Yatsen Holding Limited (YSG) Q2 2021 Earnings Call Transcript

Yatsen Holding Limited (YSG 5.42%)
Q2 2021 Earnings Call
Aug 26, 2021, 7:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, good day, and welcome to the Yatsen second-quarter 2021 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Irene Lyu, head of strategic investments and capital markets. Please go ahead.

Irene Lyu -- Head of Strategic Investments and Capital Markets

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 the 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 that 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.

For a definition of non-GAAP financial measures, a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. Joining us today on the call from Yatsen's senior management 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 a Q&A session. As a reminder, this conference is being recorded. In addition, a webcast replay of this conference call will be available on Yatsen's Investor Relations website at ir.yatsenglobal.com. I'll now turn the call over to Mr.

Jinfeng Huang. Please go ahead.

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

Thank you, Irene, and thank you, everyone, for participating in Yatsen's second-quarter 2021 earnings conference call today. So our total net revenues grew 53.5% year over year in the second quarter, in line with our guidance due to steady contribution from our flagship Perfect Diary brand and better-than-expected performance of our newly launched and acquired brands. So the number of DTC customers increased by 13.3% year over year to 10.2 million. And the average net revenue per DTC customer went up by 17.6% to RMB 117 from RMB 99 during the second quarter of 2020.

So these solid results came despite intensifying competition and rising customer acquisition costs. So even as China's beauty market grew at about 20% overall during the second quarter, growth in the premium segment and in skincare was notably stronger than other market segments. So we believe this market development validates a set of strategic growth initiatives we launched in May to sharpen our growth model. Specifically, we are optimizing internal resources and organization structures to enhance the power of our brands to facilitate positive innovation, capitalize on new growth channels, and optimize cost structures and efficiencies.

So this ongoing transformative process will continue in[Inaudible] even though we have already seen some early signs of success in the latest quarter. So with our proven ability to disrupt the traditional beauty industry using a digitalized native DTC model, we are now building a portfolio of durable iconic brands supported by consumers' insights and innovation. So we believe these strategic initiatives are essential tools to position us on the path of high-quality, sustainable growth, particularly as we prepare for a busy season in the lead up to Singles' Day in the fourth quarter. During the second quarter, we launched several new products under our flagship brand, Perfect Diary, the translucent blurring loose powder with Smartlock technology and the ultralight purifying cleansing oil.

So all of these new products featured proprietary technology and received very encouraging user feedback. So despite the competition from both international and domestic peers during the June 18th shopping festival, Perfect Diary was one of the top two best-selling domestic Chinese color cosmetics brands, selling more than 400,000 lip glosses, among other hero products. So the launch of our higher-priced slim heel lipstick treasure box was also a success during the May 20th Chinese Valentine's Day campaign with sales of more than 100,000 units. This also introduced the Perfect Diary brand to male customers who are buying for their significant others.

Heading into the second half of the year, we plan to make a strong push into the base makeup category and premiumize the Perfect Diary brand among our new and existing users. So speaking of brand building, we continue to be recognized by the industry for our achievements. For this quarter, the 2021 Tmall Beauty Awards, known as the Oscars of the beauty industry, named Perfect Diary the most sought-after brand of the year and Yatsen the fastest growing beauty group in 2021. [Inaudible] recognized Perfect Diary as one of China's 500 most valuable brands of 2021, in which we are the only color cosmetics brand and the youngest beauty brand on the list.

Now turning to other brands in our portfolio. We continue to optimize return on investment for Little Ondine and Abby's Choice during the second quarter. The newly launched color cosmetics brand, Pink Bear, has seen fast growth since it was developed in March 2021. This sensational new brand sold over more than 500,000 lip glosses during the first June 18th campaign, garnering the award as the fastest growing new cosmetic brand on Tmall in 2021.

And as we head into the second half of the year, we will continue to expand Pink Bear into the eye and face makeup categories. We are also excited about our progress in skincare, which has grown to represent more than 20% of our gross sales in the second quarter. Our new innovative skincare products strongly resonated with our consumers. Galénic pure brightening vitamin C powder quickly sold out following its initiative -- initial launch on Mainland China this April.

