Earnings Call Transcript - BZUN Q4 2024

Operator, Operator

Good morning, everyone, and thank you for joining Baozun’s Fourth Quarter 2024 Earnings Conference Call. I will now hand the call over to Ms. Wendy Sun, Senior Director of Corporate Development and Investor Relations at Baozun. Please go ahead, Wendy.

Wendy Sun, Senior Director of Corporate Development and Investor Relations

Thank you, operator, and hello, everyone. Thank you for joining us today. Our fourth quarter 2024 earnings release was distributed earlier before this call and is available on our IR website at ir.baozun.com as well as on PR Newswire services. They have also posted a PowerPoint presentation that accompanies our comments to the same IR website where they are available for your download. On the call today from Baozun, we have Mr. Vincent Qiu, Chairman and CEO, Mr. Junhua Wu, Director and Chief Strategy Officer, Ms. Catherine Zhu, CFO, Mr. Arthur Yu, President of Baozun Ecommerce and Mr. Ken Huang, CFO of Baozun Brand Management. 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 US Securities Act of 1933 as amended, the US Securities Exchange Act of 1934 as amended and the US 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 relates 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 and uncertainties or factors is included in the company's filings with the US Securities Exchange and its announcement, notice or other documents published on the website of the Stock Exchange of Hong Kong Limited. All information provided in this call is as of the date and is based on assumptions that the company believes to be reasonable as of the date. And the company does not undertake any obligation to update any forward-looking statement except as required under applicable law. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB. In addition, we may elect to use adjusted in place of non-general accepted accounting principles or non-GAAP in order to reduce oral confusions that may arise from our discussions about financial related to the Gap brand. It is now my pleasure to introduce our Chairman and CEO, Mr. Winston Qiu. Winston, go ahead please.

Vincent Qiu, Chairman and CEO

Thank you, Wendy. Hi, everyone, and thank you all for your time. I'm delighted to report that Baozun continues to execute our three-year transformation plan with strong momentum and consistent quarterly improvements. In the fourth quarter, Baozun Group achieved an 8% year-over-year revenue growth. Our e-commerce division saw a sustainable substantial 16% increase in non-GAAP operating profits, while BBM narrowed by 20%. On an annual basis, we have met our annual non-GAAP operating profit breakeven target supported by positive operating cash flow and a healthy cash balance. Baozun e-commerce has resumed annual top-line growth after two years of contraction. To navigate an ever-evolving market, we have enhanced our creative content capabilities and leveraged our technologies to help brand partners capitalize on platform interconnectivity, data intelligence and AI-driven efficiencies. By expanding into emerging channels like Douyin, RedNote and WeChat, we achieved a 16% year-over-year increase in online store operations revenue this quarter. Additionally, value-added services, including digital marketing and IT solutions, grew by 15% year-over-year. We believe these strengthening fundamentals position BEC well for high-quality and sustainable growth. BBM is experiencing accelerated revenue growth and expanding its store footprint. During the quarter, we generated a 17% year-over-year revenue increase. Notably, GAAP offline revenue has grown for the first time since our acquisition. In Tier 2 cities, we have adopted an asset-light approach by engaging franchises for store expansion. Strengthened by global and local partnerships, this strategy extends our reach across the broader China market while minimizing expansion risks. Additionally, Hunter has expanded its presence with new store openings in Malaysia and Shanghai. Each launch attracted significant foot traffic and media attention, further elevating Hunter's brand presence and appeal. These collective efforts bolster our confidence in sustaining BBM's robust top-line momentum. The year 2025 marks a combination of our strategic transformation and sets the stage for future growth. We have strengthened our senior management team to drive this next phase. My Co-Founder, Junhua Wu, has taken a more hands-on role as Chief Strategy Officer of Baozun Group, overseeing both BEC and TIC, while Ken Huang continues to excel as CFO of BBM and has now also assumed the role of CEO of Gap China. These two high achievers bring energy and vision to our leadership, fostering a more entrepreneurial and innovative culture across the group. Now, I will hand the call over to Junhua to share a few words followed by our team who will provide a deeper dive into our financials and the business performance.

