Earnings Call Transcript - MNSO Q2 2021

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 2021 that ended on December 31, 2020. 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 Investor Relations. Please go ahead, Eason.

Eason Zhang, Director of Investor Relations

Thank you, Rob. Hello, everyone, and thank you all for joining us on this call. The company has announced its corporate financial results for this day. A press release is now available on the Investor Relations website at ir.miniso.com. Today, you will hear from our Chairman and CEO, Mr. Guofu Ye, who will start to cover with an overview of our business and growth strategy. 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'd like to refer you to the safe harbor statement in our earnings press release, which also applies to this quite well as we will be making forward-looking statements. Please also note that we will discuss non-IFRS matters today, which we have to spend and reconcile to the most comparable measures reported under the International Financial Reporting Standard in the company's earnings release in accordance with the SEC.

Guofu Ye, Chairman and CEO

Thank you, Eason. Hello, everyone, and thank you for joining us today. In today's call, I will give you an update on MINISO in the December quarter and then share with you our new active strategy. For MINISO, we are pleased to see our domestic operation record an encouraging performance, while our overseas operations move further along the path of recovery. During this quarter, we added 184 new stores to our global store network. While the pandemic created challenges for offline retailers globally in calendar year 2020, we added 303 new stores during the year, demonstrating our partners' confidence in our resilient business model and a faster-than-average recovery speed. As for our domestic operations, we delivered a net addition of 135 new stores in China in this quarter, accounting for around 60% of the total net addition in calendar year 2020. Besides, we continue to unlock opportunities across China's low-tier cities, with about 60% of new stores opened in this quarter located in this market. As for overseas operations, we entered 2 new countries and opened 49 new stores in this quarter, accounting for 63% of net addition in calendar year 2020. Despite 153 overseas stores being temporarily closed by year-end and many other overseas stores being forced to reduce their business hours due to the impact of COVID-19, revenue generated from overseas operations increased by 32% sequentially. In terms of sales recovery in China, while occasional cases of COVID-19 occurred from time to time this quarter, we reached an overall recovery rate of about 95%. Some stores in low-tier cities covered 100% or even showed growth. In overseas markets, the average recovery rate reached around 60% yet with the pandemic fluctuations and holiday social gatherings increasing the difficulty of recovery in some countries. We saw an unstable and fragile recovery trend for the overseas market as a whole. Product-wise, we stick to our 7-1-1 philosophy as the core of our product strategy, providing customers with an amazing trading experience. In addition, we continue to seek cooperation with new IT partners. For example, by cooperating with Bilibili, we launched a series of new products and activities that were warmly received by our customers. This cooperation has laid a foundation for a highly realized user base between MINISO and Bilibili. Besides, our sponsorship of one of Bilibili's gala events for Chinese Lunar New Year enhanced our communication with young customers and refreshed MINISO's brand image. IT initiatives are an important component of our product strategy, and we will remain committed to launching more IT products in the future. As a young public company, MINISO announced our X strategy in December, further illustrating our vision of becoming a global leading new retail platform. Today, I would like to take this opportunity to talk about our strategy in the context of COVID. First, why an active strategy? We celebrated the 7th anniversary of the MINISO brand in 2020. Our team has accumulated core strengths in supply chain management, retail know-how, asset-light business model, and digitalization. As we realize huge potential in many sectors in new retail, we believe it is right to expand these core strengths into these new sectors. Let me share with you in detail why we believe our approach is prudent. Locally, our efficient supply chain is our core comparative advantage. We operate with more than 600 highly qualified supplier partners who can meet our sophisticated demand. By connecting their unmatched manufacturing capability with our unique customer insights and massive data, we pioneered the C2M model in the industry long before e-commerce players did. To optimize the supply chain, we build a mutually beneficial relationship with our partners by procuring products in larger volume, being punctual with our payments to them, and guiding them toward better product efficiency and enhanced cost control, thus creating a virtuous cycle where our supply partners can focus on continuous improvement of product quality, allowing us to benefit from improved quality in a cost-effective manner. Also, our efficient supply chain system, together with our ability to offer frequently refreshed products, helps us balance faster product innovation with healthy inventory levels and makes us more competitive among our products. We