Earnings Call Transcript - BZUN Q1 2022

Operator, Operator

Good morning, ladies and gentlemen, and thank you for standing by for Baozun's First Quarter 2022 Earnings Conference Call. 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, Investor Relations Director of Baozun. Please proceed, Wendy.

Wendy Sun, Investor Relations Director

Thank you, operator. Hello, everyone, and thank you for joining us today. Our first quarter 2022 earnings release was distributed earlier today 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 website, 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 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 US SEC and the announcement on the website of the 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 a 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 CEO

Thank you, Wendy. Hello, everyone, and thank you all for joining us. As you know, Shanghai, our headquarters, has been on strict lockdown since mid-March 2022. This has presented unprecedented challenges to business activities in China. As of today, I'm very glad to report that we were able to minimize disruptions. Thanks to our hardworking people, best-in-class technology, and the diversified regional service centers, we are very confident that we can support our brand partners in navigating the turbulence. Let me start with sharing some progress we have made in this quarter. Please turn to Slide #2. To date, 2022 has been quite unique due to the COVID lockdowns and a weak consumption sentiment in the macro environment. However, our total GMV grew 28% to CNY17 billion, driven by strong growth in FMCG and electronics. Services revenue increased by 24%, whereas product sales revenues declined by 30%, as expected due to our ongoing brand portfolio optimization in recent quarters. During the quarter, we made notable progress in deepening service penetration as our value-added digital marketing and IT solutions generated high double-digit growth. We view this progress as an important step in our efforts to minimize macro environment risks and enhance our value-added proposition to empower brand partners. Please turn to Slide number 3. Our strategic business development efforts continued to bear fruit with faster brand acquisitions and the accelerated progress in the emerging channels. This first quarter, we won several new brands, especially in the luxury, premium, and lifestyle sectors. Leveraging this momentum, we have more flexibility to rationalize less profitable businesses and focus on higher business efficiency. Overall, we added a net of 12 new brand partners in the first quarter, and the total number of brand partners for store operations increased to 345. Looking at the channel breakdown, this quarter, non-Tmall GMV accounted for 40% of the total compared with 32% a year ago. Notably, JD, WeChat, and Douyin all developed a triple-digit growth rate. In our view, omnichannel strategies effectively help brands accrue user access and brand equity, which is critical for sustainable growth. Our integrated digital operating platform, along with our ability to lead brand partners to set the right omnichannel strategy, enables brand partners to expand their e-commerce flexibility and capture incremental business opportunities. With our powerful omnichannel capabilities, a brand can seamlessly offer its products and services, no matter which channel consumers prefer to use. Looking at our progress in JD, during the quarter, we launched a mini program integrated store for an Italian luxury brand and opened flagship stores for a French luxury brand and an American premium fashion brand. These cases have been widely successful and regarded as industry benchmark business cases. We continue to view rich content initiatives and live streaming as powerful tools to leverage and enhance user experience. We have established a threefold service metric composed of daily in-store live streams, content-oriented digital marketing, and the Douyin partner business. Douyin is still in its early phase of brand e-commerce; we set up our dedicated Douyin sub-branch with over 200 staff currently serving in several dozens of branches. With our omnichannel enabling capabilities, our Douyin partner business has already achieved solid headway in apparel, appliance, and lifestyle categories. Now let's share some trends on technology innovations on Slide number 4. In recent quarters, the rapidly evolving e-commerce dynamics have pushed many brand partners to elevate their efforts in digital transformation. In particular, furthering the trend of omnichannel, brands want to master the digital convergence between online and