So after a relatively short period of integration into our platform, DR. WU's Mainland China sales grew dramatically during the second quarter to become the No. 1 in this category on Tmall. So during the June 18 shopping festival, DR.

WU sales increased around 700% from the same period last year. Meanwhile, Eve Lom was the No. 1 premium cleanser brand on Tmall during the second quarter and the sales of its classic cleansing cream product grew by 53% year over year during the June 18 shopping festival on Tmall. So the rapid progress we have made so far clearly shows that there is great growth potential for these brands in the future.

We continue to focus on improving ROI on our sales and marketing expenses across the firm. Throughout the June 18 shopping festival, we were able to maintain discipline on pricing and discounts as well as allocate resources on brands and the channels with higher ROI. The end result was a decline in our sales and marketing expenses to 51% of total net revenues based on non-GAAP measures, compared to 71% last quarter and 62.7% in the fourth quarter of 2020. We have also set up our investment in R&D, which increased to 2.3% of total net revenues this quarter from 1.4% a year ago.

Our increased investment in R&D has strongly -- has already borne fruit, as demonstrated by the Smartlock technology that we developed in-house and used in the new translucent blurring loose powder line. So besides launching this innovative product, we also recently announced the establishment of a joint research laboratory with the National Engineering Research Center for Nanomedicine, which was formed under the Huazhong University of Science and Technology to further enhance our R&D capabilities in advanced skincare, particularly the nano-based thermal delivery system for active ingredients. So looking ahead, the lower year-over-year growth rate in Q3, as reflected in our guidance, is largely due to the unusual quarterly seasonality pattern caused by the COVID-19 pandemic last year. So in a typical year, the China online beauty market is characterized by higher sales in Q2 than Q3.

As a result of the June 18 promotions across all sales channels, this pattern was disrupted in 2020 due to social distancing and quarantine policies during the COVID-19 pandemic in Q2 followed by relatively stronger sales in Q3 as the market recovered, helped by the pent-up demand from the previous months. So this creates a low base in Q2 and a high base in Q3 for year-on-year comparisons this year. However, if you compare our combined sales in Q2 and Q3 this year, which represent 53.5% and five to 10 based on our guidance year-over-year growth rate, respectively, the year-over-year growth is projected to be 26% to 29%. We believe this is a more accurate picture of our growth trend, taking last year's unusual seasonality into account.

We expect to have a normal basis of comparison in Q4 and our year-over-year sales growth will resume its normal trajectory. We are confident that successful execution of our strategic growth initiatives, our expanding talent pool, and the ample financial results on our balance sheet position us well to continue playing a leading role in China's evolving beauty market. So thank you, everyone. With that, I will now turn the call over to our CFO, Donghao Yang, to discuss our financial performance.

Donghao Yang -- Chief Financial Officer and Director

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 revenue for the second quarter of 2021 grew by 53.5% to RMB 1.53 billion from RMB 993.2 million in the prior-year period. The growth was primarily attributable to increased contribution from diversified sales channels and newly launched and acquired brands.

Gross profit for the second quarter of 2021 increased by 65.1% to approximately RMB 1 billion from RMB 607 million in the prior-year period. Gross margin improved by 4.6 percentage points to 65.7% in the second quarter of 2021, as compared with 61.1% in the prior-year period on the back of increased sales generated from higher-margin brands and products. We have also seen the continuation of the premiumization trend for the Perfect Diary brand in the quarter, enabling us to achieve higher average order value and better margins. Total operating expenses for the second quarter of 2021 increased by 51% to RMB 1.41 billion from RMB 935.3 million in the prior-year period.

As a percentage of total net revenue, total operating expenses decreased to 92.6% from 94.2% in the prior-year period. Fulfillment expenses for the second quarter of 2021 were RMB 118 million, as compared with RMB 81.7 million in the prior-year period. As a percentage of net revenue, fulfillment expenses decreased to 7.7% from 8.2% in the prior-year period. This was primarily attributable to the high base effect of the prior-year period, during which logistics costs were high as a result of the COVID-19 pandemic last year.

