Earnings Call Transcript - MNSO Q4 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to MINISO Group Holding Limited Earnings Conference Call for the fourth quarter of fiscal year 2021 that ended June 30, 2021. At this time all participants are in 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'd 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. We have announced our quarterly financial results earlier today. And the earnings release is now available on our Investor Relations website at ir.miniso.com. Joining us today are our Founder and CEO Mr. Jack Ye, and CFO, Mr. Saiyin Zhang. Before we continue, I'd like to refer you to the Safe Harbor statements in our earnings press release, which also applies to this call, as we've been 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 on the International Financial Reporting Standards in the company's earnings press release and filings with the U.S. SEC and Hong Kong Stock Exchange. With that, I will now turn the call over to Mr. Ye. Please go ahead.

Guofu Ye, CEO

Thank you. Hello, everyone and welcome to MINISO Group's earnings conference call for the June quarter of 2022. This quarter marks the end of fiscal year 2022 and is our first results announcement as a dual primary listed company in the U.S. and Hong Kong. Thanks to our dedicated team, we successfully completed our listing in Hong Kong on July 13 of this year. The Hong Kong listing is vital for protecting the interests of our existing shareholders and responding to the evolving regulatory environment. We believe it will provide us with broader financing opportunities to support the company's future development, help expand our shareholder base, and promote the sustainable growth of our business. On behalf of the company, I want to express my gratitude to all our employees for their dedication and to our investors who have consistently supported MINISO. Looking ahead, we are confident in our ability to create long-term value for shareholders by enhancing their enjoyment of life and introducing unexpected delights. As we've emphasized in previous calls, retailers can adapt to economic fluctuations. Our business model has shown resilience despite the impact of the pandemic on our recent results. This quarter, we have focused on enhancing our brand in China. The gross margin from our domestic operations in the June quarter rose by about 3% compared to the same period last year, due to our introduction of a new portfolio of high-margin consumption-based products. Given the unprecedented challenges facing our retail sector, we concentrated on the recovery of our overseas business, which experienced nearly 50% year-over-year revenue growth and represented 34% of the company’s total revenue, the highest since the pandemic began in early 2020. As a result of these factors, our overall gross margin reached a record high of 33.3% during this quarter. Our recent business performance shows that our global presence has provided us with greater flexibility in navigating pandemic-related uncertainties in China while allowing us to take advantage of the operational leverage from our overseas business and enhancing our cost control and efficiency. Our adjusted net profit rose by 57% year-over-year to RMB220 million in the June quarter, which is double the figure from the same quarter last year. Our adjusted net margin reached a decade-high of 9.6%, returning to pre-pandemic levels. Next, I will discuss the progress in our various business segments during the quarter. First, in our domestic operations, revenue for this quarter was RMB1.41 billion, with offline business revenue at RMB1.28 billion, in comparison to RMB1.82 billion and RMB1.63 billion for the same period last year. We estimate the gross merchandise value lost due to the pandemic was about RMB700 million, with a corresponding revenue loss exceeding RMB400 million. Specifically, sales dropped nearly 30% year-over-year in April and May due to diminished traffic to shopping malls, many of which were closed due to local regulations. In April, about 300 stores or 12% of MINISO locations in China were operational, a figure that fell to approximately 9% by May. As we moved into June, key cities gradually reopened, resulting in a swift recovery in traffic and allowing nearly all stores to operate normally, with temporary closures down to 60 or 2%. Sales in June rebounded to 94% of the levels seen in the same month last year, nearly 90% in Tier-1 and Tier-2 cities, while Tier-3 and lower cities achieved nearly 1% year-on-year growth. Ecommerce revenue for the quarter was RMB113 million, serving as a vital supplement to our offline channels. We prioritize profitability over revenue in ecommerce, which has been on the rise in recent years thanks to effective management of traffic acquisition costs. The MINISO retail partner mobile app has shown resilience amid pandemic pressures. With low inventory risk and prompt revenue shares, our working capital demands are much less than typical franchising models. This quarter, despite immense pandemic-related challenges, our business development team net added 79 stores while keeping the corporate store closure ratio down to about 1.1%, the lowest in eight quarters. Over fiscal year 2022, the number of store closures in China fell by 40 compared to the previous year. Due to stricter controls in Tier-1 and