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Bull of the Day: Vipshop Holdings (VIPS)

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Vipshop Holdings Ltd. (VIPS - Free Report) is a leading online discount retailer for high-quality brand name products in China, utilizing the online "flash sales" method where special pricing may only be available for a few days.

Offering a wide selection of various famous branded discount products including apparel for women, men and children, fashion goods, cosmetics, home goods and other lifestyle products through its website, the $9 billion company describes its unique approach thus...

"As compared to conventional on-line marketplaces or large-scale multi-category online retailers, Vipshop has successfully created and proven there is a third e-commerce model that can provide tremendous scale and profitability. By providing special offers and deep discounts on branded products, the Company has pioneered the online discount retail model in China and become the expert and leader trusted by our customers and brand partners alike."

Shift From Luxury Pays Off

In a Forbes article from last November, Heng Shao described the company's transformation since launching in 2008...

Founders Eric Ya Shen and Arthur Xiaobo Hong "quickly shifted weight to mass market brands of clothing, cosmetics and accessories, as meager sales proved online luxury shopping to be unattractive to Chinese consumers."

Their approach took some time to pay off even after their March 2012 IPO. Shao notes that "The wind only shifted in late 2012, after Premier Wen Jiabao’s visit to Vipshop’s Guangzhou headquarters injected a dose of confidence." Revenues climbed to a record $1.7 billion annually in 2013.

"Now a hybrid of time-limited in-season discount and off-season overstock clearance, Vipshop sells $40 dollar jackets alongside $1,000 designer handbags, typically within a time window of four to six days (“flash” sale of luxury products, however, can last as long as 12 days). In late 2010, DCM and Sequoia Capital injected $20 million into the company. Not long after, sales began picking up quickly, with nearly 90% coming from non-tier-one cities where outlets are rare."

What Drove the Shares Up 13X?

Since November of 2012, VIPS has consistently been a Zacks #3 Rank or better. To state that more accurately, in a way that reflects the power of earnings estimate revisions (EER), VIPS has been a Zacks #1 Rank Strong Buy or #2 Rank Buy more than half the time since it was trading $12 over 15 months ago.

To understand why the stock keeps popping up as a Zacks #1 Rank, you need only look at a recent quarterly report. On March 3, Vipshop reported strong fourth quarter EPS results, beating the Zacks consensus by 16% while revenues rose 117.3% year/year to $651.0, also above expectations.

The company's gross margin increased to 24.5% from 22.9% in the prior year period. Non-GAAP operating margin increased to 5.1% from 2.4% in the prior year period. Active customers jumped 119.5% YoY to 5.7 million. Total orders increased 102.4% to 17.7 million.

These numbers vaulted the stock from $130 to $180 that week. And here's a visual of the direction and magnitude of EPS revisions that keep institutional investors buying these shares...

Shares Worth $200?

After that report, Macquarie analysts reiterated their Outperform rating and not only raised their EPS outlook, but boosted their price target for the stock from $130 to $200.

Describing the Vipshop's premium platform for discount retail, the analysts said the guidance for 1Q revenue growth of 106-109% ($640-$650 million) YoY was 12% ahead of their prior estimates and that strong top line growth was largely being driven by substantial growth of active customers.

"With the recent acquisition of Lefeng, a leading online cosmetics retailer, revenue growth and margin expansion should continue. That said, 2014 is an investment year and we raise our estimates of revenue and EPS modestly but recognize our estimates may ultimately prove too conservative. Our $200 PT is based on 50x FY15E non-GAAP EPS due to higher growth and earnings visibility as a result of less competition."

Car Flashing

In a March 10 update, Macquarie analysts talked about Vipshop's latest innovation: selling discount coupons to its customers for buying cars at an offline dealer. "We believe this is similar to Soufun's (SFUN - Free Report) eCommerce business - VIPShop recognizes the face value of the coupon (Rmb 5,000 in today's event) as its revenue. Customers pay the Rmb5,000 upfront and can enjoy a reduction of up to Rmb30,000 from the suggested retail price when they go to designated dealers to buy the cars."

The move into automobile discount events seems like a good one for the company and signals a management team with a creative and aggressive marketing edge, especially in taking on the resident online auto experts in China, Bitauto (BITA - Free Report) .

Unlike a normal flash sales event that can last for 2-6 days, the first auto sales flash sales event was designed to last for two weeks. But all the discount coupons were sold out within one hour.

Shoppers Are Social and Fickle

Vipshop will have to continue to be creative and aggressive as more marketers compete for the Chinese consumer. Again from Shao's November Forbes article...

"The 3.3 million followers on its Weibo page speak to Vipshop’s popularity: still few compared to the more than 5 million fan base of Alibaba's Tmall or Dangdang (DANG), who launched a clearance flash sale site this year, but easily outshines its direct competitors,, and, none of which has more than half a million fans."

VIPS shares filled the early March gap like clockwork and have since rallied back up to $160 this week. I'm sure that I'm not the only investor looking for a good entry soon.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.

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