Selling and marketing expenses for the second quarter of 2021 were RMB 972.5 million, as compared with RMB 622.5 million in the prior-year period. As a percentage of total net revenue, selling and marketing expenses were 63.8%, as compared with 62.7% in the prior-year period. However, on a non-GAAP basis, which excludes expenses related to share-based compensation and amortization of intangible assets, selling and marketing expenses were 51.4% of total net revenue, as compared with 71% in the prior quarter and 62.7% in the same period last year. Such decrease in the selling and marketing expenses as a percentage of total net revenues was a result of our focus on improving the ROI on our selling and marketing expenses.

General and administrative expenses for the second quarter of 2021 were RMB 286.4 million, as compared with RMB 216.8 million in the prior-year period. As a percentage of total net revenue, general, and administrative expenses for the second quarter of 2021 decreased to 18.8% from 21.8% in the prior-year period. The decrease in percentage was primarily due to lower SBC expenses compared to the same period last year. Research and development expenses for the second quarter of 2021 were RMB 35.2 million, as compared with RMB 14.3 million in the prior-year period.

As a percentage of total net revenues, research and development expenses for the second quarter of 2021 increased to 2.3% from 1.4% in the prior-year period. The increase was primarily due to higher personnel costs and share-based compensation expenses as a reflection of our commitment to enhance our R&D capabilities. Loss from operations for the second quarter of 2021 increased by 24.9% to RMB 409.9 million from RMB 328.3 million in the prior-year period. Operating loss margin was 26.9%, as compared with 33.1% in the prior-year period.

Non-GAAP loss from operations for the second quarter of 2021 increased by 17.7% and to RMB 211.4 million from RMB 179.6 million in the prior-year period. Non-GAAP operating loss was 13.9%, as compared with 18.1% in the prior-year period. Net loss for the second quarter of 2021 increased by 21.6% to RMB 391.2 million from RMB 321.7 million in the prior-year period. Net loss margin was 25.7%, as compared with 32.4% in the prior-year period.

Non-GAAP net loss from the second quarter of 2021 increased by 12.6% to RMB 194.9 million from RMB 173.1 million. Non-GAAP net loss margin was 12.8%, as compared with 17.4% in the prior-year period. Net loss attributable to Yatsen's ordinary shareholders per diluted ADS for the second quarter of 2021 decreased to RMB 0.62 from RMB 5.68 in the prior-year period. Non-GAAP net loss attributable to Yatsen's ordinary shareholders per diluted ADS for the second quarter of 2021 decreased to RMB 0.31 from RMB 1.28 in the prior-year period.

As of June 30th, 2021, the company had cash and cash equivalents and restricted cash of RMB 4.11 billion, as compared with RMB 5.73 billion as of December 31st, 2020. Looking at our business outlook for the third quarter of 2021, we expect our total net revenue to be between RMB 1.33 billion and RMB 1.39 billion, representing a year-over-year growth rate of approximately 5% to 10%. This forecast reflects our current and preliminary review on the market and operational conditions, which is subject to change. With that, I would now like to open the call to Q&A.

Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question will come from Dustin Wei of Morgan Stanley. Please go ahead.

Dustin Wei -- Morgan Stanley -- Analyst

Hello, management. Thanks for taking my question. So first question is really regarding the third-quarter guidance. So it sounds like it's because the base kind of issue in the third quarter last year that provide -- the company sort of provide the very conservative or low guidance.

It's not -- it sounds like it's not because of the current COVID outbreak, so that's a little -- to me, it's sort of confusing. So I'd just appreciate if you could clarify that point. And if we are looking for 5 to 10% sales growth, I think by brand, are we going to assume that Perfect Diary could be declining in third quarter? Or could you provide some of the colors like by brand or by channel? So that's the first question regarding the guidance. And the second question is, consequently, we think about the margin or profit for third quarter.