Tier-2 cities, all new MINISO stores in this quarter were established in Tier-3 and lower cities, while dynamically adjusting store openings based on pandemic developments to minimize operational risk for our retail partners. Turning to MINISO's overseas operations, revenue for the June quarter was approximately RMB780 million, reflecting nearly 50% year-over-year growth. Revenue from our distributor model increased by over 30% year-over-year, while revenue from our directly operated model rose by about 70%. During this quarter, overseas markets began to recover, with overall sales increasing by 52% year-on-year and surpassing 90% of the levels from the same period in 2019. Sales from distributor markets climbed by 45% year-over-year, nearly returning to pre-2019 levels, while sales in our direct markets saw nearly 80% year-on-year growth, recovering to 80% of pre-pandemic figures. By region, sales in Europe grew almost 40% year-on-year and more than doubled that of the same period in 2019. In North America, sales increased nearly 170% year-over-year, up 13% compared to 2019. Latin America sales rose about 60% year-on-year, exceeding levels from 2019. Sales in the Middle East and North Africa experienced near 30% growth year-on-year and increased by 60% from 2019. In Asian countries, including China, sales grew over 50% year-over-year, reaching nearly 60% of 2019 sales figures. Notably, Asian countries apart from China remain the only markets that have not fully returned to pre-COVID sales levels. In terms of specific countries, sales in both the U.S. and Canada rose nearly 170% year-over-year, with Mexico up over 50% and India seeing nearly tripling in sales. MINISO entered its 105th market in the June quarter and added 57 overseas stores on a net basis compared to 35 stores in the same period last year. The overseas market has transitioned into the post-pandemic era, and due to strong demand from distributors, we expedited the opening of overseas stores this year. Despite challenges posed by the Russia-Ukraine conflict and geopolitical tensions that have delayed some store openings, we are confident that the net number of new overseas stores opened in 2022 will substantially exceed that of 2021. With high inflation in overseas markets, consumers are increasingly seeking value, which presents great opportunities for us. We remain committed to our product-centric philosophy and will continue to enhance our overseas design capabilities by deploying our domestic product teams internationally to strengthen our product design and develop localized offerings. We are currently equipped to launch products tailored to major overseas markets, focusing next on Latin America, North America, Southeast Asia, and Europe to provide increasingly localized products. We will continue to leverage China's robust supply chain capabilities to facilitate exports. As we grow our presence in overseas markets, we have launched the MINISO store image 3.1 project to bolster the visual appeal of our stores in some regions. Additionally, we support overseas distributors in refining their operational strategies. For instance, we've achieved better performance by relocating stores from tourist areas to local communities to lessen dependency on tourist traffic. Now, let's discuss TOP TOY. We are executing our established strategy and making steady progress. TOP TOY’s revenue increased by 43% year-over-year, with its online segment accounting for 15% of revenue this quarter. In response to the pandemic in China, TOP TOY scaled back its promotional activities, leading to merchandise gross margins of about 42% in the June quarter, which, while lower than in previous quarters, remains quite strong. The quarterly sales balance between TOP TOY’s proprietary products and select third-party products has gradually aligned with our established product strategy, with proprietary products making up nearly 20% of TOP TOY sales and maintaining gross margins above 60%. Reflecting on fiscal year 2022, our key operating metrics indicate we are in a strong growth phase. We added 514 stores on a net basis, demonstrating 11% year-on-year growth, with revenue exceeding RMB10 billion, up 11% year-over-year. Gross profit exceeded RMB3 billion, an increase of 26% year-over-year, and gross margin reached 30.4%, up 3.6 percentage points year-over-year. Our adjusted net profit was RMB720 million, up 51% year-over-year, and net margin stood at 7.2%, rising nearly 2 percentage points year-over-year. Looking ahead to fiscal year 2023, we remain optimistic about our revenue and profit growth despite the ongoing pandemic uncertainties, as we retain long-term confidence in China's economic development. Our ambition for our retail business remains unchanged, as does our commitment to achieving global growth. Lastly, as you may have observed, we issued an apology letter last week, in which we retracted an inappropriate marketing tactic shortly before our listing and outlined a corrective plan. Moving forward as a dual primary listed company, we will strictly adhere to the regulations of both exchanges, enhancing our compliance requirements. We are committed to raising the compliance standards that govern our operations to ensure the long-term success of our core business. That concludes my prepared remarks. I will now pass the call over to the CFO for a financial review.

