Earnings Call Transcript - BZUN Q1 2023

Operator, Operator

Good morning, ladies and gentlemen, and thank you for standing by for Baozun's First Quarter 2023 Earnings Conference Call. Agenda; there will be a question-and-answer session. As a reminder, today's conference is being recorded. I would now like to turn the meeting over to your host for today's call, Ms. Wendy Sun, Senior Director of Corporate Development and Investor Relations of Basin. 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 first quarter 2023 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 powerful 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. Vin Sancho, Chairman and Chief Executive Officer; Mr. Arthur Yu, Chief Financial Officer and President of Baozun Ecommerce; and Ms. Sanjay Zebit, President of Fosbrand Management. Ms. Qiu will review the business strategy and company highlights followed by Ms. Bo, who will discuss the business development of house e-commerce and above our financial outlook. Then Mr. Elipto will share more about 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 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 announcements 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 by applicable law. Shamali, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Vincent Qiu. Mr. Qiu, please.

Vincent Qiu, Chairman and Chief Executive Officer

Thank you, Wendy. Hello, everyone, and thank you all for your time. I'm excited about the transformation roadmap we have lined up for the next three years. This illustrates a line number two. The expansion of Baozun Group into three divisions, EEC, PBM, and BCI is aimed at creating a virtuous ecosystem in which each division brings value to the others. For instance, BEC brings cutting-edge value-added services such as DM logistics and IT to BBM. While BBM enables BEC to have a deeper understanding of client needs, leading to continuously improved technologies and operations. Meanwhile, DZI facilitates BEC and DBM in the geographic expansion of brands. The three divisions complement and support one another in a healthy ecosystem to provide the most comprehensive one-stop services for our clients. I would like to emphasize that technology is a cornerstone of our business transformation and success. In the past 15 years, we have leveraged our technology to innovate and build up a portfolio of integrated omnichannel fulfillment platforms. Our technology infrastructure enables our clients to unify the online and offline channels and conduct their business anytime, anywhere at any marketplace. In recent quarters, regional service centers of BEC, supported by our customer service management system, efficiently expanded to more cities and added a wide range of services. RSDs have improved service quality and cost efficiency for BEC. This is just one example of how technology empowers our business as we now embark on the second growth curve. Our advances in technology and digitalization form a strong foundation to empower the next generation of retail. Consumers prefer brands that are modified to Chinese consumers' preferences and community styles by closely monitoring trends and offering tailor-made updates and iterations; we aim to enable new retail experiences and supply chains that are more responsive to local needs. This approach applies to all three divisions. DBM is off to a great start. Since February 1, we began consolidating Gap China, and the initial progress is quite encouraging. In the first quarter, Gap China generated CNY 189 million in revenue and significantly narrowed its operating losses. Sandra will provide further details about BBM and the gap later. We fully believe that the BBM is a game changer. Bs is also beginning to take shape. In February, we acquired a minority interest along with the board seat in Brand Lifestyle Asia Limited, a leading premium fashion retailer with a strong brand portfolio that includes Blue dog and the routes. Ansin Phone Group is the parent company; Avgol set up a strategic technology committee to develop an enterprise-wide technology strategy and lead the digital transformation. We have already taken an exciting first step with the launch of an online store, Little Ground Singapore. We are also in the process of working with Brand Lifestyle for similar solutions elsewhere in Asia. This is an important first step for bringing our battle-tested technology to the global market. Our technology is an important piece of the foundation we are putting in place to build up our presence in the growing e-commerce market in SEA. Overall, each of our three business lines is making solid progress, and we are confident in our business transition. My priorities for the next three years will be maintaining an appropriate organizational and incentive structure and focusing on our technology-driven culture. I will also take the lead for the detection journey for BCI. Ultimately, our priority at Baozun is to achieve customer-centric, high-quality, and stable business growth. Let me now pass the call over to Arthur for an update on BEC and a review of our financials.

