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MINISO Group Holding Limited (MNSO) Q1 2022 Earnings Call Transcript

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MNSO earnings call for the period ending September 30, 2021.

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MINISO Group Holding Limited (MNSO -1.83%)
Q1 2022 Earnings Call
Nov 18, 2021, 7:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to MINISO Group Holding Limited earnings conference call for the first quarter of fiscal year 2022 that ended September 13, 2021. [Operator instructions] Now, I'd like to hand the conference over to your host and speaker today, Mr. Eason Zhang, director of capital markets. Please go ahead.

Eason Zhang -- Director of Investor Relations

Thank you, Maru. Hello, everyone, and thank you, all, for joining us on today's call. The company has announced its quarterly financial results earlier today. An earnings release is now available on our investor relations website, ir.miniso.com.

Today, you will hear from our chairman and CEO, Mr. Jack Guofu Ye, who will start the call with an overview of our business. He will be followed by our CFO, Mr. Steven Zhang, who will address our financial results in more detail before we take your questions.

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Before continuing, I'd like to refer you to our safe harbor statement in our earnings 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 with 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 will now turn the call over to Jack. Please go ahead, sir.

Guofu Ye -- Chairman and Chief Executive Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

Thank you. Hello, everyone, and welcome to MINISO's September quarter [Technical difficulty] Thank you. Hello, everyone, and welcome to MINISO's September quarter 2021 earnings conference call. During this quarter, we added 161 stores to our global store network, including 122 MINISO stores and 39 TOP TOY stores.

Revenue reached RMB 2.654 billion, up 28% year over year, exceeding the high end of our guidance range. Operating profit was RMB 213.5 million. Operating margin of 8% was the highest in recent seven quarters. Adjusted net profit was RMB 184.2 million, up 80% year over year.

Adjusted net margin of 6.9% was the highest in recent six quarters since the pandemic broke out. In spite of the headwind from the resurgences of pandemic, rainstorm disaster, and weak consumption data in domestic market in this quarter, we focused on the elements of our business that are within our control, driving product innovation, enhancing inventory management, improving operating efficiency, and executing our omnichannel strategy. These efforts yield positive results as we kicked off fiscal year 2022 with our solid performance, demonstrating the resilience of our business model and core competitive strengths. On today's call, I will share major developments we have made in MINISO brand's domestic operation, international operations, and TOP TOY in this quarter.

Guofu Ye -- Chairman and Chief Executive Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

First, let's start with the operations of our flagship brand, MINISO in China. Offline retailers and consumer confidence were challenged by the continued spread of the delta variant nationwide since late July. This regional outbreak was reported as the most widely spread wave since the first quarter of 2020. Despite the shelter in place during this quarter, domestic operations of MINISO brand recorded a revenue of RMB 1.87 billion, up 13% year over year, driven by a 16% year-over-year increase in average store count and a 58% year-over-year increase in our e-commerce business.

Guofu Ye -- Chairman and Chief Executive Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

MINISO added 96 stores on a net basis during this quarter and ended September with more than 3,000 stores in China, marking a new milestone eight-year history. As we continue to penetrate into more and more tier three and below cities and unlock these new markets, approximately 80% of newly added stores in this quarter are from there. By the end of September, the geographic reach of MINISO stores span across about 330 cities in China, including four tier one cities, 46 tier two cities, and about 280 cities, tier three and below. According to government statistics, there are about 2,200 cities in China, including 300 prefectural level cities and nearly 1,900 counties.

In addition, there are 91 cities in China with populations of more than 5 million, and 18 cities with population of more than 10 million. As China's globalization continues, there will be a large number of new shopping malls suitable for new MINISO stores every year. Although resurgences of the pandemic in China could bring short-term pressure, MINISO's long-term addressable market in China remains huge.

Guofu Ye -- Chairman and Chief Executive Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

Revenue from e-commerce was around RMB 186 million, up 58% year over year. Revenue from O2O business was around RMB 19 million, up 126% year over year. In total, online business, including e-commerce and O2O contributed 10% of our revenue. MINISO is committed to deepening consumer engagement and driving omnichannel experience.