can further leverage this efficient supply chain into our new initiatives. Secondly, we have accumulated in-depth retail know-how from our operational experience and deep consumer insights. We place strong emphasis on optimizing key aspects of store operation using this know-how to create a trading and hunting shopping experience. The standardized layout, decoration, lighting, and friendly staff in our stores contribute to a welcoming environment for our visitors. They will also find the store easy to navigate due to our optimized product arrangement and display. We have done this so well that most visitors to our stores are impressed by the difference between us and our competitors, and we believe the same applies to our newly opened Toptoy store. Thirdly, our asset-light business model enables us to form win-win partnerships with our retail partners because it aligns interests on both sides, creating mutual benefits. By leveraging our asset-light model, MINISO has quickly expanded its store network in prime locations with a consistent brand image and customer experience. Our fourth key strength lies in digitalization. The retail industry relies on effective merchandise flow, information flow, and cash flow. Success hinges on whether these flows can be effectively managed, highlighting the importance of strong IT systems. For example, our supplier partners can access our systems to monitor real-time sales figures, enabling quick and effective decisions in procurement and production. Our smart store system allows us to track consumer profiles, in-store behavior patterns, and product sales trends, using algorithms to customize store-level inventory mixes. Our system also enables us to pay our retail partners through daily revenue sharing in China, which is extremely attractive for them. To conclude, our core strengths create a patented flywheel effect. Using this flywheel, the momentum of our satisfied customers drives more referrals and repurchases. The momentum of our supply successes supports our sustainability, while the momentum of our satisfied retail partners enables us to expand our store network globally. This has been the key to MINISO's past success, and more importantly, these strategies are replicable in other sectors and difficult for others to copy. Let me share some of our first moves for the X strategy. Firstly, we plan to strengthen our core MINISO business by expanding our store network not only in China but also in overseas markets. For China, we aim for a net addition of 500 stores in calendar year 2021. In particular, we see strong demand in low-tier cities and high returns for our partners compared to saturated high-tier markets. We are excited about this potential and believe we are pursuing the right strategy there. For overseas markets, we see incredible long-term value. Before the outbreak of COVID-19, MINISO had accumulated localized experiences from team building, product verification, and market research by entering over 80 countries. With this solid foundation, replicating and achieving rapid growth in the overseas markets will be manageable. However, we also recognize that these operations may face challenges from COVID-19 in the near term. We and our overseas partners agree that our major task should be destocking and reducing operational risks in the next few quarters. At the same time, we will closely monitor the pandemic's development and adjust our store expansion plan accordingly. Secondly, we will invest in new growth initiatives to accelerate our progress toward becoming a global leading new retail platform. Take Toptoy as an example. We observed a structural imbalance between the supply and demand sides of the toy market, which presents a significant opportunity. Our first step is to meet the direct demand of younger consumers by leveraging our strong supply chain to offer eight categories of products. In the near future, we plan to launch more co-branded products by sharing MINISO's IP library. We will also develop Toptoy’s own IP product development and operation. Although it may take some time, we believe it is worthwhile. Overall, we aim to leverage MINISO's core strengths to expand our offerings while minimizing dependence on any single category. To date, we have opened nine Toptoy stores in five different cities in China. Although still early, we have seen encouraging preliminary results and received positive feedback from our stakeholders. Secondly, we are focused on an omnichannel strategy. In this quarter, online sales accounted for about 7% of MINISO's revenue, and there is substantial room for growth in the next few years. We plan to pursue a more sustainable development rate in our online initiatives rather than following the common practice of burning money to boost GMV. Our target is to provide customers with a more convenient, accessible, and personalized shopping experience through our omnichannel strategy, particularly for customers who prefer online shopping. Based on this idea, Toptoy launched its official online store and a vending machine network initially, which complement our offline stores well. To conclude, we achieved past success due to our core competitive strategies. This strength has laid a solid foundation for our active strategy, which requires heightened operational ability and agility. We will continue to build a highly competitive team by creating internal growth opportunities for employees and attracting external talent. Thank you. This concludes Mr. Ye's remarks.

