Earnings Call Transcript - BZUN Q2 2022

Operator, Operator

Good morning, ladies and gentlemen, and thank you for standing by for Baozun's Second Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I will now turn the meeting over to your host for today's call, Ms. Wendy Sun, Senior Director of Corporate Development and Investor Relations of Baozun. Please proceed, Wendy.

Wendy Sun, Senior Director of Corporate Development and Investor Relations

Thank you, operator. Hello, everyone, and thank you for joining us today. Our second quarter 2022 earnings release was distributed earlier and is available on our IR website at ir.baozun.com as well as on global newswire services. They have also posted a PowerPoint presentation that accompanies our comments to the same IR site, where they are available for download. On the call today from Baozun, we have Mr. Vincent Qiu, Chairman and Chief Executive Officer; Mr. Arthur Yu, Chief Financial Officer; and Ms. Tracy Li, our Vice President of Strategic Business Development. Mr. Qiu will review the business operations and the company highlights, followed by Mr. Yu, who will discuss financials and guidance. They will all be available to answer your questions during the Q&A session that follows. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the U.S. SEC and the announcement on the website of Hong Kong Stock Exchange. The company does not undertake any obligation to update any forward-looking statements, except as required under applicable law. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB and the comparisons are on year-over-year basis. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Vincent Qiu. Vincent, please go ahead.

