MINISO Group Holding Ltd Q3 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to MINISO's Earnings Conference Call for the Third Quarter of Fiscal Year 2023 that ended March 31, 2023. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we will conduct a question-and-answer session. Please note this event is being recorded. We have announced our quarterly filing results early today. An earnings release is now available on our Investor Relationship website at ir.miniso.com. Joining us today are our Founder and CEO, Mr. Jack Ye; and our CFO, Mr. Eason Zhang. Before I continue, I would like to refer you to the safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. Please also note that we will discuss non-IFRS financial measures today, which we have explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards in the company's earnings release and filings with U.S., SEC and Hong Kong Stock Exchange. In addition, we have prepared a PowerPoint presentation for today's call, which contains financial and operational information for this quarter. If you're using Zoom meetings, you should be seeing it right now. You can also revisit it on our IR website later. Now I'd like to hand the conference over to Mr. Ye and Mr. Zhang will translate for Mr. Ye. Please go ahead, sir.

Thank you for joining our call today. We have prepared a PowerPoint presentation that includes financial and operational information for this quarter. If you're on Zoom, you should be able to see it now, and you can also access it later on our investor relations website. I will now turn the conference over to Mr. Ye, with Mr. Zhang providing translation for him. Please proceed, sir.

Hello, everyone, and welcome to our earnings conference call. We delivered a strong start to calendar year 2023 with the best March quarter performance in our history, shaking off three years of uncertainty caused by the pandemic. Driven by the strong recovery of our offline operations in China and the continued development of our overseas business, our revenue for the March quarter increased by 26% year-over-year and reached RMB 2.95 billion. I'm also pleased to see that our margin profile continues to beat expectations. Gross profit margin of all business segments saw healthy year-over-year improvement, bringing the overall gross profit margin to 39.3%, which is 9 percentage points higher than the same period last year. Adjusted net profit exceeded RMB 418 million, an increase of 336% year-over-year. Adjusted net profit margin expanded 16.4%, a 12 percentage point increase compared to the same period last year. Both figures set new records for MINISO.

Our margin profile continues to exceed expectations. The gross profit margin for all business segments showed strong year-over-year growth, achieving an overall gross profit margin of 39.3%, which is 9 percentage points higher than the same period last year. Adjusted net profit surpassed RMB 418 million, marking a 336% increase year-over-year. The adjusted net profit margin grew by 16.4%, a 12 percentage point increase compared to the same period last year. Both figures represent new records for MINISO.

I now walk you through business updates for our three major segments: it's China, overseas, and TOP TOY.

Jack Ye, CEO, Eason Zhang, CFO, I now walk you through business updates for our three major segments: it's China, overseas, and TOP TOY.

I will start with MINISO brand China business, which recorded RMB 2 billion in revenue for the March quarter, a year-over-year increase of 19%. Within MINISO China business, revenue from offline stores totaled RMB 1.83 billion, a year-over-year increase of 25%. As we shared during the last earnings conference call, January was the best month in terms of domestic offline sales in MINISO's history. In February and March, as the pent-up demand from the pandemic gradually dissipated and the Chinese New Year holiday ended, the pace of recovery in the retail industry moderated to a certain extent. That said, our performance continued to outperform the industry according to data from the National Bureau of Statistics. Retail sales of consumer goods in China increased by 4.9% year-over-year in the March quarter, while MINISO China's offline business recorded over 25% year-over-year. Our per store GMV in the March quarter has essentially returned to the same level of the period in 2021, reaching around 85% of the pre-COVID level in 2019.

Our performance continued to outperform the industry according to data from the National Bureau of Statistics. Retail sales of consumer goods in China increased by 4.9% year-over-year in the March quarter, while MINISO China's offline business recorded over 25% year-over-year. Our per store GMV in the March quarter has essentially returned to the same level of the period in 2021, reaching around 85% of the pre-COVID level in 2019.

Entering April, we have seen sustained strong performance and even marginal improvement in store-level performance. Total offline GMV increased by 80% year-over-year, higher than the 16% sales growth in retail sales of consumer goods reported by the National Bureau of Statistics just today, while per store sales increased by 50% year-over-year, reaching 85% of pre-COVID level in 2019, representing a substantial sequential improvement from the previous two months, February and March. During the Labor Day holiday, total offline GMV increased by 75% year-over-year, per store GMV increased by 45% year-over-year, and to a comparable level of 2019.

