Earnings Call Transcript - MNSO Q2 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to MINISO Group Holding Limited Earnings Conference Call for the Second Quarter of Fiscal Year 2022 that ended December 31, 2021. At this time, all participants are in a listen-only mode. After the management prepared remarks, we will conduct a question and answer session. Please note this event is being recorded. Now, I would like to hand the conference over to your host speaker today, Mr. Eason Zhang, Director of Capital Markets. Please go ahead, Eason.

Eason Zhang, Director of Capital Markets

Thank you. Hello, everyone, and thank you all for joining us on today’s call. The company has announced its quarterly financial results earlier today. An earnings release is now available on our investor relations website at ir.miniso.com. Today, you will hear from our Chairman and CEO, Mr. Guofu Ye, who will start the call with an overview of our business. He will be followed by our CFO, Mr. Steven Zhang, who will address our financial results in more detail before we take your questions. Before continuing, 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 measures today, which we have explained and reconciled to the most comparable measures reported under the International Financial Reporting Standard in the company’s earnings release and filings with the SEC. With that, I will now turn the call over to Mr. Ye. Please go ahead, sir.

Guofu Ye, Chairman and CEO

Thank you. Hello everyone and welcome to MINISO’s December quarter 2021 earnings conference call. On today's call, I will share major developments of our business, and then talk about the strategic upgrade of MINISO brand. I will begin with business review. During this quarter, we added 191 stores to our global store network, including 174 MINISO stores and 17 TOP TOY stores. Revenue reached RMB 2.77 billion, up 21% year-over-year, exceeding the high end of our guidance range. Adjusted net profit was RMB 214 million, up 155% year-over-year, adjusted net margin of 7.7% was the highest in recent seven quarters since the pandemic broke out. During calendar year 2021, we added 615 stores to our global store network, including 531 MINISO stores and 84 TOP TOY stores. Revenue reached RMB 10.13 billion, up 34% year-over-year. Adjusted net profit was about RMB 619 million, up 90% year-over-year, adjusted net margin was 6.8% compared to 4.8% in calendar year 2020. In December quarter, MINISO brand recorded revenue of RMB 2.6 billion, up 17% year-over-year. Revenue from China was RMB 1.88 billion, up 6% year-over-year. Revenue from overseas market was RMB 717 million, up 55% year-over-year. In China, our offline stores recorded a higher recovery rate than industry average in October. Total sales increased by 9% year-over-year from the high water mark of last October and increased by 16% from the same period in 2019. Sales recovery rate is about 97% of the same period in 2019, among which Tier 1 and Tier 2 cities recovered to 95%, and Tier 3 and below cities recovered to more than 100%. However, this growth was interrupted by the new wave of the pandemic in November, and total sales was down 6% year-over-year and 7% compared to the same period in 2019 separately. Total sales in December was down 7% compared to the same period in 2019, but thanks to the operating measures for the year-end promotion campaign, total sales was down by only 1% year-over-year. MINISO added 133 stores on a net basis during this quarter and ended December with 3,168 stores in China. With a net addition of 400 MINISO stores in calendar year 2021, we have successfully completed our store expansion plan and nearly doubled the number from 225 in calendar year 2020, which demonstrates our expansion ability and retail partners' strong confidence in our business. As we continue to penetrate into Tier 3 and below cities and unlock these new markets, approximately 60% of newly added stores in this quarter are from there. By the end of December, we had more than 1,300 stores located in Tier 3 and below cities. Moving to our online business. Revenue from e-commerce was RMB 170 million. Revenue from O2O business was around RMB 130 million, up 130% year-over-year. In total, our business, including e-commerce and O2O contributed 11% of our revenue. In terms of user operations, sales contribution from members exceeded 50% for the first time in calendar year 2021. Meanwhile, we continue to strategically focus on private traffic and WeChat mini program. Our WeChat mini program had nearly 7.8 million MAUs in December, and our private traffic had accumulated over 14 million consumers. MINISO is strategically committed to enhancing consumer engagement and driving repurchase by providing improved omni-channel experience today, taking our very successful IP products in this quarter, Lotso as an example. For the first time, we managed to invite consumers to participate in the product development process. Consumers involved were asked to vote for their favorite product design. We also launched presales for these IP products online. The statistics from the presales were found useful in production projection and merchandise preparation for offline stores. A lot of IP products went viral on social media, attracting more than 12 million page views on Xiaohongshu. The secret to their success is inviting young people to become co-creators of our products so that young people can have an immersive and more friendly shopping experience. Like what we did in the Lotso case, we shall keep testing this tactic while driving user stickiness and repurchases and eventually help create a wonderful lifestyle for young consumers globally. Moving to overseas operations. Revenue for the same quarter reached RMB 717 million, up 55% year-over-year and 15% quarter-over-quarter. Thanks to the recovery from the pandemic and holiday spending. Overall GMV recorded to recover to about 80% of the same period in 2019, up 26% year-over-year with distributor markets recovered to 80% and directly operated markets, 70% of the same period in 2019. GMV in the U.S. market, for