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Ladies and gentlemen, thank you for standing by, and welcome to MINISO’s Earning Conference Call for the Second Quarter of Fiscal Year 2023 that ended December 31, 2022. [Operator Instructions] Please note that this event is being recorded. We have announced our quarterly financial results earlier today and earnings release is now available on our investors relationship website at ir.miniso.com.
Joining us today are our Founder and CEO, Mr. Jack Ye; and our CFO, Mr. Eason Zhang. Before we continue, I would like you to refer 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 earning release and filings with the 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 are using Zoom meeting, 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.
[Foreign Language]
Hello, everyone, and welcome to MINISO Group’s December Quarter 2022 Earnings Conference Call. Continuing our strong performance from the September quarter, we delivered another strong profitability result in the December quarter to cap off a successful ‘22 calendar year. We achieved these results in the most severe pandemic-related challenges of the past 3 years. In the December quarter, the company’s gross margin increased by 8.9 percentage point from same period last year, reaching a record high of 40%. Overseas revenue increased by nearly 40% year-over-year, effectively offsetting the adverse impact of the domestic pandemic situation.
Adjusted net profit increased by 82% year-over-year. Adjusted net margin remained stable compared to the prior quarter at 15%. And excluding the impact of foreign exchange gains, net margin for the December quarter was 14.9%, up from 13.2% in the December quarter.
[Foreign Language]
Let me walk you through our performance of the quarter by segment. Starting with MINISO China. According to our estimates, total foot traffic to offline MINISO stores decreased by 32% year-over-year in this quarter, while average ticket size increased by 6%, thanks to our brand upgrade efforts, partially offsetting the decrease in traffic. As a result, we saw a 28% decrease in revenue from MINISO’s offline operation in China.
[Foreign Language]
However, we’ve kicked off ‘23 with strong sales performance in China. Our off-line sales in January increased by nearly 40% year-over-year, setting a new record. Average sales per MINISO store increased by nearly 33% year-over-year. During the 7-day Chinese New Year holiday, off-line sales increased by nearly 25% year-on-year and average sales per MINISO store increased by nearly 18% year-over-year. Quarter-to-date, we saw off-line sales increased by more than 20% year-on-year in China. Overall, we are very confident about the growth prospects of our domestic business in ‘23.
[Foreign Language]
As China’s pandemic control measures update and consumer spending gradually recovers, we are optimistic about our store expansion plan for ‘23. We have very strong relationships with our major retail partners. We are in a good financial position and seeing healthy investment returns. The overall retail partner structure has remained stable throughout the past 3 years. The percentage of total MINISO stores owned by top 50 MINISO retail partners was 49%, 50% and 46% in 2021 and ‘22, respectively.
For ‘23, we are committed to improving strong performance on both the product and operational fronts. In the December quarter, we added a net 56 MINISO store in China, most of which were locating -- located in lower-tier cities. For 2023, we currently expect net increase of between 250 and 350 MINISO stores in China, but we retain the flexibility to adjust our plan dynamically.
[Foreign Language]
Moving on to an update on our overseas business. In the December quarter, our overseas business maintained its strong momentum. The overall GMV increased by 40% year-over-year and 33% quarter-over-quarter. This represents high single-digit growth compared to the same period of 2019. Overseas revenue reached nearly RMB 1 billion, representing a year-over-year increase of 38%, a quarter-on-quarter increase of 7% and increase of nearly 5% over the same period in 2019.
[Foreign Language]
In the December quarter, nearly 80% of GMV in the overseas market was contributed from the distributor channel, a similar percentage to the past few quarters. In terms of region, Latin America contributed 38% of overseas GMV and 22% of overseas stores, while Asia contributed 28% of GMV and 45% of stores. In addition, North America, Europe and the Middle East and North Africa regions each contributed about 10% of GMV. And their store shares were 6%, 10% and 7%, respectively. In terms of markets, the top 10 countries and regions contributed more than 60% of overseas GMV.
The top 20 contributed nearly 80% and the top 40 contribute more than 90%. The top 5 markets were Mexico, the Philippines, Indonesia, the U.S. and Colombia. India market has become our sixth overseas market.
[Foreign Language]
In terms of GMV growth, North America saw the best performance, recording 66% year-over-year growth, followed by Latin America with 51%. And Asia also grew by 35%.
[Foreign Language]
In terms of the average GMV per store, the overseas business as a whole has recovered to 86% of the level we achieved in the same period of 2019. Broken down by market: North America’s average GMV per store was 1.5x that of the same period in 2019, whilst the U.S. market was 1.5x and Canada was 1.1x, while Latin America recovered to 93% of the corresponding 2019 level, with Mexico surpassed by 8%. Although the Asia business has recovered to only 66% of same period in 2019, its performance has improved a lot, by 30% sequentially compared to 55% recovery rate we saw in the September quarter. And we are very confident that Asia will improve significantly in 2023.
