MINISO Group Holding Ltd

HKEX:9896

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to MINISO Group Holding Limited Earning Conference Call for the Third Quarter of Fiscal Year 2022 that ended March 31, 2022. [Operator Instructions] 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, executive]

Thank you. Hello, everyone, and thank you all for joining us. We have announced our quarterly financial results earlier today. 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 our CFO, Mr. Steven Zhang.

Before continuing, I'd 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 Standards in the company's earnings release and filings with the SEC.

With that, I'll now turn the call over to Mr. Ye. Please go ahead.

[Guofu Ye, executive]

[Interpreted] Thank you. Hello, everyone, and welcome to MINISO Group's March Quarter 2022 Earnings Conference Call. In March quarter, the pandemic once again gripped China, with major cities, including Shenzhen and Shanghai, consecutively adopting strict lockdown control measures since February. The domestic retail industry was challenged and struck by the most stringent restrictive measures taken by local governments since 2020. According to our estimates, nationwide footprints to our MINISO stores decreased by about 2% -- 14% and 34% on a year-over-year basis from January to March, respectively, due to the strict control measures by local governments. Despite the ongoing challenges of the pandemic, we delivered another solid quarter with revenue reaching CNY 2.34 billion, up 5% year-over-year. TOP TOY's revenue increased by nearly 4x year-over-year and MINISO's offline business delivered positive year-over-year growth, which again demonstrated the resilience of our business model.

So, as we have emphasized in our earnings conference call over the past few quarters, the pandemic will weigh on consumer demand, and thus, our near-term results. However, our business model has demonstrated its great resilience and flexibility under extreme market environments over the past 2 years. According to a report from Frost & Sullivan, MINISO's leadership position has been further consolidated. Our market share in global branded variety retail market has increased from 5.2% in 2019 to 6.7% in 2021. During the same time, our market share in China has also increased from 10.9% to 11.4%.

I'm pleased to see several positive trends in our business and let me share with you. Firstly, in China, we continue to execute MINISO's brand upgrade as planned by integrating the concept of interest-based consumption into product development. Our newly launched products, which feature appealing, useful, and playful, have higher gross margin compared with our traditional lifestyle products. As a result, gross margin for this quarter reached 30.2%, up to 110 basis points year-over-year. And we are pleased to see this trend of year-over-year increase in gross margin continued in April.

Secondly, benefit from the pandemic control in many overseas countries and regions, MINISO's overseas business continued to recover. Revenue for March quarter was CNY 520 million, up 17% year-over-year. Our globalized operations provided us more space and flexibility of future growth compared to peer companies.

Thirdly, global retail industry is challenged by cost pressure as many countries, including the U.S., are entering one of the highest inflation in 4 decades. Many retailers are challenged by ongoing pressures in cost and inventory. Consumers tend to look for value in such a high inflation environment, which is a very good opportunity for us.

To tackle the global inflation, we will continue to leverage our core capabilities in supply chain and ensure the value proposition of MINISO product globally. Specifically, our deep cooperation with more than 1,000 qualified suppliers, our strong bargaining power, and flexible cost-plus pricing model, MINISO is better positioned than peers to cope with the rising cost pressures.

Meanwhile, we are capable to maintain a healthy level inventory. Inventory turnover days worldwide for MINISO have returned to around 60 to 70 days, which is industry-leading and a relative normalized level of pre-pandemic.

In March quarter in China, revenue of MINISO brand was CNY 1.69 billion, of which offline stores recorded revenue of CNY 1.56 billion, up slightly year-over-year. E-commerce business recorded a revenue of CNY 113 million and healthy margin profile.

MINISO added 29 stores on a net basis during March quarter in China compared to 44 stores a year ago. Typically, our store opening in China has seasonality with March quarter the lowest season due to the long vacation of Chinese New Year. In 2022, another drag on new store opening was the pandemic. In coming quarters of 2022, we'll adjust the pace of store opening in China dynamically according to the development of pandemic control and reduce operational risks of MINISO Retail Partners.