offline spaces as well as enhanced customer relationship management to enrich life values. For example, a few months ago, we launched a dealer transformation program for one international electronics brand partner to digitalize business flows from factories to stores and to consumers. Subsequently, the brand expanded the program to incorporate more platforms such as JD, and it widened the deployment to over 3,000 stores nationwide today, targeting to double the deployment by the end of this year. Another typical trend is brands' efforts in setting up China for China IT systems. In one of our recent China for China project with a leading international sportswear brand, we also launched a one-team methodology by fully integrating our e-commerce partner team, our IT team, and the brand partner's team. We work together as one team. We focus not only on commercial and merchandising but also on consumer privacy protection and lifetime value creation. Both of these examples successfully demonstrate our technology offering's great potential. With the increasing importance of online business to drive sales growth in China, we anticipate technology and transformation will continue to play a critical role for our brand partners. Looking ahead, although our strategic progress remains healthy, we anticipate short-term turbulence due to the recent unprecedented COVID lockdown in China continuing to impact consumer sentiment. Let me share about our prompt response to COVID, as demonstrated on Slide number 5. As per our mission statement, technology empowers future success. Our technology assets afford us with the extended capability and flexibility to help our brand partners navigate external disruptions. We leveraged our one inventory system and O2O toolkit like Shopdog to seamlessly integrate online and offline inventory. Our service, Service Anywhere platform, S-Any, has been a powerful backbone, enabling us to serve our brand partners from different locations with improved quality and efficiency through digital intelligence. Our regional service centers in Nantong and Hefei physically ensure flexible and reliable remote-based services, and we further expand our operations into nine additional cities across China. In logistics and supply chain, we work with our brand partners to transition from a centralized warehouse into a great management system, and our operation team continuously monitors platform policies to adjust product and marketing strategies, nurturing brand care and pricing relationship management. On top of minimizing disruptions, our integrated WeChat mini program solutions help the brand partners migrate their offline assets to online resources. This reinvigorated their offline inventories and sales staff, mitigating their impact from the shutdown of many of their brick-and-mortar stores during the COVID lockdown. One of our luxury brands rolled out its first mini program to over 50 offline stores in more than 20 cities and sustained meaningful sales growth even during the lockdown period. Overall, ensuring smooth continuous e-commerce operations in response to unpredictable COVID lockdowns requires tremendous dedication and coordination efforts. Our ongoing efforts in category diversification, portfolio optimization, and technology innovations have greatly helped us enhance resilience. We will continue to execute on our sustainable growth strategy and proactively explore additional growth drivers as set forth in our medium-term plan. This March, we established a subsidiary in Singapore, marking a foundational milestone for our expansion into Southeast Asia. With that said, despite the lockdown challenges, we will come back to our business with courage, intelligence, and agility to protect the interest of the company and all of our shareholders. At the start of this year, we launched a comprehensive compensation restructuring initiative called BBO, which stands for Baozun Business Owner, to cultivate an ownership-oriented culture and organization. Our BBO aims to tie incentives more directly to individual contributions, empowering more entrepreneurial views and efficiency. Lastly, we would like to reiterate our commitment to sustainability. Last week, we issued our second annual ESG report, launching a new set of additional green initiatives. We are targeting a carbon emission reduction of 50% for 2030 compared to the 2021 baseline and carbon neutrality by 2050. In the longer term, we strongly believe our resilient business innovation and technology investments will triumph and earn us trust, branding, and fortune. I will now pass the call over to Arthur to go over our financials. Thank you.

