helped to offset sluggishness for its older bargain e-commerce apparel sales

As e-commerce becomes increasingly "old hat," major companies are searching for new stories to keep investor interested in their stocks. Alibaba (NYSE:BABA) (9988.HK) is focusing on AI and cloud services, while JD.com (JD.US; 9618.HK) is billing itself as a diversified company with operations in everything from healthcare to logistics. PDD (PDD.US) is trying to wow investors with the explosive growth of its overseas Temu service.

Then there's stalwart Vipshop Holdings Ltd. (NYSE:VIPS), which is struggling a bit to move beyond the early success it found with "daily deals" offering cheaply priced big brand clothing using a group buying model. That model has been running low on fuel for years now, sending the company into revenue contraction back in 2024.

In a sort of "back to the future" twist, the company revealed in its latest financial results, announced on Thursday, that it's finding some unlikely success in its brick-and-mortar outlets business. While it doesn't break out specific revenue for that part of the business just yet, the strong performance does seem to coincide with a recent trend for consumers looking for "experiential shopping" for their offline purchases these days.

Such shopping differs from more traditional store visits, in that consumers often plan special trips to places like outlet malls and membership stores like Walmart's Sam's Club, treating them as a hybrid shopping-recreational experience. Vipshop hasn't traditionally focused much on that part of its business, centered on its brick-and-mortar Shan Shan Outlet stores. But that part of the business offered a glimmer of some excitement in its latest results, including a plan to spin off the Shan Shan business' property element into a real estate investment trust (REIT).

Vipshop could certainly use some excitement these days, as its "daily deal" business model has been yesterday's news for quite some time. Despite its flatlining revenue, the company is still quite profitable. But its stock commands a meager price-to-earnings (P/E) ratio of just 7, a third or less of the 21 for Alibaba and 24 for JD.com. Even PDD, whose Temu has come under attack on multiple fronts lately, trades at a higher ratio of 10.

Vipshop's latest results show it continues to sputter, though it managed to eke out some revenue growth for only the second time in the last two years. But lest anyone get too excited, the company forecast a return to revenue contraction in the second quarter and painted a gloomy outlook for the near term.

Founder and Chairman Eric Shen noted that this year's Lunar New Year holiday in February was relatively strong, but quickly added that things have gone south since then. "Following the holiday period, we saw a very apparent moderation of sales in March," he said. "As we enter the second quarter, the April data does not turn out very well, slightly – it's not improving from March and into May to date, still very challenging."

Shifting focus

Vipshop has certainly been trying to improve itself, though most of its steps are quite incremental and lack the imagination of major strategic moves that get investors more excited with big growth potential. Among other things, the company has been focusing more of its resources on its higher-spending members, and noted its SVIP membership base grew 9% year-on-year in the first quarter.

Another bright spot for the company, whose mainstay is traditional apparel, has been its newer moves into sportswear and outdoor products that are popular among young people. It noted that part of the business continued to outperform, helping to offset weakness in its core womenswear and menswear categories.

The sum of all those factors, combined with a 30% year-on-year jump in its Shan Shan Outlets business during the quarter, added up to first-quarter revenue of 26.6 billion yuan ($3.91 billion), which was up 1.2% from 26.3 billion yuan a year earlier. But the company said it expects to slip back into the revenue contraction in the second quarter, forecasting a year-on-year drop of up to 5% for the three months to June.

Vipshop's gross margin improved a bit in the first quarter, rising to 24.4% from 23.2% a year earlier, thanks to its focus on higher margin products and cost controls. The result was a relatively strong 13.6% rise in its first-quarter profit to 2.2 billion yuan from 1.9 billion yuan a year earlier. But even here, we should note the company's adjusted profit, which excludes share-based compensation costs, was flat year-on-year at 2.3 billion yuan.

Vipshop shares rose 2.1% on Thursday after the report's release, indicating some slight investor enthusiasm. But the stock is flat over the past year, showing investors will need to see some better results to value the company more highly, including more momentum and contribution from its outlets business.

The outlets business isn't exactly new, with Vipshop noting its Shan Shan Outlets in the Central Chinese city of Zhengzhou and the Northern city of Harbin have been around for roughly a decade. But the company appears to be putting more energy into that business lately to seize on demand for experiential shopping and bargains from value-conscious consumers in China's slowing economy.

CFO Mark Wang said the company's application to spin off the property element of the Harbin and Zhengzhou outlets received regulatory approval late last month, and pricing of the shares was completed this week. Following the spinoff, Vipshop will retain 49% of the REIT's shares, allowing it to deconsolidate that part of the business from its results. It will also book a one-time 5.3 billion yuan gain from the spinoff in the second quarter.

Wang pointed out that in addition to those older outlets, the company currently holds another 18 outlet projects in its portfolio, "demonstrating strong potential for future expansion." The model for the outlets business looks quite solid, allowing Vipshop to reap benefits from operating the stores while moving the capital-intensive property ownership assets into the REIT.

But the fact that the company doesn't break out separate revenue for the outlets underscores that this business is still a relatively small part of its overall revenue pie. To get investors more excited, it will need to accelerate new openings to highlight its potential to become a major experiential brick-and-mortar retailer.

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Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.