In our earnings call last quarter, we introduced the roadmap of the strategic upgrade for MINISO brand. Here are some updates. In March quarter, we have accomplished the refreshment in substantially all of MINISO stores in China as planned. This refreshment features MINISO's new slogan of, light up one life in 99 countries or regions, together with our brand-new interest-based products. We offer better shopping experience to our customers. We continue to execute our IP strategy well with gross margin of new IP products improved by low-single digits year-over-year. In coming quarters, we'll also dynamically adjust our marketing plans according to the situation of Chinese consumer market and pursue healthy ROI.

MINISO is strategically committed to deepening consumer engagement and driving repurchases by providing improved omnichannel experience to them. As you know, we have been actively exploring various possibilities for the membership operations. Last September, we launched MINISO's paying membership program and have achieved preliminary progress. Members now only need to pay an annual subscription fee of CNY 79 to enjoy a bunch of exclusive rights. For example, they can receive a package of coupons, enjoy additional discounts and exclusive products, among others. And these rights can be enjoyed in every MINISO store in China and our Vision Mini program. This program has been warmly received by our fans. We have rapidly accumulated more than 1 million paying members. Based on our AB testing, the average incremental spending of customers after they become pay members is encouraging.

Moving to overseas operations. Revenue for the March quarter was above CNY 520 million, up 17% year-over-year. During the March quarter, we observed an encouraging year-over-year sales growth in overseas market as a whole. Total GMV increased 30% year-over-year. GMV growth in distributed markets were even higher. By region, Europe as a whole increased by 85% year-on-year; North America, 65%; Latin America, 45%; the Middle East and North Africa 20%; and Asian countries, excluding China, was 10%. By countries, we saw year-over-year growth of about 80% in the U.S.; 60% in Mexico; and nearly 30% in India and 20% in Indonesia.

We added 39 stores on a net basis in the March quarter compared to 29 stores a year ago. We have been relatively restrained in opening overseas stores during the pandemic in the past 2 years in order to control risks. Now observing the stable recovery trend in the past several quarters, we plan to speed up the pace of opening overseas stores this year. We are quite confident to open more overseas stores in this year.

In overseas markets, 74 stores or 4% of our total overseas stores have not resumed operations as of March 31st quarter-on-quarter. The majority of such stores were concentrated in Asian countries, excluding China and Latin America. It reflects the lingering effect of the pandemic on our operations in these 2 regions.

Our efforts in product never stopped. During the past 2 years, made full use of the time window to strengthen our core capabilities, one of them is product localization. As this preliminary results, we have accelerated product launch in major overseas markets in this year. Take Latin America as an example. We successfully launched 1,100 new SKUs in the March quarter and contributed directly to 45% year-on-year general growth there. We will continue to strengthen our overseas design capabilities and offer more localized products to consumers overseas in a timely and accurate manner.

Now let me introduce the development of TOP TOY. The pandemic has inevitably impacted TOP TOY's short-term performance, but we continued to follow our established strategy in this quarter and made steady progress. On the revenue side, offline revenue increased by 3x year-over-year, where online business ramped up quickly and contributed more than 10% revenue this quarter from nil last year.

In the long term, we see huge potential of TOP TOY market. According to a report by Frost & Sullivan, the size of TOP TOY market in China has increased rapidly at a CAGR of 34% from 2017 to 2021 and is estimated to grow at a CAGR of 2% to 4% from 2022 to 2026 before its size reaches CNY 110 billion.

The fast growth of TOP TOY market in China is laid on 4 pillars: diversified products, sales channel expansion, increasing importance of IP incubation and co-branding, and growing fanbase. TOP TOY is strategically committed to develop its portfolio diversified products, such as toy bricks with Chinese elements and to explore omnichannel strategy to improve capabilities in IP incubation and operation, and to understand more about the Generation Z. Going forward, TOP TOY will follow its own way of interest-based consumption in TOP TOY business. In March quarter, merchandise gross margin of TOP TOY reached a healthy level of 45%, improved sequentially. Merchandise gross margin on TOP TOY's proprietary products stabilized at around 65%, and revenue contribution has surpassed 10%.