Total offline gross merchandise volume increased by 75% year-over-year during the Labor Day holiday, while per store gross merchandise volume rose by 45% year-over-year, reaching levels comparable to 2019.

We opened 58 new stores on a net basis during the March quarter, double the figure from the same period last year. More than 53% of new stores were in Tier 1 and Tier 2 cities. In addition, store closure rate was 0.6%, a record low. The strong performance further bolstered the confidence of our regional partners, and we are quite confident now that we will meet and exceed our strong store opening target of 250 to 350 in calendar year 2023.

We opened 58 new stores on a net basis during the March quarter, which is double the number from the same period last year. More than 53% of the new stores were located in Tier 1 and Tier 2 cities. Additionally, the store closure rate was 0.6%, achieving a record low. This strong performance has enhanced the confidence of our regional partners, and we are very optimistic that we will meet and exceed our ambitious store opening target of 250 to 350 for the calendar year 2023.

We are firmly committed to pursuing high-quality growth, as we stressed in our previous quarters, in addition to maintaining a steady pace of store openings. We continue to improve store performance with better merchandise and operations in 2023.

The strong performance has further boosted the confidence of our regional partners, and we are now very confident that we will meet and surpass our ambitious store opening target of 250 to 350 in 2023. We are dedicated to achieving high-quality growth, as we have emphasized in previous quarters, while also maintaining a steady pace of store openings. We are continuing to enhance store performance through improved merchandise and operations this year.

From a merchandise perspective, we adhere to our IP strategy as a core and focus our efforts in strategic categories. This has driven strong performance in the past quarter, and our merchandise gross margin increased by nearly 7 percentage points from a year ago. Let me first address our IP strategy. As scheduled, we launched a highly anticipated series of IP products in the March quarter. We collaborated with Pokémon to design multiple high-quality products featuring classic characters. This product garnered a great response from consumers and sold out soon after their release. As we emphasized last quarter, we are going to surprise and delight our consumers with an exciting series of IP collaborations in 2023. In upcoming quarters, we will be unveiling collaborations with blockbuster IPs.

We launched a highly anticipated series of IP products in the March quarter. We collaborated with Pokémon to design multiple high-quality products featuring classic characters. This product garnered a great response from consumers and sold out soon after their release. As we emphasized last quarter, we are going to surprise and delight our consumers with an exciting series of IP collaborations in 2023. In upcoming quarters, we will be unveiling collaborations with blockbuster IPs.

Second, we remain focused on strategic categories, which we define as categories with marginal revenues, global peers, and high-growth potential. Take perfumes as an example, we believe this category exemplifies MINISO's value proposition and has strong emotional resonance with consumers. In China, we have identified perfumes as our most important strategic category in the March quarter. Sales of perfume products increased by 60% year-over-year. Sales contribution increased by 1 percentage point. Furthermore, sales of 70% of perfume-related SKUs met our internal standards for best sellers, indicating a significant increase in the success rate of product development.

We believe this category exemplifies MINISO's value proposition and has strong emotional resonance with consumers. In China, we have identified perfumes as our most important strategic category in the March quarter. Sales of perfume products increased by 60% year-over-year. Sales contribution increased by 1 percentage point. Furthermore, sales of 70% of perfume-related SKUs met our internal standards for best sellers, indicating a significant increase in the success rate of product development.

Accessories are another strategic category to which we devoted a lot of resources this year, and we believe it has strong global potential. We had a solid foundation in this sector, and we continue to strengthen it by setting up a new warehouse in an undisclosed location and enhancing our design team. We hope to forge this category into a signature category in overseas markets through high-frequency product launches and more efficient logistics. The preliminary results have been very promising with its sales increasing by over 80% year-over-year, and sales contribution increased by 2 percentage points.

It has strong global potential. We had a solid foundation in this sector, and we continue to strengthen it by setting up a new warehouse in an undisclosed location and enhancing our design team. We hope to forge this category into a signature category in overseas markets through high-frequency product launches and more efficient logistics. The preliminary results have been very promising with its sales increasing by over 80% year-over-year, and sales contribution increased by 2 percentage points.

Let's move on to our overseas business, which continued to maintain strong momentum in the March quarter in the following aspects.