Vincent Qiu, Chairman and Chief Executive Officer

Thank you, Wendy. Hello, everyone, and thank you all for joining us. As you know, in April and May 2022 there was a strict COVID lockdown in many key cities of China including Shanghai, where Baozun is headquartered. In the face of COVID-related logistics interruptions, our team quickly mobilized infrastructures to minimize disruptions and maintain operations. Overall, as shown on Slide Number 2, our total net revenue declined by 8% year-over-year, while services revenues increased by 7%, demonstrating once again our resiliency to macro uncertainties. The pandemic has accelerated the need to cope with drastic interruptions and urgency of digital transformation across a wide range of brands that we serve. Please turn to Slide Number 3, the selling trend in the rapid convergence between online/offline, or OmO, Baozun's omni-channel solution enables OmO by integrating brand partners resources including digitized advertisers of brake and motor stores, mobilized sales associates, and shared inventories that have become the lifeline of e-commerce during the strict COVID lockdown. We also benefited from the deployment of our intelligent customer service management system, S-ANY, which can support remote execution and enhanced quality. With S-ANY our staff can log into the system from anywhere and the system will keep monitoring real-time data of customer service behavior across channels. With our seamlessly integrated technology, we are pleased that Baozun has become the de facto aid and relief when it comes to overcoming uncertainties and challenges like the COVID lockdowns. And as always, we kept developing additional services. For instance, we updated our digital content and enabled more virtual reality functions for one leading sportswear brand and also launched short video services, leveraging our multiregional service centers network. All these efforts helped enrich the consumer experience and empower many of our brand partners to succeed during the 6/18 campaign. Now, please turn to Slide Number 4 to share more about our progress on business development. During the quarter, luxury and premium brands continued to surge forward, and we also added more subcategories, including outdoor cosmetics and fast-moving consumer goods, thereby enhancing our diversification. Overall, we added a net of 10 new brand partners in the second quarter, increasing the total number of brand partners for store operations to 355. While we prioritized the new partnerships, we inspire existing partners to launch more channels. By the end of the second quarter, we operated approximately 40% of our brand partners using an omni-channel approach compared with about 33% a year ago, making a milestone in our omni-channel vision. This August our capabilities and track record helped us gain greater recognition in Tencent's mini program e-commerce ecosystems. We were honored to be accredited by Tencent as a partner of excellent category for e-commerce operator and independent service vendor, or ISV, for Tencent Cloud Mall, an outstanding category for business development partner, with these recognitions, we became the only service partner that is top listed in both Alibaba, Tmall, and Tencent mini program e-commerce ecosystem. We're now further collaborating with Tencent on several initiatives such as in traffic acquisition and smart new retail. Next, our momentum towards our vision tech of technology empowers the future success. We are seeing strong demand from our clients for technologies and solutions to manage not only retail but also distribution networks. For example, our big successful project with a leading electronic giant continues to expand. During the quarter we completed a nationwide integration in mini program and JD-Daojia for all of over 3,000 stores, enabling us to generate license revenue in a recurrent stream. We're now in the next phase of incorporating Tmall and Meituan Dianping to this digital platform to fully integrate business flows from factories to stores and to consumers. Another example is one, we were recently secured world leading sports equipment retailer to co-build its digital operating platform. Thus far we have established a business pipeline with over a dozen of brand partners in technology integration. We believe as brand partners elevate their efforts in digital transformation, technology remains the backbone of our widening competitive advantages. Now move on to our progress in logistics and supply chain businesses. Despite the disruptions in some areas during the COVID lockdown, we not only were able to uphold operations at our own warehouses but also guided our brand partners to quickly transit from centralized warehousing to a great management system. We further deepened our cooperation with Cainiao to leverage its established infrastructure and network. During the quarter we started to manage Cainiao's warehouse in the apparel category, got some business referrals in luxury and premium sectors and launched more RFID-based solutions for some of our key sponsor brands. Motivated by these early synergies, we will appraise the existing lines to further streamline and advance additional strategic objectives. And during all the external uncertainties, we were able to demonstrate our resiliency and accountability. Meanwhile, we are executing our midterm plan with discipline and strategically investing in our business transformation to expand our total addressable market. For example, please turn to Slide Number 5. In brand management, we see a natural move to expand upstream in the value chain, leveraging our digitalization capabilities and growing penetration of e-commerce and marketing insights. Brand management enhances our value proposition from end-to-end solutions, which will also in turn enhance our strategic thinking and cultivate a brand-oriented service philosophy. Since last year we initiated our brand management efforts via multiple approaches, including strategic alliances through minority investment and self-incubation. We have assembled a diverse and attractive portfolio of seven brands to start with covering two major categories of apparel and accessories, and health and beauty. We are happy to report that we have empowered these brands to amass a total GMV of approximately RMB80 million in the first half of 2022. This translated to a year-over-year growth rate of over 50%, strongly outperforming the general retail industry. Finally on ESG and the sustainable growth turn to Slide Number 6. We issued our second annual ESG report this May and launched an additional set of green initiatives, including the introduction of a Carbon Neutrality White Paper in June. We are committed to reduce 50% of carbon emissions by 2030 compared to the 2021 baseline, and achieve carbon neutrality by 2050. This quarter we kicked off our public welfare initiatives by co-launching a used-shoes recycling program with one leading national sportswear brand. As a leader in e-commerce services, we will always bear in mind to operate responsibly, accountably, and sustainably. We look forward to expanding with our brand partners to mutual successes. I will now pass the call over to Arthur to go over our financials. Thank you.