In Europe, average GMV per store was at around 8% over the same period in 2019 mainly due to the weakness of the local market in October and November, but in December and January, same-store sales performance in Europe already exceeded the level seen in the same period of 2019.
[Foreign Language]
In the December quarter, we added 88 stores in overseas market on net basis, compared with a net addition of 41 stores in the same period of prior year. For calendar year ‘22, we added nearly 240 stores compared with a net addition of 131 in ‘21. Among these new stores, Asia contributed 44%. Latin America contributed 22% and Europe contributed 19%.
Looking ahead to ‘23, we are more optimistic about overseas store openings, expecting a net increase of 350 to 450 overseas stores throughout the calendar year. We expect around 60% of store growth will come from Asia and Latin America but more than 10% from North America and 10% each from Europe and the Middle East and North Africa region.
[Foreign Language]
Next, let me give you a quick update on TOP TOY. During the quarter, TOP TOY revenue decreased by 25% year-over-year mainly due to the decline in shopping mall traffic. By quarter end, there were 117 TOP TOY stores, representing a net increase of 28 year-over-year, with 1 new store in Tier 1 cities, 20 in Tier 2 cities and 7 in lower-tier cities.
[Foreign Language]
For the December quarter, gross margin of TOP TOY was around 45%, flat year-over-year. Sanrio Bricks, TOP TOY’s strategic category, contributed nearly 1/4 of sales. We continued to refine our products. The recently launched Sanrio Kuromi series of TOP TOY Sanrio Bricks has become a blockbuster product in Sam’s Club in China. During the period, TOP TOY’s exclusive products contributed nearly 1/4 of its sales. Over the past year, TOP TOY has significantly stepped up its product development capability. And in the future, TOP TOY aims to become a product brand rather than a channel brand.
[Foreign Language]
Last week, we held MINISO’s Global Brand Upgrade Conference. For the first time, I systematically laid out our road map to building a great Chinese consumer brand. Thinking about MINISO’s future from a global perspective, we aim to become a super brand. To achieve this goal, we need to focus on 3 strategic transformations. First, we need to upgrade MINISO from a channel brand to a product brand which has its own channels.
Second, we need to upgrade MINISO from a retailer to an interest-driven company. And third, we need to upgrade MINISO experience from one of consumption to one of passion, enhancing our customers’ loyalty, converting them into our friends and users.
[Foreign Language]
At the conference, we also introduced MINISO’s global product innovation center, with users as its core. This massive platform brings together IP owners, global designers and players in the supply chain around the key principle of good-looking, fun and easy-to-use products. This platform will leverage the extensive product innovation insights we have accumulated over the past 10 years.
[Foreign Language]
Finally, let me give you some details about how MINISO will continue to leverage its IP strategy and develop new products in strategic categories.
[Foreign Language]
First, I will talk about our IP strategy. IPs enable a direct emotional connection between products and consumers and are driving the increasingly salient trend of interest-based consumption. Our IP-based product innovation has proven to be our most successful product in terms of connecting with consumers’ emotions. We have seen this play out over and over again within the MINISO business. For example, last March, we introduced the limited-edition IP products featuring Sanrio’s Cinnamoroll dog to help fans to celebrate the cute puppy character’s birthday.
This product sold out on the same day it hit shelves. We see the same dynamic with the Pixar product series we launch every summer in cooperation with Disney, which has become a summer festival for Pixar fans. Another example will be MINISO’s own IP character, hanging PenPen, which has gained popularity on social media. Topics related to PenPen have reached tens of millions on TikTok. Our data shows that consumers who buy IP products have 28% higher shopping frequency and 43% higher ASP than the average customer.
[Foreign Language]
For 2023, we have lined up collaborations with many popular and influential IP owners, bringing more exciting surprises to our users. We also launched the Chinese culture globalized innovation program with the Xinhua News Agency as an important part of our efforts to promote Chinese culture and creativity spirit.
[Foreign Language]
Second, to adapt to changing consumer demand, technology and fashion trends, we need to focus our resources on categories with strategic value. We define strategic categories as having 3 criteria. Number one is emotional resonance, meaning products that convey MINISO’s value proposition of better life. Number two is global appeal. And number three is high growth potential. Categories that meets these criteria include plush toys, mugs, fragrances and perfumes, accessories and toys such as blind boxes.
[Foreign Language]
As an example: We have identified perfumes as our most important strategic category in China. During the past several years, sales in the perfume sector has been growing at a CAGR of 20%, while in MINISO their sales are growing at a CAGR of 60%. We have become the #1 brand in China’s perfume market. Together with master perfumers and top suppliers, we established the master’s aroma lab to provide consumers with high-quality perfume products that matches quality of top international brands at very attractive prices. Our master perfume series achieved instant popularity upon its launch on Double 11 shopping festival last year, breaking into Tmall’s bestseller ranking list typically dominated by international brands. Encouraged by this success, we are committed to developing perfume as our top strategic category.