Our design team aims to establish this category as a signature in overseas markets through frequent product launches and improved logistics. The initial results are encouraging, with sales up over 80% year-over-year and a 2 percentage point increase in sales contribution. Jack Ye, CEO, and Eason Zhang, CFO, will now discuss our overseas business, which sustained strong momentum in the March quarter.

Firstly, revenue from overseas markets was RMB 800 million, an increase of 55% year-over-year, marking another record for the March quarter.

Revenue from overseas markets was RMB 800 million, an increase of 55% year-over-year, marking another record for the March quarter.

Secondly, GMV in overseas markets increased by 45% year-over-year, with both the direct-operated and distributed models achieving a similar GMV growth rate of around 45%, primarily driven by a 30% growth in personal GMV and an increase of 12% in our store number. All of our major overseas markets continue to experience rapid year-over-year growth in GMV, including 100% in North America, over 60% in Latin America, and about 30% in both Europe and Asian countries, excluding China.

GMV in overseas markets increased by 45% year-over-year, with both the direct-operated and distributed models achieving a similar GMV growth rate of around 45%. This growth was primarily driven by a 30% increase in personal GMV and a 12% rise in our number of stores. All major overseas markets continue to show significant year-over-year growth in GMV, including 100% in North America, over 60% in Latin America, and about 30% in both Europe and Asian countries, excluding China.

I want to stress that per store GMV increased by about 30% year-over-year in the March quarter, recovering to around 80% of where it was in the same period of 2019. North America increased by 9% year-over-year and was 50% higher than in the same period of 2019 as we continue to see impressive growth in this region. The U.S. market has been our largest overseas market in terms of revenue contribution for two consecutive quarters, while Canada is also among our top 10 markets.

I want to stress that per store GMV increased by about 30% year-over-year in the March quarter, recovering to around 80% of where it was in the same period of 2019. North America increased by 9% year-over-year and was 50% higher than in the same period of 2019 as we continue to see impressive growth in this region. The U.S. market has been our largest overseas market in terms of revenue contribution for two consecutive quarters, while Canada is also among our top 10 markets.

In North America, we continue to enjoy tailwinds from merchandise, brand, and operations. That said, as a company that operates globally, we will inevitably face geopolitical challenges. However, I'm pleased to see that our business in North America is increasingly integrated into our communities, providing value-for-money products to local consumers in such a high inflation environment and contributing to local employment and tax revenue.

In North America, we continue to benefit from our merchandise, brand, and operations. As a global company, we are facing geopolitical challenges, but I'm happy to report that our business in North America is becoming more integrated into our communities. We are supplying value-for-money products to local consumers in this high inflation environment and contributing to local employment and tax revenue.

I believe that only through sufficient globalization can we completely mitigate country-specific risks. I'm pleased to see that in the March quarter, per-store GMV recovery was also quite positive across our overseas markets. For example, the Latin American market saw year-over-year growth of over 40%, including a 60% growth in Mexico, and the Asian market recorded a year-over-year growth of 15%, including a 90% growth in Singapore and 50% growth in both the Philippines and Thailand.

I believe that only through sufficient globalization can we completely mitigate country-specific risks. I'm pleased to see that in the March quarter, per-store GMV recovery was also quite positive across our overseas markets. For example, the Latin American market saw year-over-year growth of over 40%, including a 60% growth in Mexico, and the Asian market recorded a year-over-year growth of 15%, including a 90% growth in Singapore and 50% growth in both the Philippines and Thailand.

Finally, let me provide an update on TOP TOY. Revenue was RMB 114 million, a 24% year-on-year increase. As of quarter end, there were 116 TOP TOY offline stores, up 24 from a year ago.

Finally, let me provide an update on TOP TOY. Revenue was RMB 114 million, a 24% year-on-year increase. As of quarter end, there were 116 TOP TOY offline stores, up 24 from a year ago.

In the March quarter, our exclusive products made a greater sales contribution and helped increase TOP TOY's gross profit margin by more than 2 percentage points year-over-year. China Bricks, the most important strategic category for TOP TOY, continued to play a key role in driving sales and accounted for more than 25% of TOP TOY's total sales during the period. The strong performance of China Bricks was the key driver of the increase in TOP TOY's gross profit margin during the quarter.