Arthur Yu, CFO

Okay. Thank you, Vincent, and hello, everyone. Now let me first do a quick review of financials of the first quarter 2022. Please turn to Slide number 6. During the quarter, our total GMV, led by FMCG and electronics, increased by 28% to CNY17 billion. But excluding one electronics and one FMCG brand, the adjusted GMV would have declined by around 10%, mainly due to the BCI and weakening economy impact on sports and fashion apparel taxes. Although our non-distribution GMV expanded by 33% to CNY16.2 billion, our distribution GMV declined by 29% to CNY765 million. The reduction of distribution GMV was a reflection of our continuous progress in optimizing brand portfolio to focus on high-quality business in the past few quarters. Our total net revenues declined by 2% to CNY2 billion due to a decline of 30% in product sales revenue. Service revenue increased by 24% to CNY1.3 billion, benefiting from solid growth in service segments as well as new contributions from acquisitions in the past 12 months. Turn to Slide number 7. As we recently streamlined our organization into four business groups, we accordingly will start providing a breakdown of our revenue stream to help bring their progress. During the quarter, revenue from our traditional online store operation business accounted for 55% of total business. Revenue for warehousing and fulfillment, digital marketing and IT solutions accounted for 26% and 19%, respectively. In this quarter, revenue from our e-commerce business declined by 19%, mainly due to a reduction in low-quality product sales business. At the same time, we are glad to see our value-added services achieve double-digit growth year-over-year. We believe this validates our progress in service penetration and customer engagement. And we will continue to offer innovative products and services to expand Baozun's share of wallet from our brand partners. Now turn to Slide number 8. During the quarter, our cost of goods sold increased by 28% to CNY596 million, which was mainly due to a reduction in product sales. In the second half of March 2022, major cities such as Shanghai experienced unexpected COVID lockdowns resulting in a significant increase in undelivered goods and stagnated orders that we reported as an increase in cost of goods sold on a consolidated basis. Given that the entire second quarter to date remains in lockdown, we anticipate a similar trend in the second quarter. As a result of COVID lockdown impact, our gross profit margin for distribution model reduced to 12.5%, mainly due to a change in pricing strategy, adjustments in category mix, and the increase in costs related to defaults on certain products. But if we take into account the service revenue, our overall gross margin improved by 11% to 70%, mainly driven by higher service revenue, which generates a healthy margin. Now I'd like to turn to operating cost and expenses on Slide number 9. Please note that the breakdown of operating expenses by organic business and M&A on this slide is based on the company management account. Fulfillment expenses were CNY629 million, an increase of 24%. This was primarily attributable to the incremental fulfillment cost of CNY170 million related to our two acquired logistics businesses last year. Excluding the impact from acquisitions, fulfillment expenses from organic business was CNY452 million, a decline of 11%. Sales and marketing expenses were CNY616 million, an increase of 31%. The increase was mainly due to increased BD-related staff costs to drive growth and an expansion in digital marketing services, which was partially offset by efficiency improvements. Technology and content expenses were CNY105 million, an increase of 13%. The increase was mainly driven by growth in GMV and the company's ongoing efforts in productization and commercialization during the quarter, which was partially offset by cost control initiatives and efficiency improvements. G&A expenses increased to CNY91 million, an increase of 14%. This increase was mainly due to rise in human resource-related expenses from acquired businesses last year. Now turn to Slide number 10. Based on the above-mentioned items, our non-GAAP income from operations was CNY4.7 million during the quarter, and our non-GAAP OP margin was 0.2%. 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 11. This waterfall diagram shows our net revenue's walk from Q1 2021 to Q1 2022. In red, you can see that distribution, logistics, and sportswear and fashion apparel were the biggest drag this quarter. Meanwhile, digital marketing, luxury, IT solutions, and others were the positive growth contributors. Next, turn to Slide number 12. We also provide here an indicative walk of non-GAAP income from operations and cost streams. As shown in blue, we have positive contributions from digital marketing and IT solutions. In red, the overall macro weakness dragged down the profitability of the store operation business due to smaller economies of scale. For M&A, this quarter, there was a non-GAAP operating loss of CNY10 million, which was related to Baobida as its express business was significantly impacted by the COVID lockdown. Additionally, we continued to invest in people and infrastructure, which contributed to the red in back-end and strategic investments. Now turn to Slide number 13. In light of the current challenging situation that contains minor uncertainties, our financial management and priority will focus on three areas: improving operating efficiency, continuing portfolio optimization to improve working capital efficiency, and finally, tightening overhead cost controls. Firstly, the regional service center, or RSC, is a key component of our multi-location strategy that improves service quality, minimizes risk, and reduces operating costs. During the quarter, we enriched more functions, including operations and design, into the regional service centers. We have migrated over 50% of our customer services from Shanghai to regional service centers in Nantong and Hefei. As RSC keeps ramping up, we anticipate generating even more economies of scale. We also began allocating more medium-sized brands to our business operation center in order to leverage shared mechanisms to improve efficiency. This integrated platform serves multi-brand partners, helping to optimize low-profit business and further streamline our overall business. For the full year 2022, we anticipate cost savings of approximately CNY20 million from these strategies. Secondly, we will continue our efforts in portfolio optimization and enhancing our working capital efficiency. In light of the current macro environment, cash efficiency enhancement is more critical. We will evaluate inefficient and low-margin brand partners to optimize and minimize risk. We have established a dedicated project team to focus on our bidding processes in order to improve our accounts receivables and inventory management systems. Thirdly, we aim to further optimize our high-cost base and improve Baozun processes by implementing more disciplined initiatives. We expect notable process improvement and cost reduction. Now turn to Slide number 14 about our cash flow. As of March 31, 2022, our cash, cash equivalents, and restricted cash reached CNY3.4 billion, a decrease of CNY1.3 billion from the previous quarter. The decrease was mainly attributable to repurchases of convertible senior notes and our share buyback assets, which totaled CNY1.2 billion. We estimate a total savings of approximately CNY10 million from the retirement of convertible senior notes and its associated interest expense during the quarter. In addition, as you may have noted from our announcement, we have fully completed the repurchase of convertible senior notes due 2024 with a total principal amount of USD275 million in early May, making our balance sheet leaner. Lastly, an update on our buyback initiatives. During the quarter, we repurchased approximately 2.3 million ADRs for approximately USD20 million. Meanwhile, our Board of Directors also authorized an additional USD80 million share repurchase program in March, making our remaining authorized amount $70 million as of March 31, 2022. Overall, despite some turbulence in the macro environment, we are continuing to increase the resiliency and sustainability of the company. We aim to further lower the cost and target positive free cash flow for the full year. With a solid balance sheet and a strong brand pipeline, we are confident that Baozun's business model will deliver shareholder value in the long term. And this concludes my financial review section. Thank you. Operator, we are now ready to begin the Q&A session.

