Yatsen Holding Ltd

NYSE:YSG

Earnings Call Analysis

Company Expects Revenue Growth in Q4

In the third quarter of 2023, the company's gross profit decreased by 13.3% to RMB 512.8 million year-over-year but achieved a higher gross margin of 71.4%, up from 68.9%. This improvement was fueled by increased sales of higher-margin skincare products, more disciplined pricing, and cost optimization. Operating expenses fell by 13.1% to RMB 744.3 million. The company forecasts Q4 revenues to be between RMB 1.01 billion to RMB 1.06 billion, indicating a 0% to 5% annual growth.

Overview of Yatsen's Q3 2023 Financials Amid Market Conditions

In Q3 2023, China's beauty industry witnessed a mild recovery, yet with a deceleration in retail sales growth compared to Q2, with total retail and beauty retail sales growing by 4.2% and 2.6% year-over-year, respectively. Yatsen, amid weak consumer demand, stood resilient with its strategic pivot towards building brand equity. The company saw a total net revenue drop of 13.3% to RMB 718.1 million but enjoyed an enhanced gross margin of 71.4% due to high-margin skincare products, disciplined pricing, and cost optimization. However, they faced a net loss margin expansion to 27.6%, with non-GAAP net loss margin rising to 18.1%, reflecting increased investment in their flagship Perfect Diary brand and preparations for key shopping events.

Operational Highs and Lows: Brand Dynamics

Skincare brands like Galénic and DR.WU continued an upward trajectory, growing by 7.4% and compensating for the decline caused by the phase-out of Abby's Choice. On the flip side, Color Cosmetics felt pressure, with net revenues from Perfect Diary plummeting by 21.5% due to factors like store closures and timing of product launches. Notably, the number of Perfect Diary's offline stores shrank significantly from 198 to 123 year-over-year. Despite these challenges, Yatsen achieved gross margin improvement to 71.4% from 68.9%, thanks to higher margin skincare contributions and overall cost optimisations. Nonetheless, operating expenses as a percentage of total revenue grew to 103.6% from 99.9%, with selling and marketing expenses notably up to 71.3% due to strategic brand investments.

Brand Innovation and Market Movements

Yatsen's Q3 saw the rollout of the Perfect Diary's Biolip essence lipstick, which relies on innovative Biolip technology. As a result, this product line aligns with Yatsen's goal to appeal to higher-value customers, such as young urban moms and the middle class. Partnerships with co-brands and the introduction of brand ambassadors further signalled Yatsen's commitment to expanding brand reach and cultivating distinctive audiences for its range of skincare brands.

Financial Allocations: Efficiency and Cost Management

To maintain financial health, Yatsen focused on reducing operational costs. The company recorded a downtick in general and administrative expenses to 21.1% of total net revenues from 22.7%, mainly through reduced headcount. R&D expenses were also maintained at a reasonable 3.4% of total revenues, reflecting the company's careful management of innovation spend relative to its earnings. Meanwhile, fulfillment expenses saw a slight uptick, reaching 7.8% of total net revenues due to lower overall revenues, indicating the effects of deleveraging.

Looking Ahead: Q4 2023 Expectations

With cautious optimism, Yatsen projects Q4 2023 total net revenues to range between RMB 1.01 billion and RMB 1.06 billion, representing a 0% to 5% year-over-year increase. This guidance is based on preliminary market and operational condition assessments, hinting at a potential turnaround from the downward trend as it starts to gain momentum in sales with new product offerings and a traditionally strong season for skincare products.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to the Yatsen's Third Quarter 2023 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Irene Lyu, Vice President, Head of Strategic Investments and Capital Markets. Please go ahead.

[Irene Lyu, executive]

Thank you, operator. Please note the discussion today will contain forward-looking statements relating to the company's future performance and are intended to qualify for the safe harbor from liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion.

A general discussion of the risk factors could affect Yatsen's business and financial results is included in certain filings of the company with the Securities and Exchange Commission. The company does not undertake any obligation to update this forward-looking information, except as required by law.

During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. Please see the earnings release issued earlier today for a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results.