In the March quarter, our exclusive products made a greater sales contribution and helped increase TOP TOY's gross profit margin by more than 2 percentage points year-over-year. China Bricks, the most important strategic category for TOP TOY, continued to play a key role in driving sales and accounted for more than 25% of TOP TOY's total sales during the period. The strong performance of China Bricks was the key driver of the increase in TOP TOY's gross profit margin during the quarter.

Our design and talent pool continue to enlarge and mature, turning out a string of highly popular products in the toy bricks category, including co-branding products with Sanrio's Kuromi, Rapid Bricking the Future, Dawn Astronauts, and others. We are particularly excited about Dawn Astronauts, the latest IP product of TOP TOY's core operation with China's aerospace. This self-developed series is designed to educate young consumers about space and cultivate pride in China's strong national aerospace industry. We are as firm as two years ago in our long-term prospects of the toy market, especially in China Bricks, which is TOP TOY's #1 strategic category. We are long-termists in the TOP TOY business and will work very hard in product innovation as its key focus. We aim to grow this business further and establish it as an influential brand in this industry.

This self-developed series is designed to educate young consumers about space and cultivate pride in China's strong national aerospace industry. We remain as confident as we were two years ago about our long-term prospects in the toy market, particularly in China Bricks, which is TOP TOY's primary strategic category. We are committed to a long-term vision for the TOP TOY business and will prioritize product innovation as a key focus. Our goal is to further grow this business and establish it as a significant brand in the industry.

2023 marks MINISO's tenth anniversary as well as the first deal of our journey to become a super brand. On May 20, we will celebrate the grand opening of MINISO's global flagship store in New York City, marking another milestone in our history as MINISO will become the first Chinese consumer brand to open a flagship store in Times Square, the global crossroads. We remain committed to executing our roadmap to transform MINISO into a great Chinese consumer brand. We will firmly anchor our focus on the transformation and continue to serve every consumer with the happiness philosophy. Thank you all very much. That concludes my prepared remarks. And now I turn the call to Eason for a review of our financial performance in the March quarter. Hello, everyone. Thank you again for joining us today. I will walk you through our financial results for the March quarter. Please note that all numbers are in RMB unless otherwise stated, and I will also refer to some non-IFRS measures, which have excluded share-based compensation expenses. Revenue in the March quarter was RMB 2.95 billion, an increase of 26% year-over-year, driven primarily by an 80% year-over-year increase in revenue from China and a 55% year-over-year increase in revenue from overseas markets. Revenue from China was RMB 2.15 billion, including RMB 2 billion from MINISO Brands and RMB 152 million from our business, including TOP TOY. Revenue from MINISO brand increased by about 19% year-over-year, driven by a year-over-year increase of 25% in revenue from offline stores, but a year-over-year decrease of 23% in other smart channels. The 25% year-over-year increase in offline revenue was primarily due to a 19% year-over-year increase in per store revenue and a 5% increase in store number. On a single-store basis, the average number of orders and the average order value both increased by 8% year-over-year. So we were seeing quite healthy performance improvement across all of our operating metrics, including traffic, ASP, and the numbers in the March quarter. Revenue from overseas markets was RMB 800 million, increasing by 55% year-over-year. This growth was primarily driven by a 38% year-over-year growth in average revenue per MINISO store in overseas markets and a 12% year-over-year increase in average store count. Revenue from the distributed model was RMB 430 million, an increase of 47% year-over-year. Revenue from the directly operated model was RMB 370 million, an increase of 