[Foreign Language]
As we head into MINISO’s next decade, we need to upgrade and empower our product platform. First, we’ll incubate in-house IPs and make them our signature products alongside co-branded IP products. Second, we’ll set up 4 global design centers in China, the U.S., Japan and South Korea. Third, we will work with top market research institutions to monitor trends and gain consumer insights so that we can pursue forward-looking product development on a global scale. Fourth, we will cooperate with leading suppliers in raw materials, technology and other fields to provide more high-quality products to our users. Fifth, we will strengthen our global sourcing capabilities so that we can rapidly put MINISO product in front of our users in every part of the world.
[Foreign Language]
That concludes my prepared remarks. I’ll now turn the call to Eason for financial review. Hello, everyone. Thank you for joining us today. I will walk you through our financial results for the December quarter. Please note that all numbers are in renminbi unless otherwise stated. And we’ll also refer to some non-IFRS measures, which have excluded share-based compensation expenses. Revenue in the December quarter was about RMB 2.5 billion, a decrease of 10% year-on-year primarily due to a 27% year-over-year decline in our revenue in China, partially offset by a 38% increase in revenue in overseas markets. Revenue from China was RMB 1.5 billion, including RMB 1.4 billion from the MINISO brand and RMB 122 million from other business, including TOP TOY. Revenue from the MINISO brand decreased about 26% primarily due to the effects of COVID.
So based on our estimation, so total foot traffic to our off-line stores decreased by about 27%, 36% and 34% in each of October, November and December, while average spending per ticket size increased by about 5%, 7% and 7%, which translate into a decline of 23%, 32% and 30% in sales in these corresponding periods. Revenue from overseas markets increased by about 38% year-over-year and closed to nearly RMB 1 billion, accounting for 40% of our total revenue. So this growth was primarily driven by a 12% year-over-year increase in the average overseas store count and a 23% year-over-year increase in average revenue per MINISO overseas store. As mentioned in Mr. Ye’s remark, we were thrilled to see strong sales recovery across the board in overseas markets, boosting our top line performance.
Gross profit was RMB 997 million, an increase of 16% year-over-year. Gross margin was 40%, another record high for MINISO Group and an increase of nearly 900 basis points from 31.1% in the same quarter of last year. The year-over-year increase in gross margin was primarily attributed to 3 reasons: number one, revenue mix shift to overseas market. So overseas revenue contribution increased from 26% to nearly 40% in this quarter, while its gross margin stabilized. Number two, higher gross margin contributed by newly launched product in relation to our execution of strategic brand upgrade in China; and number three, saving measures we adopted to reduce cost.
Excluding share-based compensation expense, selling and distribution expense were RMB 409 million, representing a 10% year-over-year increase. The year-over-year increase of selling and distribution expense was primarily due to increased promotion and advertising expense, mainly in connection with our strategic brand upgrade of MINISO in China; and increased depreciation and amortization expense of our directly operated stores. Exclude share-based compensation expense. G&A expense were RMB 141 million, representing a decrease of 34% year-over-year. The year-over-year decrease was primarily due to decreased personnel-related expense and decreased depreciation and amortization expense due to the capitalization of construction costs of our headquarter building.
So other net income was RMB 8.8 million compared to RMB 12.3 million in same quarter of ‘21. Other net income mainly consists of net foreign exchange gain, investment income from wealth management products and others. The year-over-year decrease was mainly attributable to decrease in investment income from wealth management products as a result of reduced principal of such products, which was partially offset by a net foreign exchange gain of RMB 1.8 million in this quarter compared to a net foreign exchange loss of RMB 15.8 million in the same period of last year. Turning to profitability. Operating profit in this December quarter was RMB 448 million, representing an increase of 75% year-over-year.
Operating margin was 18% compared to 9% in the same quarter last year and flat quarter-over-quarter. Net finance income was RMB 23 million, representing an increase of 373% year-over-year mainly due to an increase in interest income from bank deposits. Adjusted net profit was RMB 373 million, representing an increase of 82% year-over-year. Adjusted net margin was 15% compared to 7.4% in same quarter of last year. Excluding foreign exchange gains, adjusted net margin was 14.9% compared to 8% last year and 13.2% in the previous quarter.
Adjusted basic and diluted earnings per ADS were RMB 1.16 in this quarter compared to RMB 0.68 in the same quarter of last year. Turning to cash position. As of year-end, our consolidated cash position was approximately RMB 6.2 billion. Turning to working capital. Turnover of inventories and trade receivables remained very healthy in this quarter.