Taking Sanrio, MINISO's long-term partner of IP co-branding as an example. TOP TOY launched co-branding IP products with Sanrio since day one and achieved encouraging sales performance. A new product of TOP TOY's newly-incubated IP, Strong Lucky Cat became the best-selling SKU during this quarter.

In addition, TOP TOY continued to focus on potential categories such as toy bricks. In March, TOP TOY launched original vintage home appliance series under the label of China Bricks, and this original series became top sellers and was posted by many Generation Z consumers on their social media accounts, because it reminded them their childhood. That is why we believe TOP TOY Bricks has huge addressable market and growth potential. TOP TOY has several toy bricks products in pipeline, and we'll continue to explore the potential of China Bricks and to offer diversified toy bricks to young consumers.

Thank you. That concludes my prepared remarks. I'll now turn the call over to our CFO for financial review.

[Saiyin Zhang, executive]

Hello, everyone. Thank you for joining us. Today, I will start my remarks with a review of March quarter's financial results and will then provide additional color regarding June quarter. Please note that I will talk about the financials in RMB, and I will also refer to some non-IFRS measures, which have exclude share-based compensation expenses. Revenue for March quarter was CNY 2.34 billion, including CNY 1.82 billion in China and CNY 520 million in overseas market. In China, revenue from offline business of MINISO brand was CNY 1.56 billion. Revenue from e-commerce of MINISO brand was CNY 126 million, and the revenue from TOP TOY was CNY 111 million.

From a year-over-year perspective, our revenue increased by 5% year-over-year, primarily driven by 17% year-over-year growth in overseas market but dragged by 2% year-over-year growth in China, which was caused by the lingering effect of the Omicron variant. As we have mentioned in CEO's prepared remarks, in China, in this quarter, revenue from offline business of MINISO brand grew by 1% year-over-year. The pandemic has negatively affected our revenue in China in 2 ways. Firstly, it caused the temporary closure of our stores. For example, more than 300, or 10% of MINISO stores, was temporarily closed in March.

Secondly, for those stores opened, the lockdown measures taken by local government have significantly impacted the traffic. We estimate the GMV loss for the month of March alone was around CNY 300 million, which translates into a revenue loss of about CNY 200 million. Our TOP TOY brand although it record a year-over-year revenue growth rate of more than 300%, its operation was also negatively impacted by the Omicron with more than 10% of its stores were temporarily closed in March.

In overseas market, the year-over-year growth come from both distributor market and the subsidiary market, with a part of the shipment to overseas distributors were deferred to June quarter because of pandemic has impacted the operation of our logistics and transportation service providers. However, considering the strong replacement demand from the overseas market after an encouraging GMV growth this quarter, and considering that more stores will be opened in the coming quarters, we expect a decent growth of shipment revenue to overseas in the coming quarters.

From a quarter-over-quarter perspective, revenue from overseas market down 28%. As you may know that our overseas business is subject to seasonality, typically, with the strongest performance in December quarter and a loss in March quarter. For example, our overseas revenue decreased by 40% sequentially in March quarter of 2019, which to some extent, represent a normalized seasonality before pandemic. The stronger seasonality in March quarter of 2022 is a proof of continued recovery in overseas market.

Gross profit was CNY 707 million, increased by about 17% year-over-year and decreased by 18% quarter-over-quarter. Gross margin rate was 30.2% compared to 28.1% a year ago and 31.1% a quarter ago. The year-over-year increase was primarily due to: one, revenue contribution of overseas market increase by about 2% from about 20% in the same period of 2021 to 22% in this quarter. As you know, our overseas operation usually have a higher gross margin than our operation in China. And number 2, higher gross margin contributed by those new products under strategic brand upgrade or MINISO in China. The quarter-over-quarter decrease was primarily due to the decreased revenue contribution from overseas market from about 26% to about 22%.