If we're assuming like 5 to 10% sales growth, does that mean company will also control the variable costs? So we still continue to see sort of rationalization, ROI, and reduction on net loss ratio or because of certain operating deleverage, in fact, in the third quarter, we will temporarily in the quarter see like bigger loss or bigger loss ratio? And the third point is back to David's prepared remarks, talk about the transformation plan. Appreciate if management can provide some of the details about the goal of that transformation, the operational target or the financial target and how long that we'll expect that change will be done and when we are going to see some of the better financial results. That's my three questions. Thank you very much.

Donghao Yang -- Chief Financial Officer and Director

Thank you so much for the question, Dustin. So first thing, let's discuss the third-quarter guidance. So as I mentioned before, we need to take the Q2 and Q3 combined to look at the growth rate. One of the key reasons is because of the unusual seasonality of last year because of the COVID.

So if you look at the Q3 guidance, we cannot provide the accurate breakdown of the by brand, but we still see a very healthy growth trend of Perfect Diary main brand. Because of the ROI adjustment, now we have more brands in skincare category. And for Abby's Choice and Little Ondine, we continue to sharpen the ROI. And then so for that two brands, we have been allocating the resources into the skincare growth.

So that's what we see about the Q3 guidance. And then you talked about the COVID impact on Q3, we see some moderate impact on our off-line stores because, right now, it's less than one-third of the off-line store will impact by the COVID. So we continue to already take into consideration of the impact of the COVID in our expedition of the off-line stores. So for the transformation plan, we think it's -- we take some initiative to really sharpen our growth model.

So that means a few things. First, we continue to improve our ROI. So this will be reflecting on the sales and marketing percentage of the total revenue and also improvement on the bottom line. Second is that, right now, we are -- so in the past quarter, we actually allocated our internal resources into skincare brands, which means we moved some of the best performers from cosmetics to skincare BU.

So that is under the assumption that we think our growth in the color cosmetics category will continue. However, we see a higher, more intense competition in cosmetics. So right now, we are refocusing on the growth on Perfect Diary. And also because we already take some very good initiatives to grow the skincare brand, we see the momentum on DR.

WU, Galénic, Eve Lom and Abby's Choice is moving pretty well. But we will continue to invest in the skincare like a [Inaudible].

Dustin Wei -- Morgan Stanley -- Analyst

Thank you, David. If I can just follow up on sort of the margin where the profit aspect of the question is for third quarter that should we take the third quarter's margin a little bit abnormal because of this low growth? Or you think the ROI and the margin kind of improvement will continue despite the sort of a little bit low growth for the third quarter itself?

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

I think -- so if we think about the Q3 and Q4 growth, so normally, the Q4 growth comes from the investment in Q3 because we need to take the repeat purchase rate into consideration. So normally, the new user we acquired in Q3 will come back during the Singles' Day promotion. So for Q3, the investments on our flagship brand like Perfect Diary and also the skincare brands will still be high. But somehow we see the trend, because of the optimized ROI and the lower sales and marketing percentage of revenue, so the bottom line improvement will continue.

Dustin Wei -- Morgan Stanley -- Analyst

OK. Thank you very much, David. Thank you.

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

Thank you so much, Dustin.

Operator

The next question comes from Christine Cho of Goldman Sachs. Please go ahead.

Christine Cho -- Goldman Sachs -- Analyst

Thank you so much, David. So I have a quick three questions. So just to follow up on the guidance, I think in understanding the seasonality, if I just simply add the second quarter actual revenue plus kind of your third-quarter guidance, it kind of seems to imply around 25 to 30% growth on a Y-o-Y basis. Is this around the level of normalized growth that we should look for going forward beyond fourth quarter and beyond? That's the first question.

Second question would you have any update on the off-line store expansion? I recall that you had around 100 new opening target for this year, but seems like due to the COVID situation and other kind of factors, so far, the store opening has been slower than the target. And lastly, I just wanted to hear some thoughts on kind of the weaker July numbers across the industry. Do you have any thoughts here? Do you think this is more of a pull forward of demand toward June 18th? Or is this something -- any other factors that we should think about in terms of interpreting July and August numbers? Thank you.