Junhua Wu, Director and Chief Strategy Officer

Thanks, Vincent, and hello, everyone. I'm excited to share my vision for elevating Baozun e-commerce. As Baozun's Co-Founder and Director, I'm dedicated to leading with an emphasis on profitability and sustainable growth. Technology is the cornerstone of our success. In today's rapidly evolving digital e-commerce landscape, we are well equipped to distinguish ourselves as the driving force behind our brand partner sales engine. Our competitive edge lies in enduring partnerships, omnichannel expertise, and value-driven strategies that create lasting impact. Execution requires discipline and a great team. By fostering a culture of ownership and entrepreneurship, we empower our teams to take initiative, drive innovation, and make impactful decisions. Baozun's future is profit-focused, tech-empowered, and customer-centric. I'm fully committed. Now I'll hand the call over to Catherine to provide financial updates.

Catherine Zhu, CFO

Thanks, Junhua, and hello, everyone. Now, let me provide you our fourth quarter and full year of 2024 financial results in more detail. Baozun Group's total net revenues for the fourth quarter of 2024 increased by 8% year-over-year to RMB 3 billion. Of this, e-commerce revenue grew 6% to RMB 2.5 billion, while brand management revenue grew 17% to RMB 535 million. Breaking down e-commerce revenue by business model, services revenue increased by 9% year-over-year to RMB 1.9 billion for the quarter. This growth was primarily driven by a 16% increase in revenue from online store operations and a 15% increase in revenue from digital marketing and IT solutions. Meanwhile, BEC product sales revenue decreased by 4% year-over-year to RMB 572 million, mainly due to the relatively weak performance of the appliance category as we prioritized profitability over revenue growth in this category. BBM product sales totaled RMB 535 million for the quarter, reflecting 17% year-over-year growth. This increase was mainly driven by the strong performance of the Gap brand with both online and offline sales achieving healthy growth. From a profitability perspective, our blended gross margin for product sales at the group level was 30%, while gross profit increased by 5% to RMB 332 million. Breaking this down by our key business lines, gross margin for e-commerce product sales was 10.8% for the quarter compared with 12.4% a year ago. This decrease was mainly due to a change in category mix, but remained relatively stable compared to the previous quarter. Gross margin for BBM was 50.4% compared with 52.9% a year ago. The decrease was mainly due to higher discounts during quarterly GAAP promotions. Now turning to bottom line items, our adjusted income from operations totaled RMB 103 million, an improvement of RMB 28 million, or 37% from a year ago. This included an adjusted operating profit of RMB 137 million from the e-commerce segment, an improvement of 16% compared with RMB 118 million in the same period of last year. BBM's adjusted operating loss totaled RMB 34 million, an improvement of 20% compared to RMB 43 million in the same period of last year. Our non-GAAP net income attributable to shareholders for the quarter was RMB 46 million, an improvement of 59% year-over-year from RMB 29 million in the same period of last year. Let's turn to a quick full-year summary. The group total revenue was RMB 9.4 billion, an increase of 7% year-over-year, of which e-commerce net revenues were RMB 8.1 billion, an increase of 6% year-over-year, while BBM net revenues were RMB 1.5 billion, an increase of 16% year-over-year. Our adjusted operating income totaled RMB 11 million, an improvement of RMB 34 million compared with adjusted operating loss of RMB 24 million in fiscal year 2023. In addition, we successfully completed our share repurchase program, which was authorized by our Board in January 2024. As of the last trading day of January 17, 2025, we repurchased approximately 5.3 ADS through the open market for $14.7 million. This represents approximately 9% of our total shares outstanding at the beginning of the program. As of December 31, 2024, our cash and cash equivalents, restricted cash and short-term investments totaled RMB 2.9 billion compared with RMB 3.1 billion a year ago. Let me now pass the call over to Arthur to update you on BEC, our e-commerce business.