Arthur Yu, Chief Financial Officer and President of Baozun Ecommerce

Okay. Thank you, Vincent, and hello, everyone. Let me do a quick review of the financials of the first quarter of 2023, after which I will discuss our BEC business highlights in more detail. Benefiting from our continuous cost optimization in recent quarters, we were able to achieve better year-over-year profit and cash flows in the first quarter of 2023, as highlighted on Slide number 3. During the quarter, our total revenues declined by 5% to CNY 1.9 billion, of which product sales declined by 2%, and service revenue decreased by 6% compared to the same period last year. Please turn to Slide number 4. For BEC, revenue for the quarter was still soft due to weakness in consumer confidence in China. The three years of pandemic hardship have caused consumers to be more cautious in increasing their spending, and it will take both time and consistent efforts of micro-policy implementation for the results of full spending recovery. We continue to prioritize value-added services in digital marketing and IT services while reducing low-quality product sales. Total product sales of BEC declined by 30% during the quarter, reflecting weaker consumption in the appliance category and our commitment to reducing sales of low-profit categories. Luxury continues to deliver double-digit growth, and sportswear sustained positive year-over-year growth trends. Value-added services continued to show strong resilience, with total revenue from logistics, IT, and digital marketing achieving year-over-year growth on a like-to-like basis. For BBM, total product sales revenue in the first quarter was CNY 189 million, which is in line with our plan before the acquisition. Given that the GAP acquisition was completed in February, the consolidated product sales of BBM for the first quarter only consisted of February and March. Now, turning to Slide number 5. In this quarter, our cost of products decreased by 15% to CNY 505 million, mainly due to lower product sales of BEC, partially offset by incremental costs of CNY 82.8 million from GAP. For GAP, specifically, its gross margin reached a new record of approximately 55%, representing over a 1,000 basis point improvement from a year ago on a comparable basis. Overall, at the group level, our gross margin improved by 320 basis points to 73.2% due to the acquisition of GAP Greater China. Our non-GAAP loss from operations was CNY 10 million during the quarter. At this time, we are not fully prepared to report separate costs for BBM and we plan to do so soon in the following quarters once we complete the integration. However, to provide a clearer view of the business trends for each segment, we would like to provide some direction for the profitability of BEC and BBM based on our internal management accounts. During the quarter, BEC's non-GAAP operating income delivered triple-digit growth, reflecting our high-quality growth strategy and effective cost optimization. The cost optimization efforts included ramping up regional service centers, reengineering processes, improving working capital efficiency, and reforming compensation policies. In BBM, we have reduced its operating loss by more than half year-over-year on a comparable basis. Overall, our non-GAAP operating margin was negative 0.5%. Our non-GAAP net loss was CNY 7 million this quarter, a slight reduction compared with the same period last year due to unexpected losses from GAP Greater China. Turn to Slide number 6 about our cash and cash flow status. As of March 31, 2023, our cash, cash equivalents, restricted cash, and short-term investments totaled CNY 2.9 billion. We continued to upgrade our back office processes to improve working capital and inventory management. As a result, our total operating cash outflow in this quarter was CNY 207 million, which is an improvement of CNY 338 million from the same period last year. Now let me provide some insights into our BEC business performance. This quarter, we continue to make progress in our omnichannel initiatives with 44% of our brands engaging with us on at least two channels. Our GMV from WeChat and JD both achieved high double-digit growth. Moreover, we established a strategic partnership with Little Red Book, Xiaohongshu, which will allow us to acquire incremental traffic and attract new consumers more cost-effectively for our brand partners. Value-added services are crucial in enhancing the user experience and creating value for brand partners. We have implemented new service offerings such as digitalization upgrades, data security enhancements, omnichannel data intelligence, and AI-forward customer services. These services enable us to meet the changing needs and expectations of customers, providing a more personalized and seamless experience across all channels. We are also focusing on developing system enhancements and process reengineering by utilizing the latest AI tools to drive efficiency improvements. Our new business development for 2023 is off to a good start. Year-to-date, we have established an IOC pipeline with notable wins in the luxury auto and FMCG sectors this quarter. This strong pipeline also provides us with greater flexibility in optimizing our resource allocation. In addition, we continue to focus on improving our key account management through the MPS initiative partnered with Nielsen, which will improve our service quality sustainably going forward. We also saw an opportunity to grow beyond our traditional areas of strength to capture the growth area of content-driven live streaming e-commerce. In this quarter, we established a new business unit called Creative Content to Commerce to prioritize content-driven e-commerce initiatives. This new business unit combines creative marketing, video content, and live streaming units within Baozun. Currently, we are building our grand live streaming studio with a total area of 4,500 square meters in our Shanghai headquarters. We target to officially launch this studio in June during our 618 promotion period. Now let me turn the call over to Sandra to talk about DBM.