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

Thank you so much. To answer your first question about the -- looking for the guidance on Q4 and also other quarters next year, we think the -- so I probably will take the Q1 into consideration as well. So the average growth rate of Q1 to Q3 will be something that we believe will be a more accurate reflection of our growth looking forward. And going back to your second question about the off-line stores, so in Q2 this year, we nearly opened around -- Irene, can you help to address the second question of the off-line store opening?

Irene Lyu -- Head of Strategic Investments and Capital Markets

Yes. So, so far, we have -- at the end of second quarter, we have 273 stores opened, compared to at the end of the year, 241. So that's a net increase of 32 stores. We expect to continue to open more stores.

But given the repeated COVID situation, the number of stores that we plan to open may drop a little bit compared to the number that we gave earlier.

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

For your third question about the overall growth of cosmetic industry in July, we did see like a slower growth versus the previous months and also is lower than our expectation. So I believe one of the key reasons behind is what really drives the growth of previous months. So if you look at the -- so since June or last year, so in the past 12 months beginning last June to this June, so the whole skincare -- or the whole cosmetic industry growth was mainly driven by skincare and also premium brands growth. So we see that growth trend right now is getting a little bit like slowing down.

And also, so that's why the whole market growth, we think, is weaker. But looking forward, so if you look at the August data, so we still have the confidence on the color cosmetics growth as we see some newly emerging channels booming. For example, the live broadcasting, live streaming GMV is growing really fast. So now the company's focus is we need to capture the new growth of the new category entrants and also newly emerging channels like Douyin.

Christine Cho -- Goldman Sachs -- Analyst

Thank you, that is super clear. Thank you.

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

Thank you.

Operator

The next question comes from Louise Li of Bank of America Securities. Please go ahead.

Louise Li -- Bank of America Merrill Lynch -- Analyst

Hi, David. Hi, Donghao. Thank you for taking my question. My first question is about the second quarter.

So you mentioned that that's the key driver of the quarterly sales growth is about -- is from the channel diversification and the new products. So could you give us some color on the channel diversification? So versus last quarter, so do we see further expansion from the sales contribution from outside Taobao and Tmall, particularly Douyin? So what is the gross contribution from Douyin now? And I remember that you mentioned that Douyin, the ROI of Douyin in Q1 is still as a trial period. So do we see any improvement from the ROI from this channel? So this is my first question. My second question is also about the guidance.

So it seems like the Q3 guidance is a little bit lower. But if we look at -- you just mentioned that, normally, we see higher sales from Q2 versus Q3. But if we look at the past two years, it's not the case. So in this case, how should we look at the Q4 when that space becomes even tougher? So is it the 25 to 30% is a normalized growth? And my third question is based on what we are doing for the transformation.

So seems like we are prioritizing our net loss control versus the sales growth, if that's the case? Thank you.

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

Thank you, Louise, for your question. So first one about the channel mix, yes, we have seen higher growth rates outside of Tmall in terms of channel mix. And then so we -- especially we see a very fast growth of the GMV in Douyin because of the live streaming. So in Q1, yes, we are on a testing period, so the ROI is not that high.

In Q2, we significantly improved the ROI. So right now, the growth of Douyin is on the right track. And I believe this will be reflecting on a sustainable growth on revenue and also optimized of our sales and marketing percentage of total revenue. So about the guidance on the Q3, I think I discussed that for Christine's question.

If you're taking the Q2 and Q3 growth combined and then if you're taking Q1 to Q2 combined, we believe the Q1 to Q3 combined will be something that we believe will be more accurate reflection of our growth expectation for quarters moving forward. And then so having said that, we believe our performance on Douyin on the live streaming, there are still some opportunity for us to optimize. So we will continue to devote more efforts to surpass our competitors in Douyin channel.

Louise Li -- Bank of America Merrill Lynch -- Analyst

How about my last question? So looking forward, are we prioritizing that the net loss control versus sales growth? Or how do we strike a balance here? Thank you.

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

I think so right now, we are taking a more sustainable growth strategy. So the key focus is still on growth. But if we look at the -- what does it mean for Yatsen is that we think that the value of the growth coming from the skincare brands and coming from our premium skincare brands is more valuable for the whole group. So that's why we will continue to devote more resources to grow the skincare brands.