We firmly believe that the success of our omnichannel strategy will help improve MINISO's brand awareness, user retention, and repurchase. Starting this year, we have enhanced all omnichannel strategy to become a key focus and a growth engine of the company. Supported by our 3,000-plus offline stores nationwide, we have established stable corporation within O2O platforms and accumulated a significant amount of private traffic. Let me give you some examples.

Most active user of MINISO's official WeChat Mini program surpassed 6 million in late September and private traffic of MINISO brand surpassed 12 million by the end of September. In fiscal year 2021, there were a total of about 300 million orders in MINISO stores. With that figure in mind, we believe MINISO's private traffic has huge potential for future growth.

Guofu Ye -- Chairman and Chief Executive Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

Moving to MINISO's overseas operations. Overall, sales of MINISO's overseas stores moved further along the path of recovery in this quarter, with overall GMV recorded to about 70% of the same period in 2019, GMV in distributor markets recovered to about 75% of the same period in 2019, and GMV of subsidiary markets recovered to about 50% of the same period in 2019. Revenue generated from international operations was RMB 623 million, up 78% year over year and 80% quarter over quarter. Thanks to the improved sales recovery in important markets, such as Mexico, and a restocking by distributors for the upcoming holiday season.

Guofu Ye -- Chairman and Chief Executive Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

Our total number of overseas stores reached 1,836 by the end of September, with net opening of 26 new stores during the quarter compared to a net opening of eight stores in the same period 2020. More than 60% of these new stores were located in Europe, Middle East, and North Africa. While sales recovery stabilized during the past several quarters at a level sufficient to support moderate expansion, there were 157 suspended stores in overseas markets by the end of September, down from 205 a quarter ago.

Guofu Ye -- Chairman and Chief Executive Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

Moving to TOP TOY. During the quarter, we added 39 TOP TOY stores on a net basis, bringing total TOP TOY stores to 72 by the end of September, including nine DreamWorks and 63 Collection stores. More than 90% of TOP TOY stores are opened by retail partners. With its rapid expansion this quarter, TOP TOY's revenue increased by 64% sequentially and exceeded RMB 100 million for the first time.

Guofu Ye -- Chairman and Chief Executive Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

TOP TOY has been committed to multi-category strategy since day one because we firmly believe that our toys should not be limited to blind boxes and that there should be many other potential categories to meet diversified needs of the Generation Z. One such category is toy bricks. After years of consumer education, the toy bricks category has become one of the most popular categories in China's toy market. Meanwhile, certain promise in domestic brands have emerged, but the challenge for these young brands is that they are facing a fragmented market in terms of channels, data, and productivity.

TOP TOY solution for this problem is the launch of the first-ever Toy Brick Festival in China, a major campaign launched by TOP TOY together with several domestic brands. By leveraging TOP TOY's unmatched omnichannel capabilities, this activity combined online and offline channels to increase exposure of toy bricks with Chinese elements and boost sales.

Guofu Ye -- Chairman and Chief Executive Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

Going forward, we plan to allocate more TOP TOY shelves for domestic brands to help them introduce their flagship products, especially in our DreamWorks stores. We also plan to encourage our consumer to engage more with toy brick products embedded with Chinese elements so they can learn more about the value of Chinese toy bricks. This campaign is a good attempt for TOP TOY to use its omnichannel capabilities to empower traditional toy brands. Going forward, we'll continue to focus on integrating online and offline channels to improve TOP TOY's omnichannel experience and explore more potential trendy toy categories to effectively meet customer demands.

Guofu Ye -- Chairman and Chief Executive Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

Recently, we held the fist TOP TOY show, TTS, in Guangzhou, an art toy carnival featuring approximately 200 brands and over 1,000 artists. This two-and-a-half day festival for art toy fans attracted more than 100,000 [Inaudible] visits and accumulated 200 million clicks in Douyin and Weibo, respectively. TTS was one of the largest art toy exhibitions in China during the second half of 2021 in terms of scale and number of participating brands. Through this very successful exhibition, TOP TOY has deepened its customer insights, enhanced consumer retention, and expanded the influence of the TOP TOY brand.