Saiyin Zhang, CFO

Hello, everyone. Thank you for joining us today. I will walk you through the financial results for the June quarter, as well as the full fiscal year 2022. Please note that all the numbers are in RMB unless otherwise stated. I will also refer to some non-IFRS measures, which have excluded the share-based and compensation expenses. Revenue in the June quarter reached 2.3 billion, above the midpoint of our guidance range, which was 2.1 billion to 2.4 billion, implying a better-than-expected performance in our domestic operation in June. Revenue from China was 1.5 billion, including 1.4 billion from MINISO and 95 million from the TOP TOY brand and 28 million from others. Of these, revenue from the MINISO brand experienced a year-over-year decline of 23%, consistent with the declining trends of GMV and offline traffic. Revenue from TOP TOY increased by 33% year-over-year. During this quarter, TOP TOY's sales were significantly impacted by the outbreak of the Omicron virus due to the concentration of stores in Tier-1 and Tier-2 cities. As we have included in the previous call in May, although the impact of the pandemic on short-term performance is inevitable, we continued to follow our established strategy and made steady performance in refining TOP TOY's proprietary model product and omni-channel strategy. For our overseas market, revenue increased by 49% year-over-year to 785 million. If we look at the financial year 2022, the year-over-year increase in revenue was also about 50%, which demonstrated that recovery trends in our overseas operations are very clear. For the full fiscal year 2022, total revenue reached 10.1 billion, an increase of over 11% from fiscal year 2021. Revenue from our domestic operations was 7.4 billion, increased by 2% from a year ago. Of this, revenue from domestic operations increased by 15% in the first half of fiscal year 2022 and decreased by 10% in the second half due to the spread of Omicron in China. Revenue generated from TOP TOY was 447 million, representing an increase of 355% year-over-year. Gross profit in the June quarter was 772 million, representing an increase of 21% year-over-year. Gross margin was 33.3% compared to 25.8% in the same period of 2021. There were three reasons for the year-over-year increase in gross margin. First, it was primarily due to the revenue mix change. This quarter, we have seen almost 34% of total revenue contributed by overseas markets, which is the highest level since the December quarter of 2019. Secondly, we launched more profitable products related to MINISO's strategic brand upgrades in this quarter. The third reason was the inventory clearance activities throughout the year aimed at mitigating the negative impact of the pandemic on operations. Our full-year gross profit was 3.1 billion, up 26% year-over-year. Gross margin was 30.4% compared to 26.8% in fiscal year 2021. Selling and distribution expense in the June quarter was 346 million, representing an increase of 31% year-over-year. The year-over-year increase was primarily attributed to the increase in expenses related to our recovery international operations, an increase in personnel-related expenses, and an increase in licensing expenses related to our newly launched IT products, partly offset by our savings in promotion and advertisement expense due to our reduced marketing efforts in China to mitigate the resurgence of COVID-19. For the full year, selling and distribution expense was approximately 1.4 billion, representing an increase of 29% year-over-year. The year-over-year increase was due to an increase in personnel-related expenses, an increase in licensing expenses related to our expanding IT library, and an increase in promotion and advertisement expenses mainly connected to a strategic brand update for MINISO in China. G&A expense in the June quarter was 180 million, representing a decrease of 5% year-over-year. The year-over-year decrease was primarily due to decreased personnel-related expenses. For the full year, G&A expenses were 785 million, representing an increase of 19% year-over-year. The year-over-year increase was primarily due to increased depreciation and amortization expenses, mainly related to the land use rights of the company in the headquarters building project, and increased personnel-related expenses, which were partly offset by a decrease in office operating expenses as a result of expense control measures. Turning to profitability. Operating profit in the June quarter was 272 million, representing an increase of 45% year-over-year. Operating margin was 11.7%, compared to 7.6% a year ago. For the full fiscal year 2022, operating profit was 882 million, representing an increase of 120% year-over-year, with an operating margin of 8.7% compared to 4.4% in fiscal year 2021. Adjusted net profit in the June quarter was 223 million, representing an increase of 57% year-over-year. Adjusted net margin was 9.6%, compared to 5.7% in the same period of 2021. For the full year, adjusted net profit was 723 million, representing an increase of 51% year-over-year. Adjusted net margin was 7.2% compared to 5.3% in fiscal year 2021. Adjusted basic and diluted earnings for ADS in the June quarter were 0.72, up 50% year-over-year. For the full year, adjusted basic and diluted earnings per ADS were 2.40 and 2.36 respectively, representing an increase of 43% and 40% year-over-year. Turning to cash position, as of the end of June, we had a cash position of 5.8 billion. On August 17, 2022, our board of directors approved a special cash dividend of approximately U.S.$53.5 million or RMB 360 million, up 20% year-over-year. In our capital allocations moving forward, we will balance new growth opportunities with our commitment to deliver stable returns to shareholders. Turning to working capital, turnover of inventory and trade receivables remain stable. As the newly listed company on the Hong Kong Stock Exchange, we will follow common practices adopted by public companies in the Hong Kong market and will no longer provide guidance on revenue growth going forward. That being said, as we approach the last month of the September quarter, we have observed encouraging sales and recovery in China, which has stabilized at a healthy level during the past several weeks. Looking forward into the coming quarter, we expect our bottom-line performance to further normalize due to our disciplined execution of brand upgrades and a steady recovery of overseas operations. Thank you, and this 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 of Goldman Sachs. Please go ahead.