Joining us today on the call from Yatsen's senior management team are Mr. Jinfeng Huang, our Founder, Chairman and CEO; and Mr. Donghao Yang, our CFO and Director. Management will begin with prepared remarks, and the call will conclude with the Q&A session.

As a reminder, this conference is be recorded. In addition, a webcast replay of this conference call will also be available on Yatsen's Investor Relations website at ir.yatsenglobal.com.

I will now turn the call over to Mr. Jinfeng Huang. Please go ahead sir.

[Jinfeng Huang, executive]

Thank you, Irene, and thank you, everyone, for participating in Yatsen's Third quarter 2023 earnings conference call today. In the third quarter of 2023, China's beauty industry remained in the mild recovery phase that began as the country emerged from the pandemic earlier this year. According to the National Bureau of Statistics of China, total retail sales of consumer goods grew by 4.2% year-over-year, and the total beauty retail sales increased by 2.6% year-over-year, both representing a deceleration in year-over-year growth rate from the second quarter.

Online beauty sales showed a similar pattern in the third quarter. For both Color Cosmetics and Skincare, combined total sales on Tmall and Douyin recorded a slower growth rate than in the second quarter of 2023.

Amid uncertainties in consumer demand, Yatsen remains committed to its strategic transformation plan. We continuously strive to build strong brand equity based on superior product performance and the consumer satisfaction. For the third quarter of 2023, we recorded total net revenue of RMB 718.1 million, in line with our period guidance.

Net revenue for our Skincare brand declined by 4.1% year-over-year, mainly attributable to our strategy decisions to phase out the Abby's Choice brand. Our clinical and premium Skincare brands, including Galénic, DR.WU and Eve Lom delivered another solid performance recording 7.4% year-over-year growth in combined with net revenues and further increasing their contribution to total net revenues as compared with the prior year period.

Net revenues from Color Cosmetics brands decreased by 21.5% year-over-year, primarily due to the decline in Perfect Diary sales as a result of the timing of new product launches near the end of the third quarter and the closure of underperforming off-line stores. The number of Perfect Diary's offline stores totaled 123 as of the end of the third quarter compared with 198 a year ago.

Net revenues from Little Ondine and Pink Bear continued to grow as both brands raised their brand awareness among targeted consumers. Yatsen's gross margin improved to 71.4% in the third quarter from 68.9% in the prior year period due to the rising contribution from higher gross margin in Skincare brands and ongoing cost optimization across our brand portfolio. Net loss and the non-GAAP net loss margin expanded to 27.6% and 18.1%, respectively as we increased investments in the Perfect Diary brand upgrades and preparations for the Double 11 Shopping Festival.

Turning now to our brands and products. During the third quarter of 2023, we repositioned the Perfect Diary brand, carrying out a series of campaigns with refreshed visual identities and new product launches. The brand's new hero product, Biolip essence lipstick, leverages our exclusive Biolip technology, which creates a bionic sebum film upon application to protect the lip's fragile skin barrier.

Biolip's strong efficacy in lip line reduction was validated by the prestigious Ruijin Hospital and SGS testing agency. Our 2 other Color Cosmetics brands, Little Ondine and Pink Bear, both formed co-branding partnerships with popular [indiscernible] that deeply resonated with young consumers.

For our Skincare brand, we continued to engage deeply in brand building, further cultivating each brand's distinctive audience. Galénic marked its 45th anniversary with the gala celebration that hosted an array of celebrities, media and scholars in Paris. The brand also officially announced its scientific research cooperation with Hospital Saint Louis, a well-known dermatology hospital in Paris and established Galénic Dermatology Research Foundation.

In addition, DR.WU celebrated its 20th anniversary. Its reputation as a high-quality clinical brand and a pioneer in the use of a mandelic acid continued to strengthen as the brand was honored as Asia's leading mandelic-based skincare brand [Technical Difficulty], the world's top independent provider of market research and industry analysis. Furthermore, [indiscernible] introduced renounced singer and actor [indiscernible] as its brand ambassador to increase brand awareness and establish a broader customer base.