Operator, Operator

Our first question is from Thomas Chong with Jefferies.

Thomas Chong, Analyst

I have two questions. Can management comment about the impact of the pandemic and the macro headwind on our overall business and the trends of different categories in April and March so far? And can you also share if the luxury segment also gets impacted? And my second question is about our expectation on the market recovery. Can you share the updates about the expectation from the user and also from the merchants?

Vincent Qiu, Chairman and CEO

Maybe for Tracy to give some color about this, yes?

Tracy Li, Vice President of Strategic Business Development

I think the new wave of the pandemic has posed a great impact on the Chinese economy. And we see from the public information that total retail sales in April have dropped 11% year-over-year to almost the same level of April two years before, right? Our observation from Baozun's BI shows that the 11 key categories have showed over a 20% decline during the period from March 15 to May 15. It is the same trend in the quantity of the consumer buying group. The trend is quite similar among categories like apparel, sports, footwear and cosmetics. However, there are two categories that are exceptions: one is others, and the other is luxury. In terms of consumer demand and behavior in recent two months, we do see purchase intention recover from the first week of May. This differs geographically in China. Shanghai buyers significantly dropped during the past two months, but they rebounded back from the second week of May. Zhejiang and Jiangsu have recovered quicker than Shanghai. Other provinces like Shandong and Guangdong were not as impacted by the pandemic. National-wide, we see buyer amounts have recovered in the last two weeks, almost reaching the same level as the first week of March. However, the transition still needs to catch up. We are currently working closely with our brand partners to mobilize resources for the 618 shopping festival. Even after the loss in the past two months, most of our brand partners expect signs of consumption recovery during the 618 event. We are utilizing our resources on merchants, discounts, and the marketing fees saved during the last two months to meet targets. However, it's still hard to say how much we can make up for the losses of the last two months, given some brands still struggle with domestic and overseas logistics. The 618 event is unique because most of us are working remotely at home. However, thanks to our regional service centers in Nantong and Hefei and also our Service Anywhere platform, S-Any, we can work from different locations while maintaining the same level of quality and efficiency. Regarding luxury, this category definitely slowed its growth rate and showed inactivity in April. However, from May, we see sales return to year-over-year growth thanks to significant campaigns like super brand day and others. We are collaborating with top brands in this category, and in the past two weeks, we've actively adjusted our paid media and content marketing to target markets beyond Shanghai and Beijing, particularly focusing on lower-tier cities. Our market share from middle-tier cities has increased 20% higher than before. Moreover, we observe positive progress in luxury brands’ digital transformation due to the lockdown, which has accelerated their localized strategy, including multi-node logistics solutions and updates to their CRM systems. We are working closely with our brand partners to capture these changes and believe our technology assets have afforded us extended capabilities and flexibility. I hope this answers your question. Thank you.

Vincent Qiu, Chairman and CEO

Yes, I would maybe just add a few more points on top of what Tracy answered. There’s a lot of uncertainty. From a business point of view, during this uncertainty, we prioritize cash flow, hence our business is focused on protecting cash flow and improving working capital efficiency. We are also looking into optimizing our portfolio to reduce the potential risk of our existing business. We feel this creates a good opportunity to prove Baozun's differentiation compared with our peers because we provide stable services for logistics, customer service, and IT. Over the last month, we have proven we have that capability, receiving positive feedback from some of our largest brand partners. Given the situation in China, we are also exploring overseas expansion to mitigate risks.

Operator, Operator

Our next question is from Vicki Wei with Citi.

Vicki Wei, Analyst

I have two small questions. Would you please update about the cooperation with Cainiao and focus on warehouse and logistics business? And second, would you please provide insights on the growth and traction of non-Tmall channels? Is it fair to assume that the demand from short video platforms and retail are more resilient than Tmall? Or are you seeing similar weakness in spending across all channels?