Michelle Cheng, Analyst

I have a question regarding brand upgrades, which have significantly impacted gross margin in recent quarters. Could management share strategies for the second half of the year? Additionally, what is the current update on gross margin and are there any related operating expenses tied to the brand upgrades? Thank you.

Guofu Ye, CEO

Thank you, Michelle, for your question. This is Jack. In our last call back in March, we communicated that all MINISO brand strategic upgrades will concentrate on three areas: product, channel, and marketing. Regarding products, we will enhance the gross margin of newly launched items, particularly those aligned with consumer trends. Our domestic gross profit margin rose by about 3% year-on-year this quarter to approximately 54%, recovering from nearly the lowest levels last year. We aim to further increase our gross merchandise margin by five percentage points, reaching close to 60% by the end of fiscal year 2023. For channels, we will systematically optimize offline business profitability in Tier-1 and Tier-2 cities to assist our retail partners in minimizing operational risks. In terms of marketing, we initially planned a marketing campaign for the September quarter with a budget of around RMB50 million. However, due to the current domestic pandemic situation and the potential for further outbreak restrictions, we have decided to delay or postpone these marketing campaigns to save costs, which will positively impact profit in the September quarter. I hope this addresses your question. Thank you.

Michelle Cheng, Analyst

We had a marketing plan for the September quarter with a budget of around RMB50 million. However, due to the current pandemic situation and the possibility of additional outbreak restrictions, we have chosen to delay or postpone these marketing campaigns to save costs. This decision will have a positive effect on profits for the September quarter. I hope this answers your question. Thank you.

Operator, Operator

Thank you. The next question is from the line of Anne Ling from Jefferies. Line is open, please go ahead.

Anne Ling, Analyst

Now, let me translate in English. Regarding your letter to the public about minimizing aspects of the Japanese interest, what is the strategy for operational changes? Our concern is whether these changes will affect your image, performance, or brand equity from the consumers' perspective, both internationally and domestically. I would like more information about your plan. Thank you.