64% year-over-year, and accounted for more than 46% of total overseas revenue as compared to 44% last year. Gross profit was RMB 1,162 million, representing a 64% year-over-year increase. Gross margin was 39.3% compared to 30.2% in the same period last year. The year-on-year increase was primarily due to three reasons, as we have explained in the earnings release. I want to make some supplementary notes here. First, we have seen positive growth in GP margin in all of our business segments. As Mr. Ye shared earlier, merchandise gross margin in China increased by nearly 7 percentage points from a year ago. That translates into a higher increase in our accounting gross GP margin, say, 10%, considering our revenue share percentage with retail partner is fixed. For e-commerce, its GP margin improved significantly, thanks to operational optimization. Meanwhile, we took a series of measures to optimize TOP TOY's product mix and store operations, which helped increase its accounting gross profit margin by nearly 9 percentage points year-over-year. Let me remind you here that TOP TOY's business model is now progressing towards the profit model we have planned two years ago. Second, when we look at the shift in our revenue mix, I think there are two major shifts here: The first one is the increased contribution from the overseas market as a whole. The second is the increased revenue contribution from our directly operating model from 44% to 46%, which has the highest GP margin among all business segments. Selling and distribution expenses were RMB 432 million, representing a year-over-year increase of 23%. This increase was mainly attributable to increased license expenses in relation to our IP products, increased personnel-related expenses, and logistics expenses in relation to the growth of our business, and to a lesser extent, increased promotion and advertising spending primarily in connection with our strategic brand upgrade of the MINISO brand in China. G&A expenses were RMB 151 million, representing a decrease of up to 12% year-over-year. The decrease was primarily due to decreased personnel-related expenses in relation to our cost control measures among our corporate staff and decreased depreciation and amortization expenses due to the capitalization of our depreciation of land use rights in the construction cost of the headquarters building. Other net income was RMB 3 million compared to RMB 0.5 million in the same period of 2022. Other net income mainly consists of net foreign exchange losses, investment income from wealth management products, and others. The year-over-year increase was mainly attributable to an increased investment income and a decrease in other losses. Turning to profitability. Operating profit was RMB 576 million, a yearly increase of more than 300%. Net finance income was RMB 25 million, representing a year-over-year increase of 445%, mainly due to an increase in interest income from bank deposits. Adjusted net profit was RMB 483 million, a year-over-year increase of 336%. Adjusted net margin was 16.4%, compared to 4.7% in the same period last year. Adjusted basic and diluted earnings per ADS was RMB 1.52 per quarter, increasing by 322% year-over-year. Turning to cash position. As of quarter end, our combined cash position was approximately RMB 7 billion compared to RMB 6.2 billion and RMB 5.8 billion as of December 31, 2022, and June 30, 2022, respectively. Turning to working capital turnover, inventories, and trade receivables remain stable. As Mr. Ye commented, we delivered a strong start to this year with the best March quarter performance in our history, shaking off all three years of uncertainty. Looking forward into the June quarter, we expect our sales will continue to grow strongly on a year-over-year basis, driven by better store-level performance and store network expansion. Meanwhile, our margin profile will continue to improve on a year-over-year basis despite the various challenges posed by the external environment. We will continue to focus on those elements of the business that are in our control and remain focused on our long-term strategic goals: delivering our globalization strategy, bolstering the strength of our product offerings, and optimizing our store network. Thank you. And this concludes our prepared remarks. Operator, we are now ready to take questions.