Steven Zhang, CFO

As the CFO of MINISO, I will now provide a financial review for the quarter. I will start my remarks with a review of the December quarter results and then provide some additional color regarding the March quarter. Please note that for operating expenses, I will be referring to our non-IFRS measures, which have excluded share-based compensation expense. Revenue was RMB 2.3 billion for the December quarter, around the midpoint of our guidance, and represents a decline of 18% year-over-year. In comparison, our revenue showed significant improvement from the previous quarter, where revenue declined by 31% year-over-year. This trend was also reflected in our revenue from overseas markets, where revenue showed a decline of 51% year-over-year compared to a decline of 71% year-over-year in the previous quarter. Revenue from domestic markets was flat year-over-year. Sequentially, our revenue increased by 11%, with overseas revenue increasing by 32% and domestic revenue by 7%. This sequential revenue growth demonstrates the effectiveness of our expansion strategy in low-tier cities and the business recovery of both domestic and overseas operations. Gross profit was RMB 643 million, representing a decrease of 28% year-on-year and an increase of 23% quarter-over-quarter. In addition, gross margin was 28% in the December quarter compared to 31.6% a year ago and 25.2% a quarter ago. The fluctuation in our gross margin was primarily due to changes in revenue contribution from international operations, which typically have a higher gross margin than domestic operations. During this quarter, revenue from our overseas operations accounted for 20% of total revenue compared to 34% a year ago and 15% a quarter ago. Selling and distribution expenses were RMB 306 million compared to RMB 317 million a year ago and RMB 230 million a quarter ago. The quarter-over-quarter increase was primarily attributed to increased logistics expenses, which were in line with the recovery of the company's sales during the December quarter, along with increased marketing expenses as we continue to strengthen brand recognition for MINISO and Toptoy. G&A expense was RMB 160 million, generally flat year-over-year and quarter-over-quarter. Other net loss was RMB 55 million compared to other net income of RMB 24 million a year ago and other net loss of RMB 60 million a quarter ago. This loss was primarily comprised of RMB 67 million in net foreign exchange loss, aligned with the appreciation of RMB against the U.S. dollar in the December quarter. Now turning to our profitability. Operating profit was RMB 54 million compared to RMB 330 million a year ago and an operating loss of RMB 2 million a quarter ago. The year-over-year decrease in operating profit was due to revenue decline in our overseas operations caused by the negative impact of COVID-19 in the period, despite fixed costs and expenses remaining stable. Nevertheless, we are pleased to see considerable improvement in our operating profit sequentially. Adjusted net profit was RMB 84 million compared to RMB 390 million a year ago and RMB 102 million a quarter ago. As mentioned earlier, our adjusted net profit in the December quarter includes a net operating exchange loss of RMB 67 million. Excluding this onetime foreign exchange loss, adjusted net profit was around RMB 150 million in the December quarter, an increase of 25% quarter-over-quarter. We expect our margin levels to normalize over the coming quarters as the pandemic abates. Basic and diluted earnings from continuing operations per ADS was RMB 0.08 compared to a loss of RMB 0.08 a year ago and a loss of RMB 0.07 a quarter ago. Adjusted basic and diluted earnings per ADS were RMB 0.28 compared to RMB 1.52 a year ago and RMB 0.40 a quarter ago. Looking ahead to the balance sheet as of December 31, 2020, the combined balance of the company in cash, cash equivalents, and restricted cash was RMB 6.8 billion compared to RMB 3 billion as of September 2020. This increase was primarily due to the proceeds we received from our IPO and cash flow generated from operations. Turnover of inventories and trade receivables remained flat sequentially, considering the sequential recovery of revenue and store expansion. This shows strong growth in our effective working capital management. Looking ahead into the March quarter of 2021, we expect total revenue to be between RMB 2.2 billion and RMB 2.4 billion, representing an increase of 35% to 47% year-over-year as we continue to operate in significant uncertainty regarding the severity and duration of COVID-19, especially in overseas markets. This forecast only reflects our current and preliminary views on market and operational conditions, which are subject to change. Finally, I would like to reiterate that we remain proud of our team's consistent execution and their commitment to going above and beyond in service to our customers. This perseverance in the face of uncertainty has enabled us to stay on track despite unexpected and challenging environments. Going forward, our financial strategy will involve remaining disciplined in budgeting, cost control, and capital allocation as we focus on consistent financial performance delivery. Additionally, we will not become complacent, and we will continue to invest strategically for future growth, although such initiatives may affect individual financial metrics in the short term. We firmly believe that these efforts will contribute meaningfully to MINISO's sustainable and long-term growth. Looking ahead, we are highly confident in the strength of our underlying business model and remain steadfast in our commitment to solidifying our leadership at home and expanding our market share abroad, ultimately delivering long-term shareholder value. This concludes our prepared remarks for today. Operator, we are now ready to take questions. Thank you.

Operator, Operator

[Operator Instructions] Today's first question comes from Michelle Cheng with Goldman Sachs.

Michelle Cheng, Analyst

First, should I ask questions in English or in Mandarin? Yes. Sure. I have 3 questions here. So first, you mentioned these new retail X strategy. Can you elaborate a little more regarding what categories or target customers or geographies you are going to explore in the first stage in addition to Toptoy? My second question is regarding the overseas expansion. It seems that you tend to be cautious about the short-term trend. Can you give us some highlights about the guidance for this year again? Which area do you see the biggest risk for overseas expansions now? My third question is about Toptoy. Since we just mentioned that we have 9 stores in 5 cities. Do we have any more concrete plan for the expansion this year? How should we think about the average sales per store for this year?

Guofu Ye, Chairman and CEO

Michelle, would you please translate yourself before we answer the questions? Please repeat them.