Guofu Ye, CEO

Thank you for your question. This is Jack. Regarding the correction plan for this event, we have three specific measures. First, we aim to strengthen the internal control environment of our distributors in overseas markets, particularly concerning politically sensitive issues. We will establish a global branding headquarters where our marketing personnel in overseas markets will report to headquarters, which will regularly organize relevant training for frontline staff. The second measure is operational; we have outlined a timeline in the correction plan to complete the rectification by the end of March next year. The third measure involves product development; we plan to incorporate more Chinese cultural or traditional elements in our products and will introduce a series of Chinese-themed products in overseas markets. Concerning your second question about the impact on our sales in China, we have not seen any negative effects from the marketing changes in our overseas markets. In China, total GMV in July was approximately 95% of last year’s figures, and for the first three weeks of August, it was on track for year-over-year growth. The improvement in sales in China is attributed to increased foot traffic in shopping malls, where our average selling price remains stable with low single-digit increases. In overseas markets, total GMV for distributors in July and the first three weeks of August increased by about 30% to 40% year-over-year, and for our directly operated businesses, the year-over-year growth was even higher, around 50%. Thank you for your question.

Anne Ling, Analyst

Is there any additional costs involved in this exercise?

Guofu Ye, CEO

In China, we have seen better foot traffic in shopping malls, where our average selling price remains stable with low single-digit increases. Looking at overseas markets, total gross merchandise value in overseas distributors grew by approximately 30% to 40% year-over-year in July and the first three weeks of August. For our directly operated businesses, the year-over-year growth was even higher, around 50%. Thank you for your question. Is there any additional cost involved in this exercise?

Anne Ling, Analyst

Foot traffic to shopping malls where our average selling price remains stable with low single-digit increases. In overseas markets, looking at July and the first three weeks of August, total gross merchandise volume in overseas distributors increased by approximately 30% to 40% year-over-year, while for our directly operated businesses, the year-over-year growth was even higher at about 50%. Thank you for your question. Is there any additional cost involved in this exercise?

Saiyin Zhang, CFO

Thank you, Anne. And this is Steven. Let me quickly translate for Steven. So, for the interim control measures, there will be some additional costs, but we do not believe it will significantly increase our related expenses and will not impact our earnings. Thank you.

Operator, Operator

Thank you. The next question is from the line of Lucy Ziyan Yu from Bank of America Merrill Lynch. Line is open. Please go ahead.

Lucy Ziyan Yu, Analyst

We are facing a potential recession in the U.S. and Europe. Should we be concerned about how this recession might affect our business and our plans for international expansion? Thank you.

Guofu Ye, CEO

Thank you, Lucy. This is Jack. Regarding your question about store expansion in the overseas market, we observe strong demand from our overseas distributors, and our pipeline is healthy. However, we need to be honest that the Russia/Ukraine conflict and shifting geopolitical risks in some international markets are affecting our distributor store opening plans, resulting in some delays. Nevertheless, if we look back over the past few years, from fiscal year 2020 to fiscal year 2022, our overseas markets net added 375, 121, and 163 stores, respectively. Therefore, we are confident that in fiscal year 2023, the net addition of our stores in overseas markets will be significantly higher than in 2022. Thank you.

Lucy Ziyan Yu, Analyst

The Russia/Ukraine conflict and changing geopolitical risks in certain international markets are now affecting our distributor store opening plans, leading to some delays. However, if you review the past few years, from fiscal year 2020 to fiscal year 2022, our international markets added 375, 121, and 163 stores, respectively. Therefore, we are optimistic that in fiscal year 2023, the net increase of our stores in international markets will be much greater than in 2022. Thank you.

Eason Zhang, Director of Capital Markets

Thank you once again for joining us today. If you have any further questions, please contact me or the Investor Relations team. Our contact information can be found on today's press release. We'll see you next quarter. Have a nice day.