Guofu Ye -- Chairman and Chief Executive Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

In terms of TOP TOY's proprietary products, we have been continuously discovering talented designers and work with them. Take [Inaudible] co-branding IP as an example. Sales of its new blind boxes stabilized within top three SKUs of TOP TOY during this quarter. TOP TOY is still an early stage of building core capabilities and establishing brand awareness.

This leaves its merchandise gross margin huge room for improvement. Going forward, we are confident that its gross margin will improve as its operating leverage is gradually released, driven by the expansion of its scale and the maturity of its proprietary IPs and products changes.

Guofu Ye -- Chairman and Chief Executive Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

This concludes my prepared remarks. I'll now turn the call over to our CFO, Steve Zhang, for financial review.

Steven Zhang -- Chief Financial Officer

Thank you. Hello, everyone. I will start my remarks with a review of the September quarter financial results, and then provide additional color regarding the December quarter. Please note that I will be referring to non-IFRS measures, which have exclude share-based compensation expense and certain non-recurring items.

Revenue in September quarter was RMB 2.664 billion, increased by 28% year over year and 7% quarter over quarter, above the high end of the company's guidance range of RMB 2.45 billion to RMB 2.65 billion. The year-over-year increase was primarily driven by the growth of our domestic operations and the recovery of our international operations. Revenue generated from our domestic operations was to RMB 2.03 billion, increased by 18% year or a year. Revenue generated from domestic operations of MINISO brand RMB 1.87 billion, increased by 13% year over year, mainly driven by a year-over-year increase of 16% in average store count and a year-over-year growth of 80% -- 58% in our e-commerce business.

Revenue generated from TOP TOY was RMB 109 million compared to [Inaudible] in the same period of 2020. Revenue generated from our international operations was RMB 623 million, increased by 78% year over year, reflecting an improved recovery of sales in certain markets and the restocking by distributors for the upcoming holiday season. From a quarter-over-quarter perspective, revenue from our domestic operations increased by 4%. As you may know that our business is subject to seasonality, typically with a stronger performance in September quarter than in June quarter.

For example, our domestic revenue increased by 16% sequentially in September quarter of 2019, which represented a normalized seasonality before pandemic. Apparently, the weak seasonality in this year was primarily due to the new wave of pandemic from late July. We estimate the GMV loss for those influenced stores in China during this quarter was north of RMB 200 million. Revenue from international operations increased by 18% sequentially.

According to National Bureau of Statistics in China, in the first three quarter of 2021, retail sales of supermarket, convenience stores, department stores, and the specialty stores increased by an average of 16% compared to the same period of 2020. On an apples-to-apples basis, MINISO's gross domestic sales increased by 40% during the same period, demonstrating the resilience in our business model and our core capabilities. Gross profit was RMB 728 million, increased by 39% year over year and 14% quarter over quarter. Gross margin was 27.4% as compared to 25.2% a year ago and 25.8% a quarter ago.

Both over year-over-year and quarter-over-quarter increase in gross margin was primarily related to change of revenue mix. Our more profitable international operations accounted for 24% of our revenue in this quarter, the highest percentage in recent six quarters compared to 17% a year ago and 21% a quarter ago. Selling and distribution expense were RMB 323 million, increased by 40% year over year and 22% quarter over quarter. The year-over-year increase was primarily attributed to increased personnel-related expense, logistic expense, and marketing expense.

As with the year-over-year revenue growth and the brand awareness improvement for both MINISO and TOP TOY, and to a lesser extent, increased license expense as with the increase in revenue contribution from IP products. The quarter-over-quarter increase was primarily attributed to logistic expense and personnel-related. G&A expense were RMB 200 million, increased by 29% year over year and 6% quarter over quarter year. The year-over-year increase was primarily due to increased personnel-related expense and IT expense for our new initiatives, such as TOP TOY, partly offset by a decrease in the potential service fee related to our IPO in the same period of 2020.

The quarter-over-quarter increase was primarily due to increased personnel-related expense. Turning into our profitability. Operating profit was RMB 214 million compared to a loss of RMB 2 million a year ago and a profit of RMB 108 million a quarter ago. Operating margin of 8% was the highest in the recent seven quarters.