Excluding share-based compensation expense, selling and distribution expense was CNY 352 million, increased by 28% year-over-year and decreased by 5% quarter-over-quarter. The year-over-year increase was primarily attributed to: #1, increase of personnel-related expense; #2, increase of license expense relating to our newly launched IP product; and the #3, increased promotion and advertising expense in relating to refresh of the MINISO store in China, partially offset by decreased logistics expense. The quarter-over-quarter decrease was due to decrease in logistics expense, licensing, and traveling expenses.

General and administrative expense were CNY 191 million, increased by 22% year-over-year and decreased by 11% quarter-over-quarter. The year-over-year increase was primarily due to increased depreciation and amortization expense in related to a land use right of our headquarter building project and increased personnel-related expense and tax and surcharge. The quarter-over-quarter decrease was primarily due to decreased personnel-related expense and decreased financial and legal service fee.

Turning to profitability. Operating profit was CNY 141 million compared to CNY 161 million in the same period of 2021 and CNY 255 million in the previous quarter. Operating margin was 6.0% compared to 7.2% a year ago and 9.2% a quarter ago. Adjusted net profit was CNY 111 million compared to CNY 149 million in the same period of 2021 and CNY 205 million in the previous quarter. Adjusted net margin was 4.7% compared to 6.7% in the same period of 2021 and 7.4% in the previous quarter. Adjusted basic and diluted earnings per ADS were USD0.36 in this quarter compared to USD0.52 a year ago.

Turning to cash position. As of March end, the combined balance of our cash, cash equivalents, and the restricted cash and other investments was CNY 5.49 billion compared to CNY 5.37 billion as of end December 2021. Our strong cash position and ample operating cash flow has positioned us well to cope with any kind of challenges.

Turning to working capital. Turnovers of inventory improved year-over-year and stabilized quarter-over-quarter. Trade receivables remained stable on both year-over-year and quarter-over-quarter basis. Looking ahead into June quarter of 2022, we continue to operate in significant uncertainty in regards to timetable of pandemic recovery in China and some Asian countries. In China, our business suffered more in April than in March with average 380 MINISO stores were temporarily closed and total revenue down about 10% sequentially. Although we have observed sequential improvement in May, it is more related to seasonality. As it is difficult to predict when the lockdown measure will come to end, we remain cautious in our outlook for the June quarter.

We currently expect our total revenue to be between CNY 2.1 billion to CNY 2.4 billion. The midpoint of the range represents a decrease of 9% year-over-year. Our margins have been and are expected to be pressured during this wave of pandemic outbreak, primarily due to the sales deleverage. As we have shared in CEO's prepared remarks, we have not faced any material cost headwinds, thanks to our strong bargaining power and our flexible pricing strategy. However, we have taken necessary actions, such as controlling operating overheads, reducing personnel-related expense, and adjusting marketing plans in order to ease short-term impact from the challenging we face on our bottom line.

Although we have been experiencing this tough challenge, we are confident with our competitive advantage and optimistic about our growth potential in inflation times. The fundamentals of our business remain unchanged. We will continue to focus on those elements of our business that are under our control to drive growth and protect margins.

Thank you, and this concludes our prepared remarks. Operator, we are now ready to take questions.

[Operator]

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

[Michelle Cheng, analyst]

[Interpreted] So I have 2 questions for management. The first one is regarding inflation and cost. So given a lot of retailers are calling for high pressure from the cost inflation. So what is the management observation on the cost inflation risk on our business and how do we manage that? In particular, we have very strong margin expansion in first -- in the March quarter, so how sustainable it is?

And my second question is regarding the store expansion. So can management give us some update regarding the expansion plan for China and the overseas market?

[Guofu Ye, executive]

[Interpreted] I will translate for CEO. So thank you for your question, Michelle. Yes, we have noted this situation. The recent cost pressure faced by retailers concerns everyone in this industry. Let me share with you our views. So to sum up, the recent cost pressures of retail industry I think they come from the following aspects. The first is the rising transportation and freight cost, including the rising oil price and the rising shipment cost. Second is come from the supply chain side, including the rising price of raw materials and commodities. And also, we saw the transmission of cost pressures from suppliers. And the third is the impairment of inventory will lead to the reduction of gross profit.

