MINISO Group Holding Limited (MNSO) Q2 2022 Earnings Call Transcript

MINISO Group Holding Limited (MNSO -1.59%)
Q2 2022 Earnings Call
Mar 03, 2022, 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 second quarter of fiscal year 2022, that ending December 31, 2021. [Operator instructions] Now, I like to hand the conference over to your host speaker today, Mr. Eason Zhang, the director of capital markets. Please go ahead, Eason.

Eason Zhang -- Director of Capital Markets

Thank you. 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 at ir.miniso.com.

Today, you will hear from our chairman and CEO, Mr. 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.

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 Mr. Ye.

Please go ahead, sir.

Guofu Ye -- Chairman and Chief Executive Officer

[Foreign language] Thank you. Hello, everyone, and welcome to MINISO December quarter 2021 earnings conference call. On today's call, I will share major developments of our business and then talk about the strategic upgrade of the MINISO brand. [Foreign language] I will begin with business review.

During this quarter, we added 191 stores to all global store networks, including 174 MINISO stores and 17 TOP TOY stores. Revenue reached RMB 2.77 billion, up 21% year over year, exceeding the high end of our guidance range. Adjusted net profit was RMB 214 million, up 155% year over year. Adjusted net margin of 7.7% was the highest in recent in seven quarters since the pandemic broke out.

During calendar year 2021, we added 615 stores to our global stores network, including 531 MINISO stores and 84 TOP TOY stores. Revenue reach RMB $10.13 billion, up 34% year over year. Adjusted net profit was about RMB 619 million, up 19% year over year. Adjusted net margin was 6.8%, compared to 4.8% in calendar year 2020.

[Foreign language] In December quarter, MINISO brand recorded a revenue of RMB 2.6 billion, up 17% year over year, revenue from China was RMB 1.88 billion, up 6% year over year. Revenue from overseas market for RMB 717 million, up 55% year over year. In China, our offline stores recorded a higher recovery rate than industrial average in October. Total sales increased by 9% year over year from the high [Inaudible] of last October, an increase by 16% from the same period in 2019.

Sales recovery rate is about 97% of the same period in 2019, now reached Tier 1 and two cities recover to 95% and Tier 3 cities recover to more than 100%. However, this growth was interrupted by a new wave of the pandemic in November, when total sales was down 6% year over year and 7% compared to the same period in 2019, separately. Total sales in December was down 7% compared to the same period in 2019. But, thanks to the operating measures to end the year and promotion campaign, total sales was down by only 1% year over year.

[Foreign language] MINISO added 133 stores on net visits during this quarter and ended December with 3,168 in China was a net addition 400 MINISO stores in calendar year 2021. We have successfully completed our store expansion plan and nearly double the number of 225 in calendar year 2020. Which demonstrates our unrivaled expansion ability and retail partners strong confidence in our business. As we continue to penetrate into Tier 3 and global cities and unlock new markets, approximately 60% of newly added sports in this quarter from there.

By the end of December, we had more than 1,300 stores located in Tier 3 and lower cities. [Foreign language] Moving to our online business. Revenue from e-commerce with RMB 170 million. Revenue from O2O business was around RMB 113 million, up 130% year over year.

In total, online business including e-commerce and O2O, contributed 11% of our revenue. In terms of user operations, serves contribution from members exceeded 50% for the first time in calendar year 2021. Meanwhile, we continue to strategically focus on private traffic and WeChat mini program. Our WeChat mini program had nearly $7.8 million MAUs in December, and our private traffic had accumulated over $14 million consumers.

MINISO is strategically committed to depend on consumer engagement and driving repurchased by providing improved omnichannel experience to them. Take our very successful IP products in this quarter, Lotso as an example. For the first time, we managed to invite consumers to participate into product development process. Consumers involved were asked to vote for their favorite product design.

We also launched this [Inaudible] for this IP product online. The statistics from the [Inaudible] were found useful in production projection and merchandise preparation for offline stores. A lots of IP products went viral on social media, attracting more than 12 million page views on [Inaudible]. The secret to this success is to invite young people to become co-creators of our products, so that young people can have immersive and more friendly new shopping experience.

Like what we did in Lotso's case, we shall keep testing this tactic while driving the stickiness and repurchases and eventually helped create a wonderful lifestyle for young consumers globally. [Foreign language] Moving to overseas operations, revenue for December quarter reached RMB 770 million, up 55% year over year and 15% quarter-over-quarter. Thanks to the recovery from the pandemic and holiday spending. Overall, GMV recorded to -- recover to about 80% over the same period in 2019, up 26% year over year, with distributor markets recovered to 80%, and directly operated markets 70% over the same period in 2019.

GMV in the U.S. market, for example, increased by 40% from the same period in 2019, and Europe increased by about 60%. Asian countries as a whole also delivered significant improvements from previous quarters. The positive trend in overseas markets has enhanced our confidence to actively expand our business off the pandemic.

[Foreign language] Average sales per store in overseas marketing this quarter recovered to 70% of the same period in 2019, up 20% year over year and 30% quarter-on-quarter. In the U.S. market, cells per store surpassed the level in the same period in 2019 and increased by 10%, after it recorded a recovery rate of 90% in the previous quarter. Sales per store recovered to 100% and 80% in Canada and Mexico, separately.

Total number of overseas stores reached 1,877 by the end of December, with net additions of 41 stores during the quarter. In calendar year 2021, we have surpassed all store expansion target and delivered that addition 131 stores. There were 76 suspended stores in overseas markets by the end of December, down from 157 such stores a quarter ago. [Foreign language] TOP TOY celebrated its first anniversary in December, and the first sub-brand incubated and X strategy, TOP TOY has made remarkable achievements in its first year.

Established a brand image as a global collection of art toys, forged a saddle promising omnichannel capabilities, enlarged product offerings of art toys and build a team of high potential talents. Revenue of TOP TOY was RMB 130 million, up 20% quarter-over-quarter. Total number of TOP TOY offline stores was 89 by December, including 13 DreamWorks dolls and 76 collection stores. Through this continuous efforts in online channels, TOP TOY has accumulated nearly 3 million fans and 1.5 million members.

[Foreign language] Product wise, TOP TOY continue to make breakthroughs. Proprietary products contribute -- contributed 8% offline sales and 30% of online stores in December, separately. Merchandise gross margin of all proprietary products reached about 65% and plays a positive role in improving overall gross margin. TOP TOY managed to combine EA Sports, another popular pop culture element among young people with art toys in an effort to attract consumers from different segments.

A partnership with ETG [Inaudible] gaming in January highlighted TOP TOY's leadership in the industry. [Inaudible] of the co-branding products from this corporation were encouraging and the far exceeded our expectation. For example, the 1000% [Inaudible] plus ETG figures was sold out in 48 