Arthur Yu, Chief Financial Officer

Okay, thank you, Vincent, and hello everyone. Now, let me first do a quick review of the financials for the second quarter in 2022. Please turn to Slide Number 7. During the quarter, our total GMV increased by 47% to RMB23 billion. The strong GMV growth was mainly due to outstanding performance by one leading electronics brand and service fee model. Excluding this particular brand, the adjusted GMV would have grown by 2.4%. Total revenues declined by 8% to RMB2.1 billion as product sales declined by 29%, while service revenue increased by 7% compared with the same period last year. Now, let’s turn to Slide Number 8 for a breakdown of revenue. During the quarter, revenue from our traditional e-commerce partner business accounted for 50% of total business. Revenue for warehouse and logistics contributed 29%, and digital marketing and IT solutions contributed the remaining 21%. The outbreak of COVID and subsequent strict lockdown in April and May had a general negative impact on our business. However, we are delighted to see that our luxury category still achieved double-digit growth. There was also more resiliency in value-added services where warehouse and fulfillment service revenue increased by 20%, and digital marketing and IT solution revenue declined only 4%. Due to the COVID lockdown impact, product sales revenue declined by 29%, reflecting a generally weak sentiment in product sales as well as our proactive measures to optimize working capital efficiency. Given the current uncertainty in geopolitical events and macro environments, we believe it is critical to continue to focus on high-quality revenue streams to minimize risks in the coming quarters. As such, we have put more effort on non-distribution model to grow revenues from value-added services while emphasizing distribution model on product sales. Now, turn to Slide Number 9. During the quarter, our cost of products decreased by 26% to RMB602 million, mainly due to a reduction in product sales. Our gross profit margin for product sales was 13.2% for the quarter, mostly due to a change in pricing strategy and adjustments in category mix along with increasing costs related to default and imperfect products. However, if we take into account service revenue, our overall gross margin improved 7% to 72%, driven by a higher revenue stream contribution that generates a higher margin. Now, let’s turn to operating cost and expenses on Slide Number 10. Fulfillment expenses were RMB725 million, an increase of 29%, which was largely due to the revenue growth in warehouse and logistics services, and some incremental cost related to COVID protection for front-end fulfillment staff. We are glad to see our regional service center ramp up and the efficiency of customer service has improved to a point that such costs declined by 2% year-over-year. Our sales and marketing expenses were RMB668 million, an increase of 3%, mainly due to increased business development-related staff costs to drive business growth, offset by efficiency improvements. Technology and content expenses totaled RMB112 million, a decrease of 3%. The decrease was mainly driven by the company’s cost-control initiatives and efficiency improvements, which were partially offset by the ongoing investment in technological innovation and productization. G&A expenses totaled RMB92 million, a decrease of 6%. The decrease was primarily attributable to the company's cost-control initiatives and efficiency improvements, and a higher base from the running period for the company's new headquarters in the same period last year. Now turn to Slide Number 11. Based on the above-mentioned items, our non-GAAP income from operations was RMB47 million during the quarter and non-GAAP operating profit margin was 2.2%. Once again, we have prepared a waterfall diagram depicting our analysis of how our top line and bottom line evolved year-over-year. As a reminder, this analysis is unaudited and should solely be used as supporting numbers to aid discussions. First, on Slide Number 12. This waterfall diagram shows our net revenue's walk from Q1 2021 to Q2 2022. In red, you can see that the biggest item impacting our revenue this quarter was product sales. As mentioned earlier, the two major factors contributing to this drop were our continuous efforts in brand optimization and weak product sales due to the COVID lockdown, mainly from one key brand in personal care product categories. Revenue from digital marketing and IT services, which we view as value-added services, declined slightly this quarter by 4%. This slight decline in digital marketing and IT revenue can also be attributed to the COVID lockdown that negatively impacted several new project launches from brand partners. On a positive note, this initiative in value-added services led to better profitability. Please follow me to Slide Number 13 for the indicative work of non-GAAP operating profit and cost streams. As shown, non-GAAP operating profit from digital marketing and IT improved by 19%. We also generated a positive saving of RMB15 million from cost optimization while at the same time we kept investing in new opportunities. We spent RMB40 million on brand management, overseas expansion, and COVID protection and welfare for employees during the lockdown. For our traditional store operation business and warehouse and fulfillment business, the challenging external environment dragged down the overall top line and also triggered higher operating expenses during the COVID lockdown. Please turn to Slide Number 14. To counter these headwinds caused by the COVID lockdown, we continued our cost transformation and optimization efforts mainly focused on four areas. Firstly, we proactively minimize the risk by diversifying regional service center functions, including: store operations, design, digital marketing, and technology capabilities. Following our success with regional service center in Nantong and Hefei, we have selected more cities for the next phase of expansion including: Suqian, Chengdu, and Enshi. Secondly, we continue to re-engineer our business processes by centralizing our operating capabilities where we use one team to serve multiple brands with similar tasks. We also introduce a couple of new automation and intelligence tools to increase productivity and reduce labor costs. We rationalized our compensation incentives for our frontline employees by introducing the Baozun Business Owner, or BBO, contract, which was designed to motivate our employees to take ownership of their roles and offer more entrepreneurial incentives for performance rewards. And finally, after moving into the new headquarters building, we were able to consolidate the office footprint across all departments into one place and further streamline supporting functions, such as: finance, administration, and procurement to reduce costs. Now I'd like to turn to Page 15 about our cash flow. As of June 30, 2022, our cash and cash equivalents totaled RMB3.1 billion. In light of the macro uncertainties, we continue to prioritize working capital efficiency enhancement and launched new initiatives to further advance our back-end processes to improve inventory management, billing, and collection activities. As a result, we are pleased to sustain a positive operating cash flow of RMB405 million during the challenging period of COVID lockdown. Meanwhile, we moved forward with our share buyback assets and purchase of convertible senior notes, which totaled RMB992 million during the quarter. Lastly, our Board of Directors has approved us to pursue the voluntary conversion to dual primary listing on the Hong Kong Stock Exchange. As of today, we are happy to announce that we have received the acknowledgment from the Hong Kong Stock Exchange regarding the conversion to dual primary listing. We expect the primary conversion to become effective on November 1, 2022. After the primary conversion becomes effective, Baozun will become a dual primary listed company on the NASDAQ global selected market and the main board of the Hong Kong Stock Exchange. Becoming primary listed on both exchanges, we anticipate expanding our access to a wider investor base. Overall, despite some turbulence in the macro environment, our ability to conduct business during the lockdown highlights the flexibility and resilience of our business model. We will continue to prioritize resource allocation, drive cost transformation, and improve working capital efficiency. We believe our solid balance sheet, our improved momentum in value-added service, and our well-diversified brand partner portfolio will not only prepare us to get through the tough market environment ahead but also enable us to emerge as a stronger business with sustainable long-term growth. So this concludes my financial review section and that concludes our prepared remarks. Thank you everyone. Operator, we are now ready to begin the Q&A session.