In the current turbulent market environment, the real -- the hotel retail industry has been facing more uncertain consumer demands and higher seasonalities. And this has made many companies face the difficulty to reorder or face a prolonged reorder lead time. And there is more and more freight pressures coming on the way. So some companies they are choosing to keep more inventories. But because consumer demand nowadays is more and more to predict. So at this time, on the market, if your forecast goes on, it can be troublesome and can lead to inventory overstore.

So this has become a common challenge for the retailers. For MINISO, we currently do not feel much pressure on cost side, and it has been supported by our recent rise in gross margin during the past quarters, and I think it's mainly due to the following reasons: first, I would like to expand our expense structure. So in the whole process, the freight cost billed by MINISO is from the supplier to the MINISO's warehouse. This part only accounts for a relatively small proportion of the total trade cost and the freight from MINISO's warehouse to the domestic MINISO Retail Partner stores or our distributor stores, they are charged to corresponding retail partners or distributors. So the rise in freight cost will not have material influence on our P&L.

For retail partners and distributors, because they use -- they price their products using cost-plus markup strategy, so the rising freight cost will also have no impact on their gross margin, too. Secondly, in the supply chain side, our large procurement volume as a result of our more than 5,000 stores worldwide have provided us with tremendous cost advantages. And our long-term mutually beneficial relationship with our suppliers has enabled us strong and enough marketing power to consolidate our cost advantages. So therefore, thanks to our flexible pricing strategy and our terminal end-pricing rise, be it freight cost or the commodity pricing rise, we can all transfer these incremental costs to our price. And promise that -- make sure that we have -- we can achieve our established gross margin targets.

And third is we always count inventory. As I shared earlier, the inventory turnover days range is at 60 to 70 days and very close to our pre-COVID level, specifically in FY '19, our inventory turnover days was 63 days and in fiscal year '22 and '21, it was about 78 due to the COVID. Thanks to our continuous efforts during the past year, in the past 3 quarters, our inventory turnover days has recovered to 68 days, which is very close to our pre-COVID level. And at this moment, China is the least and the latest to be affected by the global inflation, and this has positioned MINISO well. But of course, the global cost rising, it has certain -- it has some transmission mechanism, and we'll pay more closer attention to the changes and continue to do a good job in that.

[Saiyin Zhang, executive]

[Interpreted] I will translate for CFO. Yes, for your question on store expansion. Let me start with the overseas market. Now we still maintain our guidance of net addition of 350 stores in calendar year 2022. For China, it's a more complicated story here because everyone has -- everyone knows that what happens here. And the whole restrictive measures has been for a while. And as Mr. Ye shared in his prepared remarks, we will dynamically adjust our store openings in China based on the pandemic control in China. And the basic principle here is that we will focus on the long-term health of the whole MINISO system and we'll grow based on that to adjust our store openings.

[Operator]

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

[Lucy Yu, analyst]

[Interpreted] The market is concerning about China spending power deterioration. In the near term, we might face consumption downgrade or more conservative spending. It might take some time to restore consumer confidence. Meanwhile, MINISO has raised the price for certain products since second half of last year. How should we think about potential impact on sales in the consumption downcycle? And will you consider to adjust this strategy?

And second question is on the sales situation in both China and overseas during the second quarter so far. And following that, China sales has been quite soft lately, how should we think about the inventory destocking pressure in the second quarter or third quarter?

[Guofu Ye, executive]

[Interpreted] I'll translate for CEO. So thank you for the question, Lucy. One thing I want to point out here is that so many countries are facing the inflationary pressure at this moment. And consumers, they tend to look for value more in such a high inflation environment, which is a very good opportunity for us because that is our advantage. With our experience and core capabilities in supply chain, inventory management, and our pricing strategy, we'll continue to leverage our value proposition and cost advantage and get more capacity position in this downturn for consumer.