Vincent Qiu, Chairman and CEO

I will maybe answer the first question, and then maybe Tracy can add some thoughts on the second one. So in this quarter, last quarter, we completed our deal with Cainiao. We made good progress integrating the two teams and started working together. Last time, we introduced the strategy of "one plus x"—using Baozun's long-term capability in the sports and apparel category to try to bring new categories into Baozun with Cainiao's help. From Cainiao's perspective, they have provided us with a long list of potential customers, which opens many business development opportunities. Additionally, Cainiao's larger scale of economy has enabled us to utilize their nationwide warehousing and logistics network, which helped reduce impacts on our customers. Lastly, China has a larger economy of scale that can lower procurement costs. We have been able to tap into their procurement process for materials and warehouse equipment, which will lead to savings for Baozun in the long run. That's on the Cainiao part. Regarding Baozun, we can help this venture because our customers are moving into end-to-end service and omnichannel solutions, where logistics plays a vital part. We can offer full end-to-end solutions that incorporate Baozun logistics. Our technology capability, in conjunction with Cainiao's capabilities, can strengthen our technology enablers to sync our processes and enhance service quality. That's how we are making progress with Cainiao, and we expect to see more progress this year. Okay, I will pass on to Tracy for the second one.

Tracy Li, Vice President of Strategic Business Development

Regarding the second question on marketplace dynamics, it's still early to conclude as data is not comprehensive across other platforms at this time. However, in the past two months, our BI tracking indicates that new channels seem more resilient in demand. We observed many categories still growing weekly in that time, even among apparel categories that were harmed by the pandemic. In fact, those categories quickly recovered in the last week of April and surpassed results from May. This resilience is seen among lower-tier cities and younger consumers. The existing players in these channels are often brands and smaller firms, allowing for greater flexibility in manufacturing and logistics, making them less impacted by the lockdown. However, we should also expect dynamic changes. The competition has worsened, and the advantage of first-mover tactics has diminished. Brand equity is becoming more and more important. Other platforms, including various short video channels, are aggressive in connecting with brands. We have several important pilot projects lined up for the next two seasons. To mitigate losses during the transition, maintaining a balanced portfolio with certainty in ROI is crucial. Our strategy, as Vincent mentioned before, is to empower brand partners with our strong omnichannel capability, providing a seamless experience for consumers regardless of their preferred channel.

Operator, Operator

Our next question comes from Joyce Ju with Bank of America.

Joyce Ju, Analyst

I have two questions. The first is this quarter the first the company started to have a separate disclosure of digital marketing and IT Solutions segments, providing more transparency in terms of service revenue and also profit. Could you share more insights on this business, our strategic plan for these revenue lines, and how we should expect growth in the future? My second question is about the pandemic's impact on consumer demand. Apart from demand from the brand perspective, how do we see the competitive landscape of our business changing due to the pandemic? Are we seeing more competition or a price war, or is the market stabilizing with smaller players exiting?

Vincent Qiu, Chairman and CEO

I will quickly answer the first one and leave the competitive situation for Vincent to discuss. I think it's the first time we split digital marketing and IT revenue. It's also a key focus of our strategy this year. Over the last few quarters, we've observed our traditional business growth starting to slow. Customers, however, are seeking value-added services to sell more online, which we are equipped to provide through digital marketing and IT solutions. This allows us to utilize our investments and generate higher-margin business from our clients. That’s our thought process and how we are organizing our business to achieve our strategic goal. Now I’ll pass it to Vincent to answer the competitive landscape.

Arthur Yu, CFO

During the lockdown, many things have changed, and it has served as a test for all players, brands, and service providers in the market. I’m glad to say that during this pandemic, our capabilities have helped brand partners remain resilient and stabilize their business, which is no easy feat. I see three important points. First, during the lockdown, Baozun’s technology, logistics, and omnichannel capabilities greatly assisted our brands in sustaining operations. Some brands even achieved growth during this challenging period. Our achievements stem from the investments made in logistics and IT capabilities over the years. Second, we have learned extensively from the best brands in retailing, distribution, logistics, and digital marketing, which we’ve integrated into our solutions. This transformation allows us to serve more brands in the future. Third, our long-term and medium-term planning readouts prepare us for varying market scenarios. Thus, we are confident in our resources to support M&A and investments in this period, making it a favorable time for acquisitions. These three points are integral to our strategy to support company growth and deliver higher-value services to the industry.