Michelle Cheng, Analyst

Yes. Sure. [Foreign Language]

Guofu Ye, Chairman and CEO

[Foreign Language]

Michelle Cheng, Analyst

[Foreign Language]

Eason Zhang, Director of Investor Relations

[Interpreted] Okay. Michelle, thank you for your questions. Regarding your first question about our X strategy, as Mr. Ye mentioned in his remarks, Toptoy is our first initiative in this strategy, and there will be more initiatives to follow. At this moment, Toptoy is definitely the most important, and we will focus our resources to develop it into our second curve. As Mr. Steven Zhang noted, during the past 7 to 8 years, MINISO has leveraged its core competitive strengths to develop a global retail network. We have competitive strengths in supply chain management, retail know-how, digital capabilities, and an asset-light business model, all of which we can leverage toward future success in our X strategy initiative. Although it’s still early, we can share insights about Toptoy. Over the last several months, we have extended our offerings from 7 to 8 categories, including more structured categories because we believe they hold great potential. In terms of pricing strategy for Toptoy, we expect it to be much higher than MINISO's. It will not only include an average ticket sale increase but also the average product size, which we anticipate to be 2 to 5 times, or even up to 10 times that of MINISO. In terms of target customers, we are focusing on the younger generation. They have a strong willingness and capability to spend in this part of the market. Geographically, Toptoy will initially focus on Tier 1 cities; we have no plans to enter lower-tier cities for at least the next year. However, since Toptoy has adopted an omnichannel approach from the outset, our brands and customer base in lower-tier cities will still enjoy the fun experience of Toptoy through other channels, such as online channels.

Guofu Ye, Chairman and CEO

[Foreign Language]

Eason Zhang, Director of Investor Relations

[Interpreted] For your second question about our growth expansion strategy, the pandemic has been a significant factor over the past months. China has become an emerging leader globally, especially during the past holiday season. The social gatherings in December have made overseas market recovery unstable and fragile. From the perspective of our home stores, increasing operational costs for new store openings have risen as well. Overall, it’s hard to determine when the pandemic will be fully resolved. [Interpreted] In our communications with 80 covered partners, we've established the expectation of maintaining our operational risks and inventory destocking in the upcoming quarters. However, we remain confident in our global expansion potential. Despite the challenges posed by the pandemic in 2020, we successfully added approximately 90 stores this year. We expect to add 200 new stores in overseas markets in 2021. This includes around 70 in Europe, approximately 50 in the Americas, and 10 in new countries.

Guofu Ye, Chairman and CEO

[Foreign Language]

Eason Zhang, Director of Investor Relations

[Interpreted] Regarding your third question about Toptoy, as mentioned in our opening remarks, this business is still in a very early stage. Currently, we do not have additional information to provide, but we will definitely share more once we formulate a new investment plan. Thank you.

Operator, Operator

And today's next question comes from Lucy Yu with Bank of America.

Lucy Yu, Analyst

The question is, first on the GMV recovery. In January, both China and overseas markets were partially impacted by COVID-19, as you just explained. How has the situation developed in February so far? My second question is regarding store openings. For China, store expansion has exceeded expectations, especially in the second half of last year. For the 2021 calendar year, we guided for over 500 new stores. In January and February, how many stores have been opened so far? Will we revise our full-year guidance?

Guofu Ye, Chairman and CEO

[Foreign Language]

Eason Zhang, Director of Investor Relations

[Interpreted] Thank you for your questions, Lucy. If you cannot hear me clearly, feel free to signal at any time. Regarding business recovery, we have observed a worse recovery than the December quarter in this quarter. In December, the recovery rate was between 16% to 17%. As we enter 2021, we expect this recovery rate to fall further, reaching between 50% to 60% due to COVID-19's impact, and we expect these conditions to persist.

Guofu Ye, Chairman and CEO

[Foreign Language]

Eason Zhang, Director of Investor Relations

[Interpreted] Regarding your second question about the store expansion plan, we will maintain our previous guidance of opening 500 new stores in China this year. As we proceed through pre-COVID markets, we've witnessed strong demand from customers and partners.

Operator, Operator

Our next question today comes from Jian Song with CICC.

Jian Song, Analyst

This is Jian Song from CICC. My first question is about Toptoy. I'm interested in how much extra selling or marketing expenses Toptoy is incurring this year? The next question is about news indicating you have plans to open Toptoy and some self-service stores. Could you share additional information on these two new initiatives?

Guofu Ye, Chairman and CEO

[Foreign Language]

Eason Zhang, Director of Investor Relations

[Interpreted] Thank you for your questions. Regarding Toptoy’s expense margin, our target is to capture the mind share of Generation Z, and therefore we anticipate natural marketing expenditures. We currently expect to spend no less than RMB 15 million in marketing expenses for Toptoy in the first year. However, this budget will be adjusted based on Toptoy’s development. Regarding your second question about unmanned stores, I would like to clarify that MINISO has no such plans. However, as mentioned, Toptoy is adopting an omnichannel strategy, which includes the use of vending machines.

Operator, Operator

I'm showing no further questions at this time. I'd like to turn the conference back over to the management team for any final remarks.

Eason Zhang, Director of Investor Relations

Thank you very much for joining us today. We'll see you next quarter. Bye.

Operator, Operator

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.