example, increased by 40% from the same period in 2019, and Europe increased by about 60%. Asian countries as a whole also delivered significant improvements from previous quarters. The positive trend in overseas markets has enhanced our confidence to actively expand our business off the pandemic. Average sales per store in overseas markets in this quarter recovered to 70% of the same period in 2019, up 20% year-over-year and 30% quarter-over-quarter. In the U.S. market, sales per store surpassed the level in the same period in 2019 and increased by 10%, after it recorded a recovery rate of 9% in the previous quarter. Sales per store recovered to 100% and 80% in Canada and Mexico separately. Total number of overseas stores reached 1,877 by the end of December with a net addition of 41 stores during the quarter. In calendar year 2021, we have surpassed our store expansion target and delivered a net addition of 131 MINISO stores. There were 76 suspended stores in overseas markets by the end of December, down from 157 such stores a quarter ago. TOP TOY celebrated its first anniversary in December and the first sub-brand incubated under the strategy, TOP TOY has made remarkable achievements in its first year. Established a brand image as a global collection of art toys, forged a promising omni-channel capability in large product offerings of art toys and built a team of high potential talents. Revenue of TOP TOY was RMB 130 million, up 20% quarter-over-quarter. Total number of TOP TOY's offline stores was 89 by December, including 13 Dreamworks stores and 76 collection stores. Through its continuous efforts in online channels, TOP TOY has accumulated nearly 3 million fans and 1.5 million members. Product-wise, TOP TOY continues to make breakthroughs. Proprietary products contributed 8% of offline sales and 30% of online sales in December separately. Merchandise gross margin of our proprietary products reached about 65% and plays a positive role in improving its overall gross margin. TOP TOY managed to combine e-sports and other popular pop culture elements among young people with art toys in an effort to attract consumers from different segments. Our partnership with EDward Gaming in January highlighted TOP TOY's leadership in the industry. Sales of the co-branded products from this collaboration were encouraging and far exceeded our expectations; for example, the 1,000% MINISO plus EDG figures were sold out in 48 hours, again, demonstrating TOP TOY's strong abilities in rapid product development and IP co-branding. Behind this, collaboration is TOP TOY's never-ending exploration to capture various trendy topics among young people to reshape consuming environments and enlarge the addressable market of art toys. Next, I would like to introduce the strategic upgrade of the MINISO brand. During the past 8 years, the MINISO brand has become a global household name demonstrated by our entrance into 99 countries and regions and our massive network of more than 5,000 stores worldwide, enabling hundreds of millions of consumers around the world to enjoy life’s little surprises every year. It is very important for us to keep our strategy and brand positioning up to date. After careful deliberations, we have made the decision that 2022 will be the first year of an era to strategically upgrade the MINISO brand. In China, we plan to further upgrade the MINISO brand with a value proposition of a wonderful life, on the basis of our established advantages in product quality and affordability with the core of our brand upgrade strategy being from product recognition to brand recognition. We'll make efforts in the following three aspects closely around the topic of interest-based consumption. Product-wise, the upgrade does not necessarily mean raising prices of all of MINISO's products. We currently estimate that prices of about 70% of our products will remain stable and MINISO's brand promise to offer consumers value and affordability is not going to change. While new products will be more focused on interest-based consumption by offering more appealing, useful and playful options than we used to. We believe the strategic upgrade in product philosophy will drive a steady offering of such new products, which have higher premiums and will fuel our future growth. We are also building a robust pipeline of new blockbuster products of strategic importance to effectively capture more consumer mind share. Marketing-wise, we plan to take a systematic approach and first launch our branding campaigns in Tier 1 and Tier 2 cities to enhance our brand image as a global brand by leveraging our edges in appealing, useful and playful products while sticking to our core strategy of product-driven brand upgrade, and will strive to build our value proposition and brand image representing a wonderful life among consumers. Channel-wise, we'll continue to penetrate into lower tier cities. In Tier 1 and Tier 2 cities, we will focus on optimizing the margin profile of MINISO stores with key initiatives such as product mix optimization, brand image upgrade, and price range extension. We are also committed to an omni-channel strategy, enhancing our operations in private traffic and WeChat mini program, and ultimately driving business growth across online and offline channels. When I founded the MINISO brand, it was a time when e-commerce was booming and the brick-and-mortar retail industry was experiencing a downturn, just like today. The pandemic has changed consumers' shopping patterns and habits but neither the rise of e-commerce nor the pandemic has changed consumers' pursuit of a wonderful life, and it is the promise of MINISO's brand and the reason behind our path to success that we enable consumers to enjoy life’s little surprises. Looking ahead in the post-pandemic era, we are more capable and highly confident in constantly delivering long-term value to consumers, and investors with our constant offerings of products that are more appealing, useful and playful. That concludes my remarks. I will now turn the call over to our CFO for a financial review.