Moving on to R&D. R&D expenses as a percentage of revenues were 3.4%. In September, Yatsen and the Galénic brand attended the IFSCC conference in Barcelona, Spain and presented a scientific paper on the brand's patent snow algae peptide. At the conference, Galénic also announced that it has entered into a strategy cooperation with the global peptide leader, Lubrizol, to jointly research new ingredients, collaborate on anti-aging [ product ] research and expand Yatsen's Open Lab research and development boundaries.

Before handing the call over to Donghao, I would like to provide an update on our share repurchase program. As announced earlier today, our Board of Directors has approved and authorized a change to the size and term of our share repurchase program, increasing the aggregate value of shares that may be repurchased under the Share Repurchase Program from USD 150 million to USD 200 million and expanding the effective term of the Share Repurchase Program through November 19, 2025. This further demonstrated our confidence in Yatsen's prospects.

To summarize, China's beauty market is still in the process of a modest recovery this year. Looking forward, we will continue to adapt flexibility and are confident in our resources and ability to advance our strategic transformation plan.

With that, I will now turn the call over to our CFO, Donghao Yang, to discuss our financial performance. Thank you, everyone.

[Donghao Yang, executive]

Thank you, David, and hello, everyone. Before I get started, I would like to clarify that all financial numbers presented today are in Renminbi amounts and all percentage changes refer to year-over-year changes unless otherwise noted.

Total net revenues for the third quarter of 2023 decreased by 16.3% to RMB 718.1 million from RMB 857.9 million for the prior year period. The decrease was primarily attributable to a 21.5% year-over-year decrease in net revenues from Color Cosmetics brands combined with a 4.1% year-over-year decrease in net revenues from Skincare brands.

Gross profit for the third quarter of 2023 decreased by 13.3% to RMB 512.8 million from RMB 591.3 million for the prior year period. Gross margin in the third quarter of 2023 increased to 71.4% from 68.9% for the prior year period. The increase was driven by first, increasing sales of higher gross margin products from Skincare brands; and secondly, more disciplined pricing and discount policies; and thirdly, cost optimization across all of our brand portfolios.

Total operating expenses for the quarter of 2023 decreased by 13.1% to RMB 744.3 million from RMB 857 million for the prior year period. As a percentage of total net revenue, total operating expenses for the third quarter of 2023 were 103.6% as compared with 99.9% for the prior year period. Fulfillment expenses for the third quarter of 2023 were RMB 56 million as compared with RMB 63.8 million for the prior year period.

As a percentage of total net revenue, fulfillment expenses for the third quarter of 2023 increased to 7.8% from 7.4% for the prior year period. The increase was primarily attributable to the deleveraging effect of lower net revenues in the third quarter of 2023. Selling and marketing expenses for the third quarter of 2023 were RMB 511.7 million as compared with RMB 564.8 million for the prior year period.

As a percentage of total net revenues, selling and marketing expenses for the third quarter of 2023 increased to 71.3% from 65.8% for the prior year period. The increase was primarily attributable to increased investments in the Perfect Diary brand upgrades and preparation for the Double 11 Shopping Festival.

General and administrative expenses for the third quarter of 2023 were RMB 151.8 million as compared with RMB 194.5 million for the prior year period. As a percentage of total net revenues, general and administrative expenses for the third quarter of 2023 decreased to 21.1% from 22.7% for the prior year period. The decrease was primarily attributable to a reduction in compensation corresponding to a decrease in general and administrative headcount.

Research and development expenses for the third quarter of 2023 were RMB 24.7 million as compared with RMB 33.9 million for the prior year period. As a percentage of total net revenues, research and development expenses for the third quarter of 2023 decreased to 3.4% from 3.9% for the prior year period. The decrease was primarily attributable to our efforts to maintain research and development expenses at a reasonable level relative to total net revenue.

Loss from operations for the third quarter of 2023 decreased by 12.9% to RMB 231.5 million from RMB 265.7 million for the prior year period. Operating loss margin was 32.2% as compared with 31% for the prior year period. Non-GAAP loss from operations for the third quarter of 2023 increased by 1.2% to RMB 164.6 million from RMB 162.6 million for the prior year period. Non-GAAP operating loss margin was 22.9% as compared with 19% for the prior year period.