And then also for our flagship brand, Perfect Diary, as I mentioned before, previously, we did move too fast to reallocate our talent into the skincare BU. And now we think because of the intensifying competition, we need to refocus and also to devote more resources to continue the growth trend of our main brands. So growth will be the key prioritized -- key priority of the company. But the reason we see the optimized bottom line is because we have a very high discipline in the ROI -- in the resource allocation to maintain a higher ROI level.

But the higher ROI level is reflecting the whole group, so which means for all our brands, we are taking the same bar. So that actually means we need to optimize the Abby's Choice and also Little Ondine's growth model.

Donghao Yang -- Chief Financial Officer and Director

Louise, a bit more color on your second question. So you were -- I believe you were looking at Q2 versus Q3 back in 2019. And then Q2 and Q3 in 2020 in our business. And you're right, even back in 2019, in our Q3 revenue was actually higher than Q2 by about 11%.

And the reason behind that was because back then, we were enjoying a really high-growth speed. So that's why the growth, our high-growth speed actually outweighed the seasonality back in 2019. So that's why in 2019, Q3 was 11% -- our revenue was 11% higher than Q2. But if you look at our 2020, last year's number, our Q3 revenue was actually 27% higher than Q2.

And that was a reflection of the disruptions in the seasonality patterns that we were talking about. So as David has mentioned several times now, in Q2 last year, we had the social distancing, quarantine policies in almost all of the country, which actually depressed consumer demand and our sales, in fact, in Q2. But in Q3, the pent-up demand from the previous Q1, Q2 were actually relieved. So that's why we saw a much higher Q3 revenue number last year.

And that was the seasonality pattern change that we were talking about. I hope that answers your question.

Louise Li -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you very much. Very clear.

Donghao Yang -- Chief Financial Officer and Director

Sure.

Operator

The next question comes from Ingrid Zhang of UBS. Please go ahead.

Ingrid Zhang -- UBS -- Analyst

Hi, management. Thanks for taking my question. I have three questions. The first is about the brands.

I recall that in the last quarter, we commented that Pink Bear is expected to deliver strong growth this year among all the color brands. Would you please update on the sales trend in the past quarter of Pink Bear? And also for the skincare brands, we'd like to see that DR. WU sales started taking off in the second quarter. But would you share with us our new product launch plans in the second half? And also when will we expect the growth of like Eve Lom and Galénic brands to take off like DR.

WU's? And second question is about the marketing cost. Would you mind to share a bit color about our ROI maybe by a company level or by channels versus peers? Just want to get a feeling about where we are compared with the industry. And the last question is about the organization structure. Our -- would you please share with us maybe some color about our resource allocation among different online channels and, say, social marketing values in terms of personnel, marketing budgets, etc? Many thanks.

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

Thank you, Ingrid, for the question. So if I remember correctly, so the first question is about our investment plan on the skincare category. So right now, we are spending more and more effort to grow our skincare brands. So DR.

WU is growing really fast. And also, we see a very -- also the very fast growth coming from Pink Bear. So the reason we launched Pink Bear is that so when the Perfect Diary is taking a premiumization trend, so the price point of Perfect Diary is moving up. So we see the white space under the Perfect Diary price point.

So we need Pink Bear to take the market share when Perfect Diary is moving up. So we see right now, based on the initial sales results of Pink Bear in the past four months, it is exceeding our expectation because we think that the Pink Bear's growth is very healthy, it's a very high ROI and a very fast growth. And also, the brand positioning is very clear. So the brand has strongly resonated with the younger generation of consumers, which means the brand is changing a lot of new users, the new entrants into the color category.

So I think the Pink Bear right now is on check. So Pink Bear right now is really focused on the lip gloss category. But for the second half of this year, the brand will be expanding to the eyeshadow category and also some base makeup as well. So we think the fast-growing channel of Pink Bear will continue, and that will help us to drive the growth of our value share gain in the color cosmetics.

So for DR. WU, so right now, we are already focusing on the hero product. But because DR. WU has a very strong product lineup architecture, so we think in the Q3 and Q4, we are going to expand to other essence items of DR.