Operator, Operator

Our next question comes from Sophia Tan with Credit Suisse.

Sophia Tan, Analyst

I have two questions on behalf of Ashley. The first question is about the outlook for the second quarter and the next half of this year. How should we assess the potential impact on both top line and bottom line, considering the duration of the pandemic and corresponding containment measures? My second question is about cost organization. Can management share the measures being taken this year to cut costs and operating expenses? How will these affect gross margin and operating margin?

Vincent Qiu, Chairman and CEO

There’s a lot of uncertainty, and many scenarios could unfold with the current lockdown. We are conservative in our financial outlook for the whole year regarding top-line revenue. We do expect our GMV to continue with double-digit growth, owing to strong brands in the electronics and FMCG sectors. However, we remain concerned about certain sectors, like apparel, impacted by the slowing economy. Thus, we think we will see weaker revenue than in our last outlook. A good recovery time is expected after the 618 shopping festival; we’re keeping our hopes up for a rebound similar to what we witnessed during the first COVID wave in 2020. About our cost control initiatives, we’ve made considerable progress in that area. Our approach to cost control and optimization focuses on process reengineering coupled with IT implementation for automation. Moving around 50% of our customer service workforce from Shanghai to Nantong has also reduced labor costs. Additionally, we have established a strict headcount control mechanism, evaluating value creation per role, including profit contribution per FTE from our frontline staff. We aim to replace low-efficiency brand operations with high-profit new businesses. Lastly, we are tightening overhead control, adopting a culture that ensures every expenditure is considered carefully. By implementing these process improvements and increasing efficiency through system automation, we’re confident we can effectively manage costs during this challenging year.

Operator, Operator

Our next question comes from Charlie Chen of China Renaissance.

Charlie Chen, Analyst

I have two questions. First, we all know that China's economy is particularly challenging this year. Is there any noticeable change among your brand partners regarding their willingness to spend on marketing? Are there changes in the consumption trends among Chinese consumers—such as downgrading from upgrading—which may impact your decision-making on brand prioritization and pricing strategies? Second, regarding international brands, it seems they're losing market share in specific categories, such as apparel. How do these brands perceive China's market moving forward? Are they continuing to invest in China? What is the progress of onboarding Chinese local brand partners this year?

Tracy Li, Vice President of Strategic Business Development

Regarding marketing investments by brands, it’s still early to conclude whether spending trends will diminish or decrease. However, two points can be shared. First, given market uncertainty, consolidating their marketing investments will be a likely approach. As seen from recent policies by top players like Alibaba, they're proactive in cutting down channels that yield low ROI, suggesting brands will shift their marketing focus accordingly—to balance their media, content, and campaign investment for optimal returns. Second, the pandemic has nudged some brands to reconsider their strategies in China. Given that their China business constitutes a significant share of global operations, they will reflect on their growth strategies here, especially in terms of merging assets and localized marketing investments. Baozun prioritizes quality in choosing brand partners, aiming to provide exceptional service and best support for leading brands. We will adjust our category and channel mixes, focusing on maximizing revenue beyond commissions by including marketing and tech solutions. I hope this answers your first question.

Arthur Yu, CFO

To add on the first point regarding selection, we focus on value creation for each brand partner. We may not be the cheapest option, but we offer premium services along with higher fees for our premium service level. We assess commercial viability and profitability to decide whether to onboard a brand partner. During this time, cash flow is critical; we’re also stringent regarding payment terms and inventory management. We have, at times, rejected reputable brands due to unfavorable payment conditions. So it’s a careful balancing act to ensure our inventory risk remains protected while improving working capital efficiency.

Vincent Qiu, Chairman and CEO

As for the second question regarding the international brands quickly losing market share, despite the current lockdown, many experts remain optimistic about the importance of the Chinese market, given its size. Therefore, it’s too significant to ignore. I believe that this optimism should outweigh negative sentiments concerning the brands' futures in China. We have a robust set of brand assets that should support recovery after this lockdown ends. The domestic brands also benefit from Baozun's established solutions—from digital marketing to IT and logistics—allowing us to serve more local brands effectively. We have seen solid progress in various functions that cater to these local players, just as we've done for international ones, strengthening our pipeline.

Operator, Operator

I would now like to turn the call back over to Wendy Sun for closing remarks.

Wendy Sun, Investor Relations Director

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

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.