Sandrine Zerbib, President of Fosbrand Management

Thank you, Vincent, and Arthur, and thank you all for joining us today. It is my great pleasure to speak with you. Please follow us to Slide number 7. As a holistic and well-rounded partner for global brands, BBM aims to unlock their business potential in China by utilizing our technologies and insights to deliver the best seamless omnichannel experience. We integrate the digital and physical at scale, and we bridge demand and supply with fast supply chain adjustments through our digital intelligence. Our focus is on growing a portfolio of mid-end and premium consumer lifestyle brands under DBM. We've been very selective in narrowing down to a few lifestyle brands, limiting ourselves to only one or two additional brands in 2023. Obviously, our focus this year is on GAP. Please turn to Slide number 8. In 2023, we are prioritizing the post-acquisition transition of Gap China, refining product and merchandising strategies, building supply chain infrastructures, enhancing back-end systems, and developing the right talent pool. First of all, we are committed to accelerating our transformation from a discount-driven approach to one that focuses on building consumer desire for our brand and products. While this initiative may have some negative impact on price-sensitive customers in the short term, we believe it is necessary for the brand's long-term positioning. Another priority is our China Fit China product and communication. It is critical for us to interpret the DNA of the Gap brand in a way relevant to China rather than simply copying and replicating GAP globally. We've put together a design team with a new director. We base our designs on more data insights and execute with a much shorter supply chain cycle. The results will start showing in fall and will be fully released in late winter. This will give us the first meaningful and measurable product impact. In terms of communication, we've started upgrading our store design, and we're working hand-in-hand with GAP to create a new store, along with a new approach to visual merchandising. In addition, we are upgrading the supply chain to react quickly to new data and consumer demands. We have identified close to 30 new local manufacturers to fully meet our projected production needs. Except for global IP styles, we aim for 100% local production. We will continue to seek more factories with fast replenishment capabilities while ensuring the same quality and lower prices compared to GAP's global sourcing. Now in addition, we've taken a series of quick actions on store efficiency, including changing existing store visuals with a focus on mix and match storytelling, strictly controlling discounts, and enhancing sales adviser training. Thanks to these actions, our blended gross margin reached approximately 55%, an improvement of over 1,000 basis points from a year ago. This is, in our view, a major achievement as gross margin increase is key to GAP China's success. Overall, we generated total revenue of CNY 189 million, a decrease of 30% year-on-year on a comparable basis. There are actually two factors that impacted this comparison. The first factor is the timing of Chinese New Year, which is normally a peak season for retail. Chinese New Year was in February last year, but in January this year. The second factor is the different starting points of offline sales. 86 stores were closed before we took over, which is equivalent to a decline of 40% year-over-year. Therefore, despite our strong comparable store growth, our overall sales decreased. For the remainder of 2023, our overall operating strategy remains unchanged: focused on products and margins, uplifting brand image, integrating product and consumer marketing, fast-response supply chains, and enhanced omnichannel digitalization and customer experience. With these objectives in mind, we have set our store opening plans according to our product cycle. We plan to open about 10 new stores in first-tier cities covering flagship adult stores and kids and baby store formats with an upgraded store concept and customer experience by the end of 2023. Lastly, organizational competency and IT transformation are the two foundations that will enable our strategy. We've taken quick actions to build up the talent pool for GAP and future BBM operations. Over the past 60 days, we were able to quickly identify and hire critical positions, including, but not limited to, Head of Design and dedicated kids and baby designer lead, Head of Supply Chain, new CHRO, and new CFO. All of our new hires are local industry experts with vast experience in both well-known MNCs and local apparel companies. We have also significantly reduced costs in logistics, marketing, and store maintenance. We believe this will accelerate our business transformation and organizational efficiency. Now regarding IT transformation, we are making solid progress in transforming the former GAP China siloed inefficient and outdated system into a fully integrated, flexible, and modern architecture. With the help of Baozun technology, we have already completed the overall design for the integrated system transformation of GAP China, and we aim to have the new systems in place by Q4 2023. This system transformation will improve our business operation capability and efficiency across multiple areas, including merchandising, planning, operations, design, production, fast and responsive supply chain, omnichannel inventory management, retail experience enhancements, and business intelligence analytics. All of these improvements will be powered by optimized business processes and rules from market-leading best practices. Overall, although there remains quite some way to go in our transformation, we have established a good first step for BBM and we are firmly determined to accelerate the necessary changes in our first year to set up a solid foundation for our future growth. With all this being said, I shall now hand over the call back to Arthur. Thank you.

Arthur Yu, Chief Financial Officer and President of Baozun Ecommerce

Okay. Thank you, Sandra. In summary, we are excited about our transformation roadmap, which focuses on becoming a technology-driven omnichannel commerce player. With BEC, we will continue the execution of our customer-first, high-quality growth strategy, and the early progress in BBM reflects our team's high-quality execution and agility. We have also taken first steps in BCI, which validates a natural opportunity for us to replicate our China e-commerce success overseas. That concludes our prepared remarks. Thank you, operator. We are now ready to begin the Q&A session.

Operator, Operator

We're now going to proceed with our first question. And the questions come from Alicia Yap from Citi.