WU. So the R&D of DR. WU is very strong, and the products have been proven in the past decade in the market. So the reason we just choose the first one to be very focused is that we think that one is very competitive in the market, and the product performance is exceeding the consumers' expectation.

So we strengthened the brand equity by making the first hero item to become the No. 1 in this subcategory. So in Q2 -- in Q3 and Q4, we were expanding the essence line, expanding into the facial mask line, and also other special items as well. So we think the new product launch and expansion plan for DR.

WU will be very strong based on the existing product lineup. And then in the future, we are also devoting the resources in R&D and developing new products, new hero products for DR. WU as well. So for the third question about the ROI, so right now, because of the expansion in Douyin because of live streaming, so the cost structure in Douyin is more CPS-based, which means we pay a fixed cost of the sales.

So that is really helping us to improve in the ROI. So we think as long as we continue to devote resources into growing the revenue percentage in Douyin, the optimization of the ROI will continue.

Ingrid Zhang -- UBS -- Analyst

Thanks, David. My last question was about the organization structure, our resource allocation among different online channels and social marketing values in terms of personnel, marketing budgets, etc, say how many people we have for the Douyin [Inaudible] on-channel operation.

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

I cannot remember the number of the people working in Douyin [Inaudible] right now. But in the past months, we were having the strategy review for our past half year and we see a demand that we need to allocate more talent into the fast-growing channel and also fast-growing brands because of the -- we have a very proficient talent pool based on our management training program. And also, we are getting a lot of very experienced people from the industry to join us as well. So we think we have sufficient talent to manage the growth of the different channels.

In terms of brand building, brand building is one of the key focus for Yatsen Group. So in the past half year, so we hired very talented people, traditional beauty conglomerates. And then they brought in a lot of experiences in brand building. So we are strengthening the brand equity in Perfect Diary and also our other brands as well.

So we think the investment in brand building will continue to take a bigger percentage of our sales and marketing expense.

Ingrid Zhang -- UBS -- Analyst

That makes sense, David.

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

Thank you.

Operator

The next question comes from Casper Shi of CICC. Please go ahead.

Unknown speaker

Hi, this is Casper from CICC. Thank you for taking my question. My first question is about the pace of introducing new products or new brands because we noticed that recently the pace of introducing new brands is slower than before. So I wonder if the time spent for the new product development is longer now.

And the second question is about the skincare products of the main brand, Perfect Diary, so could you share a bit color about the recent sales performance and maybe our future plans of the new brand development especially in the skincare category? Thank you.

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

I think in the first half of this year, so we spent more and more effort in developing better products in -- for our [Inaudible] brands. So initially, we took a better and fewer strategy to come up with a very innovative and long-lasting performance SKUs. For example, the loose powder we just launched, it takes longer than our traditional products to develop. But the technology and also the Smartlock, the proprietary technology, right now, it's becoming a very strong driver to helping the product to gaining share in the market.

So if we look at the loose powder, and then we believe this one will become a very important milestone of Perfect Diary because, as we all know, the loose powder category is one of the -- I would say, the strategic focus of one of our very important competitors in this market, so which means when we are gaining share in loose powder, it's actually helping us to become more competitive in the market by head-to-head comparison to our main competitor. So you're right that in the first half, we are spending more efforts to developing really competitive products. It takes longer time. But for the second half of this year, we will see a higher frequency of launch of new products.

That is mainly because ever since like last Q4 and the first two quarters this year, we have been preparing for very innovative product launch in the market. So we just launched our -- the makeup remover oil. And also, we are launching some other new items as well. So for our lipstick, we are going to have a very breakthrough formula which we are going to launch right before the Singles' Day.

And then for our eyeshadow palette, we just launched the first eyeshadow palette, which has become the blockbuster of the eyeshadow category this year. And then right before Singles' Day, we will see a lot of new SKU launching among our existing brands, not only Perfect Diary but also Little Ondine, Pink Bear, and also our skincare brands. So we are confident about our initiative -- new initiative pipeline in the second half of this year.