Arthur Yu, President of Baozun Ecommerce

Thank you, Catherine, and hello, everyone. Let me share the key operational achievements of the fourth quarter and how we closed the year. We are glad to report that BEC maintained its momentum in the fourth quarter, achieving a 6% year-over-year increase in total revenues and a 16% improvement in non-GAAP operating profit. More encouraging, our annual e-commerce top line resumed growth, rising 6%. Our growth continues to be driven by strong brand partnerships and category expansion. By the end of 2024, our brand portfolio has expanded to over 490, up from approximately 450 a year ago. This includes around 330 brand partners in online store operations, 340 in digital marketing and IT solutions, and 180 in warehousing and logistics. We are pleased to collaborate with our brand partners on end-to-end solutions with most engaging with us through omnichannel approaches in value-added services. In-store operations alone, omnichannel adoption has increased from 44.7% to 48.8%. Our key categories performed well during the quarter. Total apparel service revenue grew by 27% year-over-year, with sportswear increasing by 18%, luxury returning to growth, and other apparel achieving an impressive 62% revenue increase. We continue to optimize our service offerings across various channels to help brand partners grow. We also upgraded our business intelligence offering to provide real-time visualized data insights across channels, making it easier for brands to track performance. This quarter, we launched Douyin Business Intelligence and by the end of 2024, we were working with over 30 brands on content-driven store live streaming. Our latest live streaming event for a Spanish fast-fashion brand hit a peak viewership of 35,000, total paid views of 5 million, and sold out 100% of the featured products. Our efforts were recognized with the Douyin Ecommerce Diamond Brand Service Provider Award, the highest honor at the latest Douyin Commerce Awards in January. We strengthened our capabilities in content creation, influencer collaboration, and data-driven marketing. In 2024, we executed over 50 brand marketing campaigns and 1,000 live stream sessions, with more than 18,000 KOLs in our established network. Client satisfaction remains a priority, and our efforts are paying off. Our Net Promoter Score (NPS) has steadily improved. In the latest Nielsen survey released this month, our NPS reached 8.53 in 2024, up from 8.23 last year. Our key accounts also show strong loyalty with a 95% renewal rate. Cost optimization is another focus. Our regional service centers continue to ramp up, and as of the end of 2024, approximately 2,700 of our staff were located in these centers. We also continued to integrate AI into our service system. During the recent Double Eleven, we deployed our iSwipe AI assistant for customer service, and the feedback was highly positive as we cut response time by 13% while improving customer satisfaction and conversion rates. As BEC completes the first phase of its transformation initiated in 2023 and returned to a path of growth, I believe this is the right time for me to pass the baton to Junhua and pursue a career opportunity outside of Baozun. It has been an incredible journey, and I'm deeply grateful for the support and collaboration I have received from everyone over the past five years at Baozun. I have full confidence that Baozun will continue to thrive and reach new heights in the years to come. Now I will pass to Ken for an update on BBM.

Ken Huang, CFO of Baozun Brand Management

Please turn to slide eight for additional insights into BBM's progress through Q4. I'm proud to report that we sustained strong momentum through Q4 2024, delivering a 17% year-over-year sales growth, marking one of our strongest performances in recent years. This growth was driven by continued expansion across both online and offline channels. Same-store sales increased for the second consecutive quarter despite a challenged macroeconomic environment. Importantly, offline revenues continued to show positive growth for the first time since our acquisition, demonstrating the impact of store optimization and enhanced in-store experiences. In the second half of 2024, we opened 40 new stores, including 16 in Q4, which performed strongly in new Tier 1 and Tier 2 cities such as Changsha and Zhuhai. We leveraged our strategic partner model to expand in emerging cities, securing premium retail spaces and further strengthening our competitive edge. The unit economics of these new stores are highly promising, driven by strong productivity and healthy store-level margins. By the end of 2024, we managed 152 Gap stores across various cities, and the total store footage is back on our growth trajectory. While we opened new stores throughout the year, we also strategically closed underperforming locations to optimize our offline network, marking 2024 a year of structural upgrades. Looking ahead, we plan to accelerate our expansion by prioritizing high-traffic locations that maximize sales potential. In 2025, we aim to open approximately 50 new stores, resulting in a net increase of 40 stores after accounting for strategic closures. We continue to strengthen Gap's brand DNA and reinforce our iconic categories. Through our close collaboration with Gap Inc’s global merchandising team, we have refined product localization while preserving the brand's core identity. Moving forward, we are prioritizing design improvements, supply chain refinements, and deliberate product planning to enhance our offerings and margin performance. We are also aligning marketing strategies more closely with cultural trends and local collaborations to deepen consumer engagement. Our recent partnership with Forbidden City stands out as one of the most successful IP collaborations in the past three years, highlighting the power of well-executed brand storytelling. Our key strategic pillars for 2025 include expanding channels across shopping malls, outlets, and strong online platforms while ensuring a balanced and sustainable retail mix. In summary, BBM's partnership with Gap Inc., voiced by our localized approach and operational excellence, continues to drive tangible results. With a clear roadmap, we are well positioned to maintain our strong momentum and capitalize on new opportunities. In 2025, we strive for double-digit top-line growth while continuously improving operational efficiency and profitability. That concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

