VIPS – China’s Vipshop a Portfolio Buy Right Now

Welcome to the Stock of the Day!

As the leading online discount retailer in China, Vipshop Holdings (VIPS) profits from a booming middle class that is becoming increasingly brand conscious. And this morning the company demonstrated just how powerful this consumer trend is, posting triple-digit sales growth and a double-digit earnings suprise. VIP shares are up over 10% this morning, but can the Chinese stock keep up the momentum heading into 2014? Find out now.

Company Profile

Vipshop is a leading online discount retailer in China. The company targets China’s brand-oriented middle class, working with thousands of well-known brands to host online flash sales at deep discounts to regular prices. China is significantly underdeveloped in terms of physical discount retailers and outlets, and consumers are going directly online for discounts on popular brands.

Vipshop offers a selection of branded discount products, including apparel for women, men and children, fashion goods, cosmetics, home goods and lifestyle products, footwear, sporting goods, luxury goods and gifts. The company sells its products via its website, and its mobile app.

Earnings Rundown

In the third quarter, Vipshop Holdings swung to a profit thanks to stronger margins and a surge in new active customers. Compared with Q3 2012, the company’s sales soared 146.1% to $383.7 million. Vipshop’s sales were nearly $20 million above analysts’ consensus estimates.

During the same period, Vipshop Holdings’ non-GAAP operating earnings rose to $15.1 million compared with a loss of $1.2 million year-on-year. This translated to adjusted earnings of $0.26 per ADS, which trounced the $0.21 consensus estimate by 24%. The company’s active customers have climbed to 4.0 million from 1.7 in the past year, while its total orders have risen to 11.7 million from 5.4 million during the same period.

Looking Ahead

Encouraged by these strong results, management guided its fourth-quarter revenues forecast above the Street view. Vipshop Holdings projects total net revenues to be between US$580 million and US$590 million, well above the $532.64 million in sales forecast by analysts. This translates into 94% to 97% annual sales growth.

Looking ahead to the following quarter, the analyst community forecasts 71.3% sales growth and 100% earnings growth. For fiscal 2014, the consensus calls for 62.1% sales growth and 101.1% earnings growth. This is nearly four times the 28.5% annual earnings growth forecast for the industry as a whole. So we’ll likely see other blowout earnings announcements from Vipshop in coming quarters.

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. Ever since I added VIPS to my Portfolio Grader database last March, this stock has remained squarely at an A-rated buy.

The main reason is that this Aggressively-ranked stock enjoys enviable institutional buying pressure—VIPS receives an A for its Quantitative Grade.

Meanwhile, the company could stand to improve some of its financial metrics, including cash flow and return on equity (both C-rated). The company currently receives lackluster grades for operating margin growth and earnings growth as well (also both C-rated), but I expect that these grades will firm up once the latest quarterly results are plugged into the system.

Vipshop currently scores well on sales growth (A-rated), earnings surprises and analyst earnings revisions (both B-rated), and I don’t expect that to change. VIPS receives a C for its Fundamental Grade.

Bottom Line

As of this posting, November 12, I consider VIPS an A-rated Buy. As shown by this morning’s price activity, this is an Aggressive stock, so I recommend you only add it as part of a well-diversified investing strategy.

Recommendation: A-rated Buy

Would you like to check the fundamentals backing up one of your stocks? For more stock grades, please visit my Portfolio Grader website!

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