Operator, Operator

Thank you. Your first question today comes from Alicia Yap from Citi. Please go ahead, your line is open.

Alicia Yap, Analyst

Hi, thank you. Good evening management. Thanks for taking my questions. I have two questions. The first one is related to the progress and traction for the non-Tmall channels. It seems like this quarter, the contributions declined from last year to 24%. Could management share more color on the reasons for this mix and how we should be thinking about the future growth opportunity for all these alternative channels? For this quarter specifically, should we interpret that as suggesting the brands are remaining quite resilient or actually returning more to Tmall channels? And then the second question is can you update us on your relationship with iClick? How is the business cooperation with iClick so far? Is the investment and strategic business collaborations working as planned? Any color management could provide will be appreciated? Thank you.

Arthur Yu, Chief Financial Officer

Okay, Alicia, I will take your question. So this is Arthur here. So first of all, on the non-Tmall percentage, basically the number you have seen is based on including a very strong performance of one major leading electronic brand during the 6/18. If we exclude this one leading electronic brand, actually non-Tmall represents 48% of total GMV this quarter compared with 43% last year, which is an improvement of 5% year-over-year. This demonstrates our omni-channel strategy has continued to gain traction. We also see that more brands are starting to utilize the non-Tmall channel to grow their e-commerce business. As we mentioned earlier, we have made good progress not only with Tencent but also with JD and other private omni-channels as well. On your second question regarding the cooperation with iClick, just a recap: the main purpose of our investment in iClick is to enjoy operational synergies by Baozun operating the back-end of operations, and iClick having a front-end system which allows us to jointly feed and pitch to more customers. The integration is fully completed, and we have seen good progress in terms of joint business development. As a result, you can see we mentioned earlier, our Tencent ecosystem has made significant progress this year where we were awarded two good ratings: one in e-commerce operation and the other in ISV – both in the top categories of the Tencent ecosystem. That cannot be achieved without the support from iClick. After that, we became the only company in China which enjoys the top rating in Tmall, which is the six-star rated TP, and also the top-rated in the Tencent system, making us the best service provider for both the public domain and private domain. This is what we have seen in terms of progress and strategic opportunities we opened along with the investment into iClick.