Operator, Operator

Thank you. The first question we have is from Alicia Yap of Citigroup. Please go ahead.

Alicia Yap, Analyst

Good evening, management. Thanks for taking my question. My question is related to consumer consumption sentiment. Has management observed any improvement in consumer consumption sentiment over the past two months, especially with the supportive measures from the government and promotional activities during International Women's Day? What is management expectation for 2025 growth and what are the key drivers? And how should we view the benefits Baozun could capture from smartphone trading subsidies? And my second question is related to Gap China. Can management update us on Gap China's same-store sales growth and the performance of other brands under BBM? And my last question is for Mr. Wu. With your return to the company recently, what are your key initiatives and top priorities for Baozun? And will there be any meaningful change in strategic direction for the company in the coming months? Thank you.

Junhua Wu, Director and Chief Strategy Officer

Okay. Thank you for the question. This is Junhua. So, let me address your first question and your last question. Your first question is about the consumption sentiment over the past two months. Our observations during the past Queen's Day were very good. We drove quite decent growth in terms of our revenue, and many brands have achieved their higher targets worldwide. During the past two months, we see a lot of categories growing rapidly, for example, the home appliance category and the smartphone business, considering we have support from the government subsidy. In those two categories, our services lie in driving our conversion rate and increasing the right capital efficiency into our distribution model and our services model. So we are expecting a higher momentum of the consumption sentiment in the future. As for my working priorities when I just returned to the frontline, my day-to-day focus lies in two areas. The first is bottom-line oriented. I'm going to optimize our existing team structure and implement our salary structure and incentive programs. I'm also going to focus on day-to-day financial management related to the business, including AR and AP, and how we leverage our capital in the right way. Additionally, under our distribution model, I'm going to optimize the terms we work with our partners and enroll more high-quality revenue-based distribution businesses while trying to release some kinds of low-efficiency businesses in terms of our distribution and service models. For the top-line focus, I'm going to place my emphasis on same-store growth by looking into a deeper dive into our day-to-day operations and driving more initiatives in omnichannel strategies that harmonize with each other like Douyin, Tencent Smart Retail, and RedNote. Moreover, driving marketing capability is key this year. We also want to leverage various AI initiatives in driving our top line and increasing our bottom line efficiency. For business development, we have a new strategy for this year. We can share more later when we meet those questions. We also want to optimize our business structure in terms of our DC model and consignment model.

Ken Huang, CFO of Baozun Brand Management

For your second question about BBM, I think our sales growth is coming from both same-store growth and our new expansion of stores. For the same-store Gap, we had a low single-digit same-store growth in Q4 2024. For Hunter, it is relatively small in terms of percentage sales revenue contribution to the total BBM sales volume but it grows very rapidly and the same-store growth rate is over 100% last year. For new store expansion, we see a very good trend in our new openings, especially in Q4 in new Tier 1 and Tier 2 cities. Our sales per square meter rank over many of our competitors. We opened our first store in Shanghai and we will accelerate our expansion in Tier 1 cities, including Shanghai, Beijing, Shenzhen, and some new Tier 1 cities such as Hangzhou. That's all from me.

Operator, Operator

The next question we have is from Chris of Huatai Securities. Please go ahead.

Unidentified Analyst, Analyst

Thank you for taking my question. Congratulations on the solid results this quarter. I have two questions for the management. The first is about the competition. As we see more changes in merchant policy from e-commerce platforms, such as cutting commission rates for several categories, how should we expect the potential influence on Baozun’s fundamentals from the changing competitive landscape in the e-commerce sector? The second question is about the consumption recovery trends. With more consumption stimulus policies rolling out, how should we look at the consumption recovery trend in 2025? Could management share more color on the growth outlook for Baozun's key categories? That's my two questions.