For a long time, MINISO has always followed our pricing strategy of taking around 50% merchandise gross margin. And starting in 2021, our new product pricing margins are represented by these IP products have increased by at least 5%. But it needs to be emphasized that this price increase are just for the 30% interest-based products. For the rest, 70% of MINISO products, we will stick to our value proposition. And I can share the sale numbers. In the past 3 or 4 years, the average selling price per MINISO product in China market has been slowly decreasing from CNY 12.5 to less than CNY 12. And during the same time, our margin in China market stabilized. So we won't raise MINISO's product price completely, but we'll do that based on our value proposition and do some differentiated pricing to meet the more diversified consumer demands.

As of today, I think this strategy it's influenced our gross margin as positive. And in the future, there will be not many changes for our pricing and promotion strategy. It will still be for the 30% interest-based products and only for new products. And as we communicated in last quarter's earnings call, I really hope that after brand upgrade when consumers come to MINISO store, they won't feel that we got more expensive, but we have more value.

[Saiyin Zhang, executive]

[Interpreted] Translate for CFO. I will answer your second question. So your first part on the recent recovery in April and May, so first off in China, currently, April is even worse than the situation in March because we had more stricter measures. So sequentially, the GMV in April is down 10%, mainly due to, #1, the temporary store closure is even higher. So in April, there was about 380 stores temporary closed. And #2, good traffic footprint to our stores also decreased in April.

And for the operations in May in China, we saw some kind of recovery, but our judgment is that it's more related to seasonality as May is traditional a strong month for MINISO. But on the other side, we also saw that the store closures in May in China has raised to about 160 stores in recent days. For the overseas operations, I think the hope -- the big picture is that the overseas situation is much better than in China. If we look at first the March quarter's year-over-year growth, it was 30% of sales. Entering into the June quarter, we have seen apparently acceleration in the whole recovery in overseas market. For example, India and Indonesia, our average we saw more than 60% year-over-year growth, especially in the Indian market, so more than 100% growth.

And for your second part of question on the inventory. My first guess -- my first impression here, based on the situation, we observed here is that we're justifying -- we are good on the inventory because during the past 2 years, we have every chance we get to control our inventory turnover days and we also very disciplined in our whole inventory management process. So in March due to the COVID and the control measures, our inventory was negatively affected a little bit. But the inventory turnover days for China was still at the low level of 60 days. In fact, I want to express here that our whole control of the inventory level is quite good. So we are very confident for this side.

[Operator]

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

[Veronica Song, analyst]

[Interpreted] Maybe I'll quick translate. So how is our latest development in our overseas market, especially in North America? Have we seen a stabilizing store economics in the U.S.? And also, in which overseas countries have we entered the stage of having a civilized store economics and ready for further mass expansion?

[Guofu Ye, executive]

[Interpreted] Thank you, Veronica. So, generally speaking, since we only officially launched our new tenant annual program in North America since the last year in the fourth quarter, everything went quite well in North American market. I would take America, the U.S. market, as an example, since it has become a majority part of the annual business. As of the end of March, we had 54 MINISO stores in America and mostly directly operated. And the store number increased by 70% year-on-year.

In terms of average store performance -- average store sales, in March quarter, we have seen a 100% recovery to the pre-COVID level. And if we look at the high season, the peak season of December quarter last year, the average store performance was 10% higher. And of course, it has a large part, the whole recovery of the U.S. retail market. But beyond that, we also have accomplished a lot of internal management improvement, such as the localization of our products such as the solution to our supply chain and so on. So during the past 7 quarters, we have seen more and more profitable stores in the U.S. market, and we are more and more close to see a relatively stable store model. And we really hope we can do -- we can have this drop down in the year of 2022.

So except the U.S., we will also try Canada market in the second half of '22. And except the North American market, we also had other -- several subsidiary markets. I would say that many of them have already had a store model there, especially in the next year. So for the whole South Asia market, including Indonesia, the major problem of them is the pandemic. It's still there. So it has still lingering effect on our sales there. So we do really hope that in 2022, the impact of the COVID in this market will fade eventually so that we can improve substantially our P&L for the subsidiary markets.

[Operator]

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.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]