The first question comes from the line of Michelle Cheng from Goldman Sachs.

So, I have two questions for management. Firstly, about gross margin. Given gross margin continues to be driven by brand upgrade strategy, can management comment on the gross margin upside and also the product mix adjustment progress? And related to this question, can management share the IP products contribution right now and also the future target? That's my first question. And second question is regarding the overseas operation. So can management comment on the different market dynamics and also the improvement progress? For some countries like North America, what are the key drivers that we can do better? And for certain regions, especially Asia, where is the pressure coming from and how are we going to adjust this?

It's Jack here. Now maybe you still remember, we first introduced our MINISO brand strategic upgrade last March. Then we provided the market outlook that about 30% of MINISO's products will be interest-based and the other 70% of our products will still be of high value proposition. In terms of the whole project progress, we estimate that by the end of the June quarter this year, our merchandise gross margin will be close to 60%. So if we look at the March quarter, I would say that we are a little bit ahead of this estimated timetable. Our product is upgraded from the past. Our margin growth, our gross margin of different product categories now varies. That said, our future growth in gross margin will come from the change of the product categories. For example, I just mentioned accessories; their sales contribution increased by about 2 percentage points in the March quarter. On the other side, for accessories, this category's gross margin increased in high single digits compared to the same period last year, so it contributed positively to our overall GP margin increase. This is the first part. Regarding your question about IP product contribution, in the March quarter, we still see about 20%-ish IP-related product contribution. I would say it's flat quarter-over-quarter and a little bit higher than last year. We do not have a specific sales target for IP-related products, but we will strive to keep a competitive product portfolio regarding IP products. As for overseas market dynamics, we have divided our overseas markets into five major markets: North America, Latin America, Asian countries excluding China, Europe, Middle East, and North America. We will address them one by one. For North American markets, total GMV grew by over 100%, making it the strongest among our international markets. We currently operate around 120 stores in North America, which represent 6% of our total stores, but this region contributes almost 10% of GMV. In terms of GMV per store, we experienced a 90% increase year-over-year this quarter, and it has now reached 150% of pre-COVID levels. In Latin America, total GMV rose by 62% year-over-year, making it the second fastest-growing region internationally. We have seen about 22% growth in this area, and it contributes nearly 40% to GMV. This quarter, the average sales per store in Latin America grew by 42%, the highest among its peers. In Asian countries, total GMV increased by approximately 30% this quarter, representing about 45% of our total overseas stores, though its contribution to GMV is relatively low at around 30%. Compared to the pre-COVID period, there is significant potential for growth in the Asian market this year and next. Average GMV per store in this quarter rose by about 15%. The Asian markets are diverse with different countries and populations, resulting in varying recovery rates. For instance, Singapore reported a 90% year-over-year increase, while the Philippines and Thailand experienced 50% growth. However, we also have Indonesia, one of our largest overseas markets, which saw a 21% increase this quarter, faster than the average. In contrast, India has been lagging primarily due to inventory issues this quarter, which we are currently addressing. If you look at Europe, GMV increased by 34% in this quarter, and European stores accounted for about 10%, although GMV is also comparable to that level. In the Middle East and North America, GMV increased by 20% this quarter, with GMV per store increasing by single digits in this quarter, and we have 7% of stores there and the GMV contribution is about 10%. Regarding our store opening target in calendar year '23, at this moment, we do not want to adjust our target; we want some time to observe before deciding.

The next question is from the line of Lucy Yu from Merrill Lynch.

So domestically, we mentioned that store opening is going to exceed our previous expectations. How many stores have we opened in the second quarter so far, or year-to-date? Which part of China are we seeing an accelerating expansion pace? Second question is on the domestic consumption pattern. Have we seen any change in terms of shopping frequency, trends of consumer products, ASP, as well as consumer shopping behavior in our stores? Lastly, regarding the overseas situation, although we are not revising our full-year guidance at the moment, we have seen in the first quarter that store opening still lags largely behind our expectations. Could you please share the reason behind that as well as the second quarter-to-date store openings in the overseas market?

This is Eason, and I will answer your question. Yes, you are right, and we are highly confident that we will surpass our previous guidance of 250 to 350. Currently, we estimate that we can open 350 to 450 stores in the China market on a net basis in calendar year 2023, and we will absolutely adjust dynamically according to the recovery of the home market in China. If you look at the structure, I would say Tier 1 and Tier 2 will have a lot of opportunities this year. As you may have read from news reports, we have opened many flagship stores in China's top-tier cities in recent months. In the March quarter, about 53% of new stores came from Tier 1 and 2 cities, which is a new trend we have never seen during the past three years. In terms of our retail partners, we are highly confident; we can tell from our strong pipeline regarding new stores that both new and our old retail partners have opened stores in this quarter. Especially in the March quarter, we see many of our old partners opening new stores as their stores recover quite well. By the end of the quarter, our average retail partners had 3.4 MINISO stores in China, which is comparable to the historical average. Regarding customer behavior, let me take April as an example. As Mr. Ye just mentioned, total GMV increased by about 8%. Personal GMV rose by approximately 50%. This yearly increase of 50% is attributed to a high single-digit ASP hike and another 40% increase in our orders. This trend has continued year-to-date. In terms of product categories, base-related products are among the best sellers, as shown in the presentation. Many top sellers this quarter are IP-related products. We've seen significant growth this quarter, both in China and international markets, particularly for our co-branded IP-related bulk buys or plush toys. We will provide more details on our overseas buying business in the next quarter. Regarding customer profiles, there hasn’t been any change; we continue to focus on young people, with most of our customers being female. In response to your third question about our overseas store expansion plan, we plan to wait a bit to see if any adjustments are necessary. Historically, most of our annual additions occur in the second half of the calendar year, and I expect this to be true again this year. In the March quarter, our original plan was to open about 40 stores, but we ended up adding around 20 by the quarter's end. I don't consider this a negative outcome, as we still added many new stores in overseas markets in April. We remain on track for new store openings internationally.