Steven Zhang, CFO

Thank you. Hello, everyone. I will start my remarks with a review of December quarter's financial results, and I will then provide additional color regarding the March quarter. Please note that I will be referring to non-IFRS measures, which have excluded share-based compensation expense and certain nonrecurring items. Revenue in the second quarter was RMB 2.77 billion, increased by 21% year-over-year and 5% quarter-over-quarter, above the high end of our guidance range of RMB 2.5 billion to RMB 2.7 billion. The year-over-year increase was primarily driven by the growth of our domestic operations and the recovery of our international operations. Revenue generated from our domestic operations was RMB 2.06 billion, increased by 12% year-over-year. Revenue generated from the domestic operation of the MINISO brand was RMB 1.88 billion, increased by 6% year-over-year. Revenue generated from TOP TOY was RMB 131 million compared to RMB 3 million in the same period of 2020. Revenue generated from our international operations was RMB 717 million, increased by 55% year-over-year, reflecting a consistent improvement of our sales recovery in the overseas market as a whole. From a quarter-over-quarter perspective, revenue from our domestic operations remained flat. We estimate that the GMV loss following store influences in China during this quarter was comparable to that in the previous quarter. Revenue from international operations increased by 15% sequentially. Gross profit was RMB 863 million, increased by 34% year-over-year and 19% quarter-over-quarter. Gross margin was 31.1% compared to 28% a year ago and 27.4% a quarter ago. Both the year-over-year and quarter-over-quarter increases were primarily due to: one, revenue recognition, a contribution of international operations increased from 20.1% in the same period of 2020 to 25.9% in this quarter. As you know, international operations typically have higher gross margins than domestic operations; and number two, our expanding co-brand IP product offerings and its associated high gross margin in this quarter. Selling and distribution expenses were RMB 371 million, increased by 21% year-over-year and 15% quarter-over-quarter. The year-over-year increase was primarily attributed to increased personnel-related expenses, license expenses, and marketing expenses that were in line with the year-over-year revenue growth and the brand awareness improvement for both MINISO and TOP TOY. The quarter-over-quarter increase was primarily attributed to an increase in license expenses and rental-related expenses. G&A expenses were RMB 215 million, increased by 34% year-over-year and 7% quarter-over-quarter. Both the year-over-year and quarter-over-quarter increases were primarily due to increased depreciation and amortization expenses of land use rights related to our headquarter building project and to a lesser extent, increased personnel-related expenses and professional service fees. Turning to our profitability. Operating profit was RMB 255 million, increased by 371% year-over-year and 20% quarter-over-quarter. Operating margin was 9.2% compared to 2.4% a year ago and 8% a quarter ago. Adjusted net profit was RMB 214 million, increased by 155% year-over-year and 16% quarter-over-quarter. Adjusted net margin was 7.7%, the highest in recent seven quarters compared to 3.7% a year ago and 6.9% a quarter ago. Adjusted basic and diluted earnings per ADS were RMB 0.72 in this quarter compared to RMB 0.28 a year ago and RMB 0.60 a quarter ago. Turning to our balance sheet. As of December end, the combined balance of our cash, cash equivalents, restricted cash, and other investments was RMB 5.37 billion compared to RMB 6.14 billion as of the end of September. Turning to working capital. Turnover of inventories and trade receivables remained stable on both a year-over-year and quarter-over-quarter basis. Looking ahead into the March quarter of 2022, we expect our total revenue to be between RMB 2.4 billion to RMB 2.7 billion, which represents an increase of 7.7% to 21.1% year-over-year. In calendar year 2022, we currently expect to open about 400 MINISO stores in China and about 350 stores in overseas markets. As we continue to operate in a time of significant uncertainty regarding the timetable of pandemic recovery in our major markets, we remain cautious in our outlook in terms of sales and store expansion and may update and adjust this operational plan based on the latest development of the pandemic. We are encouraged by our efficient working capital management and a strong recovery in both top line and bottom line in this quarter. Before we move to the Q&A section, I would like to reiterate our financial strategy, which has led us to the above-mentioned results and the idea of disciplined investment throughout it. The same idea will also apply to the strategic update of the MINISO brand. We have developed a thorough financial plan on this project, and we will have this plan quickly tested on a small scale before it is implemented nationwide. We will also closely monitor the performance and gather feedback from consumers throughout the process to ensure we remain committed to MINISO's brand promise of enabling everyone to enjoy life’s little surprises with products that are more appealing, more useful, and more playful. That concludes our prepared remarks. Operator, we are now ready to take questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Your first question today comes from the line of Michelle Cheng from Goldman Sachs. Your line is open. Please go ahead.