Alicia Yap, Analyst

Management, I have two quick ones. One is that can management share with us how are you seeing the consumption demand in April and May? And any qualitative expectation on the upcoming June 18 events? And then what have been the brand merchants' attitude so far towards the June 18 promotion? And then second, can management elaborate on your near-term priorities? And would you also plan to explore more acquisitions and investments in other brands if opportunities occur?

Arthur Yu, Chief Financial Officer and President of Baozun Ecommerce

Okay. Thank you, Alicia. I will take the first question about the and maybe Sandra can add a little bit more on the investment of BBM. First of all, in terms of April and May, we definitely see an improving trend year-over-year. As I mentioned, luxury, sports, and apparel start to show signs of recovery. For us, our Gap brand has also shown a steady recovery and positive trend in terms of April and May. In terms of the 618, I would say for the upcoming 618, it is probably one of the most prepared 618 from the platform and from the brand because this is the first 618 promotion after three years of the pandemic, and both the platform and brands put a lot of effort into it. From a platform point of view, Tmall, JD, and others have launched new initiatives to attract customers and incentivize brands to use the platform. From a brand point of view, they have started very early to prepare merchandising and also the new initiatives to attract new customers. Both are helping them during the last two to three weeks to launch those plans. We have seen some good early signs in terms of our plans starting to make an impact for the upcoming 618. So the ITT is positive, but there are still uncertainties in terms of how strong customer confidence is because the overall macro environment has still not recovered to our expectation. So we would say it's cautiously positive at this moment. In terms of the near-term management priority, I think as Vincent has laid out, this year, we have put the Baozun group into BC, BDM, and BCI, the three business units. Myself, Sandra, and Vincent will each take the role in terms of driving the strategy for each of the business units with our own priorities and plans. Now we are focused on execution to make sure we actually deliver our plan to achieve the overall group plan for this year. Regarding investments, maybe Sandra, you could add your thoughts?

Sandrine Zerbib, President of Fosbrand Management

Yes. Just a few words to say that, obviously, in the mid- to long-term, we want to grow a portfolio of mid-end and premium consumer lifestyle brands under DBM. Therefore, we have actually looked at many brands in order to be able to be extremely selective and to really narrow down to very few potential candidates for this portfolio, particularly for this year. We want to limit ourselves to a maximum of two new brands for the portfolio, because this year, obviously, our focus is on GAP. Our total priority is a smooth post-acquisition transition of Gap China.

Arthur Yu, Chief Financial Officer and President of Baozun Ecommerce

Yes. And on that one, we also have an internal process to evaluate each of the opportunities with a lot of care and detailed diligence. So we will only proceed with acquisitions when we find good opportunities.

Operator, Operator

We are now going to proceed with our next question. And the questions come from the line of Colin from Citi.

Unidentified Analyst, Analyst

My first question is a follow-up on the 618 campaign. As we see more competition in the online shopping market, how should we think about the impact for us? My second question is that as you've seen consumer sentiment gradually recovering, how should we think about the second half performance for discretionary items like apparel, cosmetics, durables like electronics, and luxury categories? Should we see a pickup in the second half?

Arthur Yu, Chief Financial Officer and President of Baozun Ecommerce

I believe the competition among platforms is beneficial for Baozun because it leads to a situation where these platforms become more standardized. Currently, many features that exist on Tmall are also being introduced on other platforms as they attempt to imitate one another. Consequently, platforms are evolving into marketplaces, forcing brands to stand out through their branding. Brands need Baozun’s expertise to navigate the various nuances of these platforms. Moreover, we are well-positioned to assist brands in crafting specific strategies for success in an omnichannel setting. This strategy has been part of Baozun's plan for several years. Our back office systems enable us to oversee various channels, and the insights we have gained from operating in each channel will be crucial for high-performing brands moving forward. Additionally, as platforms become more commoditized, the unique value-added services we offer, such as digital marketing, logistics, and warehousing, enhance a brand’s ability to better serve its customers through improved capabilities. In recent quarters, we’ve noticed a significant pipeline for these value-added services, and we are optimistic that they will lead to revenue growth in the future. Regarding customer sentiment, it is indeed progressively improving for apparel and somewhat for cosmetics. However, for durable goods like electronics and other categories, we may need to be patient and observe the market. The 618 campaign will provide a solid opportunity to gauge the rebound in consumer confidence and to understand spending patterns for the rest of the year.

Operator, Operator

The next questions come from the line of Colin Chan from Citi.

Unidentified Analyst, Analyst

Evening management. Can you hear me?

Arthur Yu, Chief Financial Officer and President of Baozun Ecommerce

Yes, Colin, I can hear you.