The next question is from Anne Ling from Jefferies.

Now my question is first about the mix of the best-selling items. What is the definition of the background item for MINISO, and what is the mix for this quarter versus in the previous quarter? The second question is regarding the overseas market and domestic market. What is the operating margin mix for this quarter? What has been driving these improvements in terms of margins? This leads to another question regarding the selling expense, the SG&A. Moving forward, are we going to increase our selling expense ratio to drive higher sales when the market is fully opened?

This is Eason. In terms of best-selling items, yes, we have internal definitions and standards. We have a certain threshold that when a certain SKU sales contribution in a certain time period surpassed that threshold, we call it best sellers. In the March quarter, we still see that a lot of our best-selling SKUs come from the strategic product categories, as Mr. Ye mentioned. Let me share some numbers: about 40% of our total sales in China come from these strategic categories. Year-over-year growth for these best-selling SKUs achieved about 120% year-over-year growth. These results are quite promising. In terms of your question about segment margin, we have different distinct business segments, including MINISO China and MINISO overseas. Looking at MINISO China, I would say it is above the company-level operational margin, as you can see in our P&L in this quarter. Conversely, for the MINISO overseas market as a whole because we still have the directly operated model in hand and ramping up, we still see that the overseas market as a whole has an OP margin lower than the corporate level. We have seen significant improvements in TOP TOY's margin profile, as Mr. Ye mentioned. Its gross margin increased by 9%, right? Additionally, its bottom line lost ratio significantly narrowed compared to last year. Regarding OpEx trend, yes, if you look at the historical averages, we are confident that we can still control OpEx ratio at about 20%. If you examine pre-COVID times, our SG&A ratio was below 20%. During the three years of COVID, we faced some fluctuations, but during the past three quarters, we have managed to keep the OpEx ratio within or around 20%. In the future, we still aim to maintain our OpEx ratio around 20% or so.

Just a follow-up, Eason, if we have the overseas market growing a lot faster, and then half of it is like a wholesale order. Does it mean that we have more operating leverage for the overseas market versus the domestic market? Or is that not really the case?

This is still no way to be certain because during the past two or three quarters, we've seen the more significant operational leverage in China business due to the unifying market structure. A lot of costs can be shared, right? However, regarding the overseas market, especially within the distributor business, we have different distributors in varying markets and countries. Many costs are non-shareable. Still, I might agree with you that in the long term, with the sales increase in this overseas business as a whole, we have some potential for operational leverage.

The next question is from the line of Veronica Song from Credit Suisse.

My first question is about MINISO's directly operated overseas markets, mainly Indonesia, India, and the U.S. So what's the current store profitability? Can you share anything? And what kind of profitability should we expect in the coming quarters? My second question is regarding TOP TOY. The company has been adjusting its store model in previous quarters. You also mentioned that we've been approaching profitability for TOP TOY. In the coming year, what will be the key focus for this brand? And what kind of profitability should we expect in the coming quarters?

Yes, we have several key countries in our direct operational model, including the U.S. market, Indonesia, and India. In comparison to the U.S. market, our businesses in India and Indonesia are more established and have a longer history. Currently, we are operating at a very strong status in these markets. If you look at the operational side and analyze the bottom line, it appears solid even with a sales recovery rate of approximately 60%. For the U.S. market, it is still too early to draw conclusions or share specific information with investors regarding its margin profile. However, I can say that the U.S. market overall saw an increase of more than 100%, with personal sales rising by nearly 6%. We are optimistic about future growth in this market, though it will take some time to improve the store unit economics and develop plans for the next growth phase. As for TOP TOY, we do not have specific targets for store openings, overall revenue, or profitability this year because, as Mr. Ye stated, China Bricks is our top priority for the year. We want TOP TOY to focus heavily on product innovation, team building, and similar initiatives, but that doesn't necessarily mean it will incur losses this year. Regarding our top four businesses, I anticipate they will grow faster than the company's total revenue growth in calendar year 2023, due to sales leverage and exclusive products gaining traction. We expect that TOP TOY will significantly reduce its losses in the upcoming year.

Thank you once again for joining us today. If you have any further questions, please contact MINISO's IR team. Our contact information can be found in today's press release. We will see you next quarter. Have a nice day. Thank you.