So looking back on the past 3 years. MINISO has demonstrated strong profitability under the repeated stress tests of the pandemic. Over the past 18 quarters, MINISO’s adjusted net margin averaged 8.6%. Of these 18 quarters, MINISO’s adjusted net margin average 8.6%. Of these 18 quarters, 12 were in pandemic.
And MINISO’s adjusted net margin averaged 7.6%. For the remaining 6 quarters without pandemic, MINISO’s adjusted net margin averaged 10.7%. And we will continue to execute a disciplined financial policy in terms of budgeting, cost control and allocation of capital as we focus on consistently delivering solid profit and healthy cash flow in the future. Thank you. And this concludes our prepared remarks. Operator, we are now ready to take questions.
Your first question today comes from the line of Michelle Cheng from Goldman Sachs.
[Foreign Language] So my question is about gross margin. So the first part is regarding the December quarter gross margin; essentially, on the year-on-year, a significant improvement. We also see a very strong quarter-over-quarter improvement on gross margin, so can you please elaborate more details on how? What are the drivers to -- like led to these strong quarter-over-quarter margin improvement?
And second question is about forward-looking gross margin upside. So given already very strong improvement in the past few quarters and how much upside we are expecting. And more specifically, we have been adjusting quite a few products’ price. And what are the sales contribution from these products’ already adjusted prices? And also, from the merchandising gross margin, how much upside we are expecting from the historical 50% level.
[Foreign Language]
Okay, thank you for your question, Michelle. This is Jack Ye. So if you have to, if we have to quantify the strong gross margin performance in the December quarter, I think there are 2 reasons. The first is the revenue mix shift. So for overseas market -- for overseas business, this quarter, we have a gross margin of about 45% and flat year-over-year, but this is obviously higher than the domestic gross margin of 35% or so.
So the overseas market in this quarter has contributed the historical-high revenue of 40% compared to 26% last year. So because of this reason, the incremental gross margin to the company for this revenue mix change is about 5%. And second reason is due to the brand strategic upgrade in China. So in this quarter, we have seen the gross margin here improved about 4% year-over-year, and this number has included the impact from the rebates from the suppliers.
[Foreign Language]
So for your second question: In ‘23, we plan to improve our gross margin, as we shared. If you look at the calendar year 2022, for the whole year, our merchandise gross margin has improved by at least 5 to 6 percentage points. If you look at December quarter, the increase in merchandise gross margin is about 6 to 7 percentage points compared to the last December quarter. So our initial target, as we shared in last March’s earnings conference call, is to increase our merchandise gross margin as a whole to around 60%. And we are still planning to do this at this moment, so for the whole year, calendar year, ‘23, I think we still have low single digit to grow to achieve that number. Thank you.
The next question is from the line of Veronica Song from Credit Suisse.
[Foreign Language] So my question is about overseas business. We’ve seen significant improvement in overseas, both for sales and profits. So what’s our current OP margin for overseas direct operation business? And also, for major overseas countries such as Indonesia and U.S.A., what’s our current store UE and the payback. What is our target store UE and payback period? So what will be the key growth driver for the margin improvement in overseas?
Okay. Michelle -- Veronica, thank you for your question. This is Eason. So for your first question, for our overseas directly operated markets, we are quite encouraging that we have seen this part of business break even for 2 consecutive quarters during the past half of -- half year. And specifically, we can divide this directly operated business into 3 parts.
We have mature business in India and Indonesia. Although, for these 2 markets, the sales recovery has not been quite well, but it has huge -- a relative large store network. And it has huge sales leverage, so the OP margin for these 2 countries can be more than 10%. And a normalized net margin for these 2 markets can be about 10%. And for our directly operated markets such as the U.S., a good news is that we have seen the U.S. market has been breakeven since November in last year. And this trend is very obvious in the past several months, and we are happy to see that we have seen this trend continue as we entered year 2023.
So maybe we can share more about the U.S. market situation in next quarter. And if you look at the payback and ROI for these 3 countries, I will say Indonesia is a very mature business and as it use the similar model as we do in China, meaning the MINISO retail partner model. And considering that Indonesia has a relatively low rent level and low salary level. So the ROI was quite handsome even in the pandemic during the past 3 years.
And if you look at India and we have now developing a lot of new stores in India in the past year, especially in lower-tier cities of India. And we have developed a new format or -- we called low-tier stores in India. This is a relative small type of store, typically has 60 to 120 square meters for each store. And it has optimal rent level and nearly has 0 salary cost because the boss is also the store clerk and so on. And we have seen this model has paid off handsomely in the past year in India.
And for the U.S., I think we have found a very good store unit economics in the past year. And I will say, in the holiday season of 2022, the majority of our stores in the U.S. market has recorded a very nice profit level, bottom line level. So thank you.
Okay. 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 on today’s press release. We will see you next quarter.