Michelle Cheng, Analyst

I have two questions for management. One is for the brand upgrade. The Chairman just mentioned that they are focusing on the brand upgrades. Specifically, 70% of the products will still have stable prices, but 30% of the products are likely to have a more premium offering. So what exactly are these product lines? And also since we are penetrating lower-tier cities, how do we balance these penetration strategies versus the brand upgrade strategy? My second question is about overseas expansion. We have a 350 store opening target this year. Which areas will be the focus? And specifically in the U.S., what kind of model are we focusing on? And also, what will be the impact on the margin?

Guofu Ye, Chairman and CEO

In response to your questions about balancing brand upgrades with maintaining important factors, I believe that enhancing the brand can coexist with ensuring cost efficiency and product affordability. A strategic upgrade of the MINISO brand should not be viewed merely as raising prices. It's crucial for MINISO to remain affordable for consumers, particularly in physical stores. However, focusing solely on affordability could lead to uniform competition, which could hinder the MINISO brand's long-term growth. Therefore, we need to set the MINISO brand apart from others. What distinguishes MINISO is our emphasis on delivering appealing, useful, and playful products that embody a wonderful lifestyle for consumers. Concerning the pricing strategy in lower-tier cities, we will not adjust prices across all products. We anticipate about 70% of our product prices will remain unchanged, while new products will adopt various pricing strategies that cater to consumer interests. For instance, our stock category appeals to consumers who are less price-sensitive and have a higher recognition of our IP and other brands. We've repeatedly noted that MINISO stores in lower-tier cities often perform similarly to those in Tier 1 and Tier 2 cities regarding cross-selling rates and average selling prices. This suggests that consumers in lower-tier cities choose our products not just for their low cost, but because they genuinely appreciate them. As we implement our strategic upgrade, we will conduct partial testing and quick trials, allowing us to continually refine and improve our pricing strategy. Once the brand upgrade is completed, we want consumers to feel that they are receiving more value, rather than just facing price increases. Regarding your second question about international development, given the current trends in overseas recovery from the pandemic, we project a net addition of 350 MINISO stores abroad in 2022. Around 35% of these stores will be located in Asia, which faced significant pandemic challenges in 2021, but we have seen better recovery in the last quarter of the year. Asia remains our largest overseas market. In countries such as India, we have been actively opening new stores, with about 30% expected to come from Europe, the Middle East, and North Africa, where store numbers have surged in the past two years as pandemic recovery has improved. Additionally, 30% of new stores will be in the Americas, including 20% in Latin America and 10% in North America. In the U.S., we plan to open more directly operated stores with a new concept, especially in the American market, while the remaining 5% of our new stores will be in other markets. In terms of performance, GMV in the U.S. grew over 10% sequentially in the last quarter, and average sales per store increased by 10% compared to the same period in 2019, with an 11% increase in the U.S. during this time. We added 18 stores in the U.S., bringing the total to about 53 by the end of December. The new concept stores have performed better than we anticipated, and combined with strong holiday sales in December, our sales surpassed initial forecasts by nearly 60%. However, we recognize the need to evaluate the situation over a longer period and refine our business model as we are strategically focused and not rushing to achieve profits in this market.