Adjusted net profit was RMB 184 million, increased by 80% year over year and 27% quarter over quarter. Adjusted net margin was 6.9%, the highest in recent six quarters, compared to 4.9% a year ago and 5.9% a quarter ago. Adjusted basic and diluted earnings per ADS were RMB 0.60 in this quarter compared to RMB 0.40 a year ago and RMB 0.48 a quarter ago. Turning to our balance sheet.

As of September 30, 2021, the combined balance of our cash, cash equivalents, restricted cash, and other investment was RMB 6.14 billion compared to RMB 6.88 billion as of June 30, 2021. Turning to our working capital. Turnover of inventory and the trade receivable remained flat sequentially. Looking ahead into December quarter of 2021, we expect our total revenue to be between RMB 2.5 billion to RMB 2.7 billion, which represent an increase of 9% to 18% year over year.

Looking ahead, we remain confident in our ability to continue to deliver shareholder value, attracting likeminded stakeholders, and enable our consumer to better enjoy life's little surprise. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Questions & Answers:


Operator

Thank you. We are now beginning the question-and-answer session. Your first question today comes from the line of Michelle Cheng from Goldman Sachs. Line is open.

Please go ahead, Michelle.

Michelle Cheng -- Goldman Sachs -- Analyst

Yeah. Thank you. [Foreign language]

Eason Zhang -- Director of Investor Relations

[Foreign language]

Michelle Cheng -- Goldman Sachs -- Analyst

[Foreign language] So, I have two questions for the management. For the first one is the company has been turning more aggressive expanding in U.S. and European market. In the U.S., we're also seeing the new concept like 10 Below.

So can management share the cost -- the strategies regarding the overseas expansion. And my second question is about IP development. So, we are seeing that for MINISO brand, there are new -- there are some price adjustment for the IP product. And can management share whether we are aggressively expanding the IP product contribution for MINISO brand? And for TOP TOY, management just mentioned that the proprietary IP development has been quite successful.

So can you share with us what's the outlook and development stage? Thank you.

Guofu Ye -- Chairman and Chief Executive Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

OK. Hi, Michelle. This is Jack, the CEO of MINISO Group, and thank you very much for your questions. And for your first questions about our, you know, strategies in the U.S.

market specifically on the $10 N' Under new concept. Here's my answer. You know, we opened $10 N' Under concept in MINISO stores in the U.S. in October.

Three in California and one in Virginia. And the company now has some, you know, recent business development plan in the U.S. market that is based on our, you know, observation that the U.S. market has a relative good recovery in terms of sales in the last, you know, consecutive three months.

These same stores in the U.S. market in this quarter reached nearly around 90% compared with the same period in 2019. And in terms of, you know, this concept of $10 N' Under, you are right that according to our customer insight, local consumers in the United States market, they have a great demand for household products under $10. But the demand is not well met at the moment.

So, with MINISO's supply chain strength, we decided to give the concept a try. So this $10 N' Under concept is still in its early stages, and we will definitely show more in due course. Thank you.

Guofu Ye -- Chairman and Chief Executive Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

OK. And for your second questions on the company's IP strategy, Michelle, you know, we will introduce the IP strategy separately for our MINISO brand and TOP TOY brand. First for MINISO brand, you know, the company has, you know, recently gradually adjusted our pricing strategy of the newly launched IP products. And the gross profit margin of these newly launched IP products is higher than that of the non IP products.

After a period of observation, we have found that MINISO's, you know, conversion rate and, you know, our cross-selling rate remained stable after this new IP pricing strategy was adopted several months ago. And the sales contribution of IP products now is at about 20% to 25%. And for MINISO, the majority of our product is still non IP products. So, we're definitely committed to our, you know, valid points at this moment.

And in terms of TOP TOY, by the end of September, TOP TOY has launched a total of eight SKU for its proprietary products, and two more that --than in the quarter of June. So this includes the blind box as we mentioned in CEO prepared remarks. [Inaudible] 52:13 blind box. And the second is, you know, a badge blind box of Twinkle, and among which, the [Inaudible] blind box.

It's so small, it sells. It was quite encouraging and ranked in the top three SKUs in the whole categories of TOP TOY. And for the Twinkle badge blind boxes, it was introduced on, you know, September 30th. And the gross margin of our TOP TOY's proprietary products now has stabilized about 60% -- above 60%.