Unidentified Analyst, Analyst

Okay. I'm calling from Citi Securities. I have two questions. The first is that I noticed that in Q1, the non-Tmall GMV share rose to 49% with a significant increase year-over-year and quarter-over-quarter. So I'm curious about the driver of the change and what's your expectation of the GMV distribution in different channels in the next few quarters? And a follow-up question: facing the structural changes of e-commerce channels, do you observe any changes in the standards and criteria when a brand chooses to cooperate with their partners?

Arthur Yu, Chief Financial Officer and President of Baozun Ecommerce

So Colin, the first one, I think it's very simple that it's the omnichannel strategy we have been pursuing over the last two to three years that is starting to show results, as we now see that Tmall's percentage has become only half of non-Tmall. We think this is a solid foundation for us to drive the omnichannel strategy going forward. This is also what the brand is trying to pursue at this moment. But I would say, Tmall and non-Tmall are not in competition per se; they have their unique advantages in terms of providing certainty and very good quality customers from the Tmall consumer group. Our recommendation to brands is to choose the best platform for the product that is suitable for their own business model and strategy. That’s how we will help brands design a successful strategy in the new e-commerce environment post-COVID. Regarding your second question, many brands we are talking to recently emphasize the value-added services we can provide with AI and the current competition. Many basic activities can now be easily replicated by either machines or Baozun’s competitors. However, our unique strengths, such as our capability to provide insights and assistance, help brands to define successful strategies. These services have become very sought after at this moment, as I mentioned earlier. So overall, I think the current competition and intensified competition among all channels is actually good news for us.

Unidentified Analyst, Analyst

Very clear. Thank you.

Operator, Operator

We are now going to proceed with our next question. And the questions come from the line of Sophia Tan from Credit Suisse.

Sophia Tan, Analyst

I have one question on behalf of Ashley. In terms of our PBM business line, it has been several months post our acquisition. Can you please share with us the major surprises or challenges that we have encountered so far? And will this bring any changes to our previous guidance for the operating results, financial outlook, or any execution timeline?

Sandrine Zerbib, President of Fosbrand Management

Okay. Thank you, Sophia. I think the biggest surprise is actually a positive one, which is the fact that we were able to improve our gross margin much faster than we had expected. This is due to the fact that consumers have accepted higher price points and less discounts much faster, particularly offline, than we had anticipated. This is actually a very important positive surprise for us because it drives all the rest of the P&L. So, a very positive surprise that we believe will enable us to overachieve our year in terms of gross margin, even if, obviously, with the upcoming 618 and 11/11 events, we will not necessarily keep the same level of gross margin as we've experienced in this first quarter. So that's for the surprise. For the challenges, I see two. The first is obviously the speed of overall market recovery and consumer sentiment recovery because this will determine how fast we can really push ourselves on the recovery and the transformation of GAP. The other challenge is to ensure that in terms of execution, we continue to work hard to really put all the pieces together because today we are experiencing our first good surprise without having all the pieces in place. In fact, the new products are not yet here. The new marketing is not yet implemented, and the new store concept we are working on is not yet here. So you can see that we have a very ambitious plan to work on for the remainder of the year, and we need to continue to work hard to get all these pieces together to really maximize our results.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

The questions come from Larona Sophie Huang from CMBI.

Unidentified Analyst, Analyst

Okay. Just a follow-up question regarding to BBM. I'm wondering what customer feedback you have received with your discount reduction strategy? Can you share more about recent sales performance of online and offline stores, and how you think the consolidation will impact different channels, meaning online versus offline?

Sandrine Zerbib, President of Fosbrand Management

Okay. Thank you, Sophia. In fact, as I just said, we had a relatively good surprise in terms of acceptance of the reduction of discounts, which enabled us to improve our gross margin faster than we had anticipated. However, this acceptance was actually faster offline than online. We expect the acceptance of reduced discounts to take a little more time online than offline because we need to wait for certain marketing activities and also for product differentiation. As we said, we are now working from products ordered before we took over the company. Therefore, everything we plan to do in terms of differentiating products for different channels online has not been implemented yet. We think this will be very important to accelerate acceptance online, and we've already had good positive signs from the offline side. In terms of omnichannel management, we are still underway of putting together the new systems, which will truly enable integrated online and offline inventory management. This new system will be available in the last quarter of this year.

Operator, Operator

We have no further questions at this time. I'll now hand the call back to Wendy Sun for closing remarks. Thank you.

Wendy Sun, Senior Director of Corporate Development and Investor Relations

Thank you, operator. In closing, on behalf of the Baozun management team, I would like to thank you 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 today. This concludes the call.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.