Steven Zhang, CFO

Based on the latest developments of the current overseas pandemic recovery, we expect a net increase of 350 MINISO stores overseas in calendar year 2022. About 35% of this will come from Asia, which was heavily affected by the pandemic in 2021, but we noted improved recovery in the December quarter. Asian countries, particularly India, continue to open new stores and about 30% will come from Europe, the Middle East, and North Africa regions which have similarly seen a fast growth in the past two years. Recovery of the pandemic is also better in these regions than in others. Another 30% is from America, including 20% from Latin America and 10% from North America. We will focus on opening more directly operated stores using the new concept model in North America, especially in the U.S. By the end of December, we had about 53 stores opened at the U.S., and over the December quarter, we added 18 stores. The performance of the 10 and under concept stores in the U.S. has exceeded our expectations. Continuing the positive impact of holiday spending in December, the sales in this month exceeded our original plan by nearly 60%. However, we must still look at a longer-term perspective to refine our business model. At this stage, we are not rushing to achieve profitability in this market as it is strategically significant for us.

Lucy Yu, Analyst

So first question is on a year-to-date recovery rate for both domestic and overseas market. And could you please give us some guidance on 2022 revenue growth? My second question is on the competitive landscape. The COVID has been going on for two years. Have we seen any changes in the competitive landscape in both online and offline markets?

Steven Zhang, CFO

This is Steven. Thank you for your first question. We have now given store opening guidance in our prepared remarks. To conclude, we estimate 400 new stores in Mainland China on a net basis and 350 stores in the overseas market on a net basis. Meanwhile, we estimate that in the calendar year 2022, whether in China or overseas markets, we will continue to recover from the pandemic. There may be some fluctuations, but the overall trend is recovery. We believe that our e-commerce business can maintain a high double-digit annual growth rate next year. The TOP TOY business, in its second full year, is expected to grow at more than 100%. Based on these assumptions, our top line in calendar year 2022 is likely to show a double-digit growth compared to calendar year 2021. We want to stress here that we typically do not provide annual revenue guidance, so this is an estimate based on the assumptions I mentioned. According to our business model, if we can achieve top line growth, our bottom line will also reflect a very positive outcome in calendar year 2022. Regarding your question about recent developments in our business, in overseas markets, we observed stabilization in recent quarters. However, given the holiday seasons in December, we anticipate a sequential decline in the overseas markets in the March quarter. When compared to normalized years prior to the pandemic, the current situation in overseas markets appears stable. In China, the resurgence of local cases has influenced the offline retail industry, and many cities are observing increased cases. However, we have fully prepared for the pandemic resurgence in domestic operations. This is why we presented the top line guidance for the March quarter.

Guofu Ye, Chairman and CEO

During the pandemic, I believe we did three things right. The first is that we adopted a more robust business strategy that controlled the expansion rate of overseas, and we did not pressure our overseas distributors. Instead, we took various measures to actively assist distributors in clearing their inventory. Secondly, we actively expanded our online channels and clarified that our omni-channel strategy will be a key driver for the future, with online now accounting for more than 10% of total company revenue for several quarters. Finally, we began to penetrate into low-tier cities in China, where the pandemic impact is less severe compared to Tier 1 and Tier 2 cities, enabling us to continue providing stable returns to our retail partners. Accomplishing these three things correctly has allowed us to maintain a relatively healthy store growth rate each year in China while ensuring our retail partners receive a good return on their investment. Over the past two years, the number of our retail partners has continued to rise, and the average number of stores per retail partner has remained stable as we mentioned in previous quarters. In terms of overseas markets, we have seen that some competitors in some overseas markets have exited the market due to the pandemic severely affecting their operations. Thus, we believe that post-pandemic, we will undoubtedly gain a larger market share in these markets.

Operator, Operator

There are no more questions. Thank you once again for joining us today. If you have any further questions, please contact MINISO Investor Relations team. Our contact information can be found on today's press release. We will see you next quarter. Have a nice day.