And in September quarter, our proprietary has contributed 5% of total sales of TOP TOY and 50% of them is from our, you know, proprietary IP and co-branding IP and another, respectively. And, you know, we also launched our [Inaudible] in our TOP TOY mini program in -- last quarter. And it was a huge success and was warmly welcomed by the fans. For example, this mini program, it'll launch us three to four SKUs every month with each of the sales tripled the average sales of TOP TOY's average.

Although products of these [Inaudible] have relative lower gross margin than artist, but its turnover is much relative faster than it can be -- that every time it can be nearly sold out within 10 minutes after its launch. Thank you.

Operator

Thank you. The next question is from the line of Lucy Yu from Bank of America Merrill Lynch. Line is open. Please go ahead, Lucy.

Lucy Yu -- Bank of America Merrill Lynch -- Analyst

[Foreign language] So my question is regarding fourth quarter and quarter-to-date sales momentum in both China and overseas markets. And the second question is regarding the guidance for the next quarter of 2.5 billion to 2.7 billon. And could you please give some quick breakdown by China, overseas, as well as, TOP TOY. Thank you.

Steven Zhang -- Chief Financial Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

OK. Hi, Lucy. Thank you for a question. This is Steven, CFO of MINISO.

And I will answer questions about, you know, the update on the October operations. You know, as you ask me -- you have known that the latest resurgence of the pandemic is reported to be the most widely spread wave since the March of 2020. And, you know, the cold weather wind has definitely increased the difficulties with [Inaudible] COVID pandemic. But in MINISO, we currently estimate that its influence will be smaller than that of the [Inaudible] late July.

So considering that it has, you know, spread into about the provinces so our best estimate at the moment that it will be somewhere between the -- the loss in the GMV will be somewhere between, you know, RMB 15 million of, you know, Guangzhou pandemic in late May and RMB 200 million of the potential damage in late July.

Steven Zhang -- Chief Financial Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

And in terms of, you know, overseas -- in terms of overseas markets, in October, the number of suspended stores by the end of October were 118 compared to, as we mentioned earlier, 157. And in terms of sales recovery, you know, it has absolutely sequential improvements compared to that of September. And the overall GMV overseas market has recovered to 70% to 75% of that in the same period of 2019, including 80% recovered in our distributor markets and 60% recovered in our subsidiary markets. Thank you.

Steven Zhang -- Chief Financial Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

So, Lucy, for your second question on the revenue guidance, so let me just give you a simple breakdown. Actually, we have made this estimation based on, you know, the current recovery [Inaudible] and overseas operations in terms of December quarter revenue. Absolutely. And our current estimate that it will be pressured by, you know, the pandemic recovery, especially in domestic markets.

In terms of overseas domestic -- in terms of overseas operations, traditionally, due to, you know, the holiday season, especially the Christmas, so the overseas market will be stronger sequentially. And for TOP TOY business, you know, because its store numbers is kept to -- has been increasing, and we, you know, [Inaudible] the store has opened for a while is increasing. We estimate that the revenue of TOP TOY will also improve sequentially. But here, I want to stress that, you know, due to the pandemic resurgences in China, and it has some level of this decrease.

So based on these factors, we have given this revenue guidance for the last quarter.

Operator

Thank you. The next question is from the line of Wenhui Song from CICC. Line is open. Please go ahead, Wenhui.

Wenhui Song -- CICC -- Analys

[Foreign language]

Eason Zhang -- Director of Investor Relations

[Foreign language]

Wenhui Song -- CICC -- Analys

[Foreign language] Good evening, management. I have two questions. The first is that we can see that the overseas business improves month by month. So what's your store opening plan for the next year, I mean, 2022? And to what extent can the overseas business to be breakeven or profitable? And the next question is that are the newly opened overseas stores mainly from old franchisees or new franchisees? Thanks.

Steven Zhang -- Chief Financial Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

OK. Hi, Wenhui. This is Steven. So, I'll answer you first questions.

