Vipshop Holdings Ltd. (VIPS) shares slipped Tuesday after the Chinese discount retailer posted a sharp drop in adjusted profit and issued a third-quarter sales outlook that came in below expectations.

The company reported second-quarter adjusted earnings of 12 cents per American depositary share, missing the analyst estimate of 51 cents by a wide margin. Revenue fell 4.3% year over year to $3.641 billion, though that still managed to top the $3.620 billion analysts were looking for.

Consumer Weakness Pressures Operations

The numbers underneath the top line tell a familiar story for anyone watching China's retail sector. Gross merchandise value slipped to 50.6 billion yuan from 51.4 billion yuan a year earlier. Active customers dropped to 42.3 million from 43.5 million, and total orders fell to 182.4 million from 193 million.

Margins also felt the squeeze. Gross margin narrowed to 23.3% from 23.5%, while adjusted operating income declined to 2 billion yuan from 2.4 billion yuan. The adjusted operating margin contracted to 8.1% from 9.3%.

Chairman and CEO Eric Shen acknowledged the headwinds, saying the company navigated a "challenging consumer environment" during the quarter. The plan going forward? Strengthen merchandising, improve the customer experience, and lean more into artificial intelligence.

Vipshop's results underscore the mounting pressure from China's consumer slowdown. Active customers, total orders, and merchandise sales all declined, while adjusted profit took a hit and margins narrowed.

One-Time Gain Lifts Reported Profit

Here's where the headline numbers can be a bit misleading. Reported net income surged 189% to $634.7 million, but that jump was mostly thanks to a one-time 5.79 billion yuan investment gain tied to the listing of a commercial real estate investment trust.

Strip that out, and the picture looks very different. Adjusted net income plunged to $57.8 million from about $306 million. Vipshop blamed the decline mainly on a one-time withholding tax adjustment related to historical dividend distributions.

The company also reported a free-cash outflow of $110.3 million during the quarter. As of June 30, it held $4.4 billion in cash, cash equivalents, and restricted cash.

Vipshop Forecast Trails Estimates

Looking ahead, Vipshop expects third-quarter revenue of $2.992 billion to $3.154 billion, which comes in below the $3.180 billion analyst estimate. The forecast implies a year-over-year decline of up to 5%.

Shares were down 2.65% at $13.94 during premarket trading on Tuesday.