Junhua Wu, Director and Chief Strategy Officer

I believe those two questions are for me. I'm Junhua. So, the first question is about Douyin. We all know that the GMV growth rate on Douyin is competitively higher than the GMV growth rate on other platforms. But from our perspective, Tmall and JD are still the largest GMV platforms when considering the transactions. That said, Douyin cutting our commissions based on the GMV growth is beneficial for us in certain categories, especially in fashion apparel and luxury. We see decent growth in those categories and benefit from the commission rate supports across the landscape. We aim to expand our services and drive more of our existing partners onto the Douyin platform, harmonizing Douyin traffic with Tmall and JD to leverage our omnichannel strategy. For the consumption and overall expectation in 2025, we serve over 400 different brands. Each brand has a different strategy regarding their expectations for 2025. Some brands maintain a high growth strategy, while others focus on product development and design optimization to improve sales either late this year or early next year. Based on our portfolio of categories, we cannot give a unified trend regarding the consumption expectation for 2025, but we maintain high expectations and an optimized outlook for GMV growth, revenue, and operational profit in 2025.

Operator, Operator

The next question we have is from Jiawei Yan of Citigroup. Please go ahead.

Unidentified Analyst, Analyst

Good evening management. Thanks for taking my question. My first question is that JD.com has actively invested in the clothing category since the end of 2024 and this trend is expected to continue in 2025. What's the Baozun strategy in this channel? My second question is how does the company view the rise of AI tools such as DeepSeek? What are the main application scenarios on the business side? Is there any quantitative data available for sharing? Thank you.

Junhua Wu, Director and Chief Strategy Officer

Thank you for the question. The first question is about the rapid growth in the fashion apparel category on JD.com. Baozun is omnichannel-focused, and we have served JD for a long time. Many of our brand partners have already placed their businesses on Tmall and JD and other platforms. We are definitely going to assist our existing clients in moving their businesses onto JD.com, particularly in fashion apparel categories. Additionally, we will leverage our expertise in fashion apparel to drive more business and new clients onto JD, benefiting from the growth trend. Regarding AI initiatives like DeepSeek, we are focusing on AI driving our efficiency and enhancing our top line growth. For the bottom line, we developed many AI tools like smart customer service tools that help our customer service agents utilize our existing knowledge base and improve product discovery efficiency. We have already implemented AI systems for our clients in our distribution models to boost automation in digital asset creation and management, data collection, etc. Internally, we’re also leveraging AI technology to improve processes like financial reconciliation. Regarding top-line revenue, we’re developing tools on RedNote that drive various promotions and target the right consumer, converting to sales effectively. We are keeping pace with the latest technology, and given our extensive in-house tech talent, we believe we have promising prospects in the future by leveraging AI.

Unidentified Analyst, Analyst

Thank you. That's very clear. Could you please also follow up on RedNote plans as well?

Junhua Wu, Director and Chief Strategy Officer

Let me address your question regarding customer journey and RedNote. We are leveraging RedNote to enhance the customer journey. When targeting new customers, we need to consider their customer journey, identifying opportunities and driving brand awareness or product awareness of RedNote, increasing interest and leading to purchases, followed by maintaining loyalty post-purchase. RedNote is currently at the forefront of this strategy. We aren’t directly promoting specific SKUs or products on RedNote but focusing on creating engaging content, establishing emotional links before transactions. For instance, in fashion apparel, we educate customers on how to dress for special occasions and utilize advanced technology to enhance their lifestyle. We create compelling content using AI technology and KOLs to engage and retain customer attention for specific brands or products, leading to successful first transactions and repeat purchases, continuously providing quality content to foster a healthy cycle.

Operator, Operator

Thank you. At this time, we have no further questions. I would like to hand over back to management for any closing remarks.

Wendy Sun, Senior Director of Corporate Development and Investor Relations

Thank you, operator. On behalf of the Baozun management team, we would like to thank you all for your participation in today's call. If you require any further information, feel free to reach out to us. Thank you for joining us again. This concludes the call.

Operator, Operator

Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.