Alicia Yap, Analyst

I see, this is very helpful. Thank you, Arthur. Congrats on this solid achievement.

Operator, Operator

Thank you. The next question comes from Thomas Chong from Jefferies. Please go ahead. Your line is open.

Thomas Chong, Analyst

Thanks management for taking my questions. I have two questions. First is about the recent trend. Can management comment on the impact of the macro headwinds and consumer sentiment on our overall business, as well as the trends of different categories in June and July and August so far? And my second question is about our cooperation with Cainiao. Can management provide an update on the cooperation and also share our thoughts about the expansion into Southeast Asian markets? Thank you.

Vincent Qiu, Chairman and Chief Executive Officer

Okay. So maybe Tracy you can answer the first one. Then I will take the one about China.

Tracy Li, Vice President of Strategic Business Development

Thank you, Jefferies. I’m going to cover the first one. Regarding the digital consumption, we have been monitoring closely over these three months, and after a rough time, the accumulated consumer demands have helped us to achieve a very successful 6/18 as Vincent mentioned. Since these past two months, we can see the traffic and GMV are up from July to August. Overall, consumption has gradually recovered. Although it hasn’t fully recovered to the same level compared with last year, we think the trend is good. This is a very similar situation regarding consumer sentiment; the market is facing challenges with free traffic and lower conversion rates, along with a higher rate of cancellations and returns across categories. We see fluctuations in the 5% up and down across different categories, but we can also note that the platforms are taking many initiatives to upgrade the apps and improve consumer experiences. Thus, we believe all of these investments will pay off in terms of better consumer preferences in the long term. From Baozun's side, over the past quarter, we have focused a lot on improving consumer experience by working with our brand partners to launch new features such as digitalized poster sales, and consumer care services. We have enabled over 1000 products to enjoy the same premier services online and offline, and we also launched the 3D display modeling service and gift card options for Tmall exclusive capital in the CBD period. All of these tactics will help us to engage with the younger demographic.

Vincent Qiu, Chairman and Chief Executive Officer

Okay. Thank you, Tracy. I will answer your second question regarding the cooperation with Cainiao. We are making good progress quarter-on-quarter. We have operated mainly in three areas. The first one is we have been jointly conducting business development with several luxury and primary apparel brands, achieving good results, and we see significant opportunities for us in collaboration with Cainiao. Secondly, Baozun utilizes Cainiao's nationwide logistics and warehouse capabilities. During the 6/18, we leveraged this capability to operate the great management system, allowing for faster delivery to customers, which helped us achieve good results in the 6/18 campaign. Thirdly, both Tmall and Baozun are technologically strong companies. In this quarter, we started operations utilizing RFID technology, adapting it for a few international sportswear brands to improve efficiency and customer satisfaction. We foresee great future success in our continued collaboration with Cainiao. Regarding expanding overseas, we have started to look outside China early this year with offices now in Singapore and Paris, France. We have begun crafting our footprint across Asia and Europe, with additional personnel and networks on the ground. This quarter, we generated approximately 200 million GMV from outside of China, and this figure is growing steadily every quarter. Our strategy for international growth focuses on replicating our e-commerce success in China while adjusting for local practices and utilizing local expertise to achieve a second generation of e-commerce in each market we enter. In our approach, we will consider both organic and inorganic growth as integral parts of our M&A strategy.

Thomas Chong, Analyst

Got it. Very helpful. Thank you.

Operator, Operator

Thank you. We will now take our next question. Please stand by. And your next question comes from the line of Joyce Ju, Bank of America. Please go ahead. Your line is open.

Joyce Ju, Analyst

Good evening Vince, Arthur, and Wendy. Thanks for taking my questions. I have two questions. The first one is the big picture one. As we all know, there is a lot of change in macroeconomic conditions, regulatory requirements, industry dynamics, and competitive markets. I want to know from a management perspective, what is the top priority of Baozun right now? Is there any change in the company's strategic direction? My second question will be regarding the upcoming Singles Day promotion. I'm wondering how the preparation from the brands' perspective is going. Have we made any plans so far, and how does the momentum look like at this time? Yes, thank you.