You know, traditionally, MINISO will review our whole year performance at the end of calendar year. And based on that of review, we will make a detailed working plan or budget for the next year. So, as of today, you know, we do not have, you know, a specific plan at our mind. But what I want to stress here that, you know, MINISO has listed both as a public company for several quarters.

And from all our past performances during the past several quarters, we have shown that our, you know, resilience in our business model and our core capabilities. And that gives the whole management confidence. So we can stick to our, you know, strategy, in both at-home and abroad, and listen to the, you know, rollout and the rapid growth of TOP TOY. We are very confident of that.

And in terms of, you know, the overseas stores, here's what we think. For those areas that, you know, that COVID is controllable, maybe in the first half of next year, we will, you know -- we do not have detailed plan, you know, to make a very rapid development at these areas because the pandemic resurgence will be very harmful to our business in that market. But for those countries and markets that COVID is well-controlled, such as the Europe and the U.S., as we have shown earlier that we have, you know, begun some of our business development and as we operate in the U.S. market.

Thank you.

Steven Zhang -- Chief Financial Officer

[Foreign language]

Eason Zhang -- Director of Investor Relations

Hi, Wenhui. This is Steven. For your second question about the store opening of overseas markets, you know, in the September quarter, our subsidiary countries, there were some of them have, you know, opened a lot of stores. I would give you some examples, such as India.

We opened six course in that. And as we have mentioned earlier that in the U.S. market, we opened four stores in this quarter. And in Indonesia, we opened one store.

Absolutely, our distributor countries -- use our distributor partners, they are also opening new stores as they did in the past several quarters. For example, in Spain, the distributor in Spain opened three stores this quarter and three in Italy. So in general, you know, the recovery of overseas markets, we have high confidence that in the coming quarters, overseas markets and our distributor partners will gradually recover to, you know, a modest expansion. Thank you.

Operator

Thank you. The next question is from the line of Xiaofang Xu from Citi. Line is open. Please go ahead, Xiaofang.

Xiaofang Xu -- Citi -- Analyst

[Foreign language] Could you please give us more detailed information about the expenses of TOP TOY, that is the operating expenses and other expenses? When can we make profit on TOP TOY, in the coming half of the year, or it may be need year or more years? Thank you.

Steven Zhang -- Chief Financial Officer

[Foreign language]

Xiaofang Xu -- Citi -- Analyst

[Foreign language]

Eason Zhang -- Director of Investor Relations

OK. Hi, Xiaofang. Thank you. Thank you for your question.

This is -- hi, Xiaofang.

Xiaofang Xu -- Citi -- Analyst

Hi.

Eason Zhang -- Director of Investor Relations

This is Steven. I will answer your questions about the TOP TOY's margin profile. You know, for TOP TOY, it's still at it's, you know, early stage of rapid growth. So we are continuously make some investment of TOP TOY, including its team building, including its marketing to improve its branding -- brand awareness, and including in the IP side.

So, you can look at the operating expense ratio of TOP TOY. It's at a relative high level at this moment. For example, in the past September quarter, the TOP TOY's operating expense was about RMB 40 million. And now, absolutely, TOP TOY is in a loss status.

But we do believe that the development of TOP TOY's scale and its -- the mature of its proprietary products, TOP TOY's merchandise gross margin will improve as we have shared earlier that at the early of 2021, TOP TOY's merchandise gross margin was about less than 40%, but its merchandise gross margin has reached about the 5% by the end of September and beginning of October. So we are highly confident that by the mid of next year, its merchandise gross margin can reach as high as 50%. So, if we can do that and based on its development next year, we do believe that TOP TOY can reach breakeven on a monthly basis at some point at the second half of next year. Thank you very much.

Xiaofang Xu -- Citi -- Analyst

Very clear. Thank you.

Operator

[Operator signoff]

Duration: 77 minutes

Call participants:

Eason Zhang -- Director of Investor Relations

Guofu Ye -- Chairman and Chief Executive Officer

Steven Zhang -- Chief Financial Officer

Michelle Cheng -- Goldman Sachs -- Analyst

Lucy Yu -- Bank of America Merrill Lynch -- Analyst

Wenhui Song -- CICC -- Analys

Xiaofang Xu -- Citi -- Analyst

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