Net loss for the third quarter of 2023 decreased by 6.1% to RMB 197.9 million from RMB 210.7 million for the prior year period. Net loss margin was 27.6% as compared with 24.6% for the prior year period. Net loss attributable to Yatsen's ordinary shareholders per diluted ADS for the third quarter of 2023 was RMB 0.36 as compared with $0.37 for the prior year period. Non-GAAP net loss for the third quarter of 2023 increased by 3% to RMB 130.2 million from RMB 126.5 million for the prior year period.

Non-GAAP net loss margin was 18.1% as compared with 14.7% for the prior year period. Non-GAAP net loss attributable to Yatsen's ordinary shareholders per diluted ADS for the third quarter of 2023 was RMB 0.24 as compared with RMB 0.22 for the prior year period.

As of September 30, 2023, we had cash, restricted cash and short-term investments of RMB 2.24 billion as compared with RMB 2.63 billion as of December 31, 2022. Net cash used in operating activities for the third quarter of 2023 was RMB 163.4 million compared with net cash generated from operating activities of RMB 21.8 million for the prior year period.

Looking at our business outlook for the fourth quarter of 2023, we expect our total net revenues to be between RMB 1.01 billion and RMB 1.06 billion, representing a 0% to 5% increase year-over-year. These forecasts reflect our current and preliminary views on the market and operational conditions, which are subject to change.

With that, I would now like to open the call to Q&A.

[Operator]

[Operator Instructions] The first question comes from [indiscernible] with CICC.

[Unknown Analyst]

I have 2 questions. The first one is regarding the new products of Perfect Diary. We've seen the launch of Biolip essence lipstick and also foundations in Q3. So is there any feedback we've got from the customers? And how should we expect on your performance in next year? This is for the first question.

And my second question is about our guidance. We've guided a positive revenue growth for Q4, which is an encouraging signal. So behind this guidance, could management give us more color on your expectation for both Skincare and Color Cosmetics sectors in Q4? And like what are the key drivers for us to achieve that goal? That's my question. Thank you.

[Irene Lyu, executive]

Let me take the first one. Well, Perfect Diary is new lipstick launch, which is the bio essence lipstick. After its launch in the end of September, we have received very positive feedback from our users as they enjoy very strong efficacy from the lipstick. Basically, our philosophy is to have a very perfect makeup look combined with in-level efficacy benefit from the lipstick. So that's number one.

And then secondly, the user profile also started to shift after our brand upgrade and also the new launch. Historically, our consumers are mostly Gen Zs and also young consumers from the lower-tier cities. But then after we launched this new product and the brand upgrades, given that our price points start to increase and with new bolt-on benefits, we start to see more high-value consumers coming to buy our lipstick including, for example, the sophisticated young moms and also the upper middle class.

And also since the launch, we have seen very positive ranking performance on both Tmall and Douyin. So the launch of the lipstick was only at the end of September, so it haven't really contributed to much of the Q3 performance. But in Q4 and Double 11, we continued to see this product to gain market share.

[Donghao Yang, executive]

Yes. And your second question, I think Irene already covered part of the answer for your question. We launched our new product, Perfect Diary, towards the end of -- mid- to end of September, Q3. And the sales contribution from those new products, we started to show on our P&L starting in Q4. So that's one reason. One other reason is Q4 has traditionally been a strong season for our skin care products. And if you look at our skin care products and the main -- 3 main skin care brands have been growing really fast in the past many quarters, and we are expecting strong growth from those skin care brands.

So all in all, with the slowdown of the decline -- sales decline of Perfect Diary brand and strong growth from those other skin care brands, that's why we are expecting a strong quarter in Q4. And therefore, we gave the guidance of 0% to 5% year-over-year growth. As you know, in the past almost 2 years, the sales of the company have been declining. And hopefully, that decline has bottomed out, and we do expect our sales to start to gain traction in the foreseeable future.

[Operator]

[Operator Instructions] This concludes the question-and-answer session. I would like to turn the call over to Irene Lyu for any closing comments.

[Irene Lyu, executive]

Thank you once again for joining us today. If you have any other further questions, please feel free to contact us at Yatsen directly or Piacente Financial Communications. Our company information for IR in both China and the U.S. can be found in today's press release. Have a great day. Thank you.

[Operator]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.