Arthur Yu, Chief Financial Officer

Okay. Thank you, Joyce. I think maybe Vincent, you can share some high-level thoughts on the first question and Tracy you may be able to provide insights on the second one. Yes, is that okay…

Vincent Qiu, Chairman and Chief Executive Officer

And we want to engage existing and potential new users through this technology arm. We are seeing a really good progress in the first half of this year as well. I think the integration between these tools is significant; when these tools can connect and leverage each other, we see much better synergy. This suggests that our experience in China's e-commerce can be pivotal when talking to potential technology clients. Additionally, our expertise will significantly enhance e-commerce operation for technological customers. So I believe that focusing on overseas expansion alongside technology will be key strategic priorities and remains in line with our midterm plan. Yes, that is the first part of our priorities. Regarding the 11/11 promotion, I think Tracy can elaborate.

Tracy Li, Vice President of Strategic Business Development

Yes, sure. Thank you, Vincent. So regarding the 11/11 promotion, the planning stage is still in early development as we move into real planning discussions for inventory and investment levels. The top conversations with our leadership team regarding marketing brand ambitions are ongoing. Most brands are still looking for solid plans in terms of marketing investment and stock level at this time. However, there are some brands with better economic situations based on their omni-channel landscape and product mix, and they’ve increased their marketing investment in preparation for 11/11. We continuously monitor our position and cost structures. I want to emphasize we need at least a six-month plan focusing on two critical areas: the first is shifting focus from daily sales to profitability and introducing new products, not solely concentrating on discounts. Secondly, we are concentrating our resources on stock level and marketing efforts for significant promotions. It will be crucial to mitigate the impact of missing top KOLs and to establish metrics for a new livestream ecosystem. These three elements will be integrated into our six-month action plan to work with our brand partners to counter the COVID-19 effects. I hope this clarifies our position.

Joyce Ju, Analyst

Thanks. Thanks a lot.

Tracy Li, Vice President of Strategic Business Development

Thank you. Yeah.

Operator, Operator

Thank you. We will now take our next question. Please stand by. And your next question comes from the line of Charlie Chen from China Renaissance. Please go ahead. Your line is open.

Charlie Chen, Analyst

Hi management, thanks for taking my questions. I have two questions here. The first one is about the performance of some international brand partners; financial reports indicate their performance in China has been rather disappointing. As Baozun is an existing long-term partner with some of these key international apparel brands, what is the management strategy to turn around this trend? Are there any other brands that can compensate for the revenue shortfall from these international apparel brands? That’s the first question. The second question is a follow-up; Baozun has been the partner of internet marketing for many brands for a long time. Moving forward, I want to get some color on how Baozun can sustain growth or even create a second growth curve. Specifically, can we further penetrate the international brands in China, or should we bring some international brands into the Chinese market? Alternatively, is there sufficient demand from domestic brands for international internet marketing, or do we plan to take domestic brands overseas? I would like to get some color on these points. Thank you.

Vincent Qiu, Chairman and Chief Executive Officer

Okay. On the first question, maybe I will share some brief thoughts, and Tracy, you can add to that. Given the current challenges, we are looking at two strategies to counter them. First, we are placing more emphasis on value-added services, such as our digital marketing, IT solutions, and logistics. These services will not only generate new revenue streams but also assist in penetrating new customer bases. Secondly, we have made significant efforts and seen progress in business development; we now have an established business development team across all categories. We have created a long list of potential brands to onboard and are optimistic about opportunities to further integrate our capabilities. Tracy, do you want to add more?

Tracy Li, Vice President of Strategic Business Development

Sure. I think business development is one of the key driving factors for our business right now. We have highlighted three areas in the first half of the year. The first is solid programs on the mini program channel, where we plan to open at least 20 significant stores this year across various categories including luxury, beauty, and sports. The growth potential in these stores has not been fully realized as many remain in early stages of operation, ensuring greater contributions to our business landscape next year. Secondly, we’re seeing good progress in lifestyle-related categories, including collaborations with high-quality brands in the food and home sectors, which allows us to balance our category mix and seek sustainable growth. Thank you.