Unknown speaker

OK. Yes. The second question is about the skincare products of our main brand Perfect Diary. So could you give us some details about the sales performance in Q2 and maybe the guidance into Q3 and Q4?

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

So skincare products of Perfect Diary is similar to color lens and also male skincare products, which will be the category expansion of Perfect Diary brand. So for the skincare products we launched for -- in our off-line stores, and now we see the percentage of the skincare product lineup as the total revenue of our off-line stores has been continuously growing. And based on the initial feedback from our customers, they believe those like skincare items is actually helping to help them better apply their makeup. So I believe the product performance has been proven and also be well received by the consumers and will be -- so after a test period, we're expanding the skincare product items into other channels as well.

So looking forward, we will be taking like a higher percentage of the total revenue of Perfect Diary.

Unknown speaker

OK. Thank you very much about very detailed explanation and I have no other question. Thank you.

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

Thank you.

Operator

The next question comes from Kevin Xiang of 86Research. Please go ahead.

Kevin Xiang -- 86 Research -- Analyst

Hi, management for taking my questions. I have two quick questions. The first one is about the data security. So how does the company evaluate the potential impact from data security-related regulation? Because based on our understanding, on the one hand, our customer insight and product development process is really data-driven.

On the other hand, the firm usually spends a lot of dollar in targeted marketing. So I was just wondering if the marketing ROI will be diluted post this sort of database regulation. This is the first one. The second one is about the management team.

Because our ex-COO, Vincent, resigned due to health reasons. So what have we done to ensure the stable operation and transition? And how do we reallocate the responsibilities of COO to other members?

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

Kevin, thank you for your question. The first one is about the data security law, so right now, our legal counsel is reviewing the draft legislation on data security. So the preliminary view is that data security will not impact Yatsen too much because Yatsen obtained its customer data mainly through the online platforms like Tmall. So the data from Tmall are pretty well protected.

So data obtained for our private domain channels provided voluntarily by consumers. So -- and also, we have very strict data security measures in place to prevent the abuse. So I think overall, our assessment on the data security law's impact on the company is something that we believe will not be very big. The second question related to our co-founders recently.

So because of the health issue, he actually left the company around in April, so we started the transition in Q2 already. So originally, he is taking a big responsibility of the company's operation. And because we have the second-tier management and also my co-founder, Jianhua, is taking the majority part of Vincent's responsibility. So in the past five months, we see the operation went quite smooth.

And also we are taking the new initiative to sharpen our growth model. So I think the team's morale and also the team's operational efficiency is still in line with our expectations. Although the team has been facing a very competitive environment from the industry and also a very disturbing macroeconomic environment, I believe the team right now has been quite, I would say, confident about the initiatives we are taking. We believe we are heading into the right direction, and then we are sharpening our growth model.

And also, we see some initial success coming from our brand expansion and also our sales growth in future category. So all those are the some of the very important milestones we are making. So looking forward, I believe the organization has been moving to the next stage, and then we will continue to work on what we believe will be the right direction. And then we will be long-term-focused, and we will continue to grow the existing brand portfolios and then gaining more share in the cosmetics industry.

Kevin Xiang -- 86 Research -- Analyst

Thank you, David. That's very helpful. I have no more questions.

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

Thank you so much.

Operator

And that concludes the question-and-answer session. I would like to turn the conference back over to management for any additional or closing comments.

Irene Lyu -- Head of Strategic Investments and Capital Markets

Thanks, everyone, for joining us today. If you have any further questions, please feel free to contact us at Yatsen directly or TPG Investor Relations. Our company information for IR in both China and the U.S. can be found on today's press release.

Thanks, and have a great day.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

Irene Lyu -- Head of Strategic Investments and Capital Markets

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

Donghao Yang -- Chief Financial Officer and Director

Dustin Wei -- Morgan Stanley -- Analyst

Christine Cho -- Goldman Sachs -- Analyst

Louise Li -- Bank of America Merrill Lynch -- Analyst

Ingrid Zhang -- UBS -- Analyst

Unknown speaker

Kevin Xiang -- 86 Research -- Analyst

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