Arthur Yu, Chief Financial Officer

Thank you, Tracy. Regarding the second question about sustaining growth, I think it’s important to emphasize that before we explore new growth avenues, we need to ensure that our existing e-commerce business is growing solidly. Our priority will be on quality over sheer speed of growth, focusing on protecting our margins and cash flows during this period. E-commerce still presents a significant opportunity in the Chinese market; we will address this while also focusing on technological advancements and brand management to create pathways for future growth.

Joyce Ju, Analyst

Thank you very much.

Operator, Operator

Thank you. Your next question comes from Leo You from CLSA. Please go ahead. Your line is open.

Leo You, Analyst

Hi, good evening management, congratulations on the solid results. So, I have a question on the margin outlook for the second half. Should we expect further margin improvement compared to what we saw last year? Will we see any further benefits from our ongoing cost transformation efforts? Also, a small question regarding the use of cash. How should we think about capital expenditure in the second half? Thank you.

Arthur Yu, Chief Financial Officer

Okay. Thank you for the question. On the first point regarding margin, we will continue driving cost transformation and prioritize cash flow improvement in the second half. However, given the overall market dynamics, there are still many uncertainties caused by potential COVID lockdowns and an economic slowdown, which could impact both product sales margins and overall growth. We aim to protect our margin with the initiatives we have on the ground, but the final outcomes will depend on the changing market conditions, which we will keep you updated on later this quarter. Regarding cash management, our focus right now is on sustaining cash over rapid growth. In this uncertain period, cash is essential. We are working on improving working capital to reduce inventory and accelerate collection for improved operating cash flow. While we are mindful of capital expenditures this year, we’re still pursuing investment opportunities in the brand management, overseas expansion, and technology investment that are necessary for sustainable growth in the long term.

Operator, Operator

Thank you. I'm not sure if Leo You is still connected. I will go to the next question. Please stand by. And your next question comes from the line of Wang Zhihao from CICC. Please go ahead. Your line is open.

Unidentified Analyst, Analyst

Good evening management. My question is also about brand partners. As the macro environment is weak did you lose any big brand partners this quarter due to their own operations or due to foreign brands closing offline stores in China? Thank you.

Vincent Qiu, Chairman and Chief Executive Officer

Okay. I will share some insights and Tracy will add more. What we are seeing is that brand partners are increasingly taking a cautious approach in managing their e-commerce operations. They are prioritizing efficiency over growth; many brands are looking to establish stable partnerships to develop long-term strategies. We have noticed a reduction in churn over the last couple of quarters in light of increasing uncertainties. The Chinese e-commerce market is rapidly evolving, with new channels emerging frequently, which requires brand partners to work with service providers like Baozun that can stay ahead of these changes. Our ability to learn from multiple brands and add value to our partners gives us a competitive edge. Tracy, do you want to elaborate?

Tracy Li, Vice President of Strategic Business Development

Yes, exactly. As strategic partners, we understand that brands are focusing on long-term plans, especially in the face of COVID-19. Over the next 18 months, we will work with our brands to rationalize investments and test waters carefully. In doing so, we aim to prepare strategically for the upcoming 11/11 by focusing on key promotional elements and leveraging our channel capabilities to rebuild brand equity and engage consumers effectively over time. This will be essential to navigating the impacts of COVID-19 on our operations. Thank you.

Unidentified Analyst, Analyst

Very clear. Thank you.

Vincent Qiu, Chairman and Chief Executive Officer

Thank you.

Operator, Operator

Thank you. I will now hand the call back to Wendy for closing remarks.

Wendy Sun, Senior Director of Corporate Development and Investor Relations

Okay. Thank you, Operator. In closing, on behalf of the management team, we'd like to thank you for your participation today. If you wish to reach out to us, thank you for joining us. This concludes the call.

Operator, Operator

Thank you. This concludes today's conference call. Thanks for participating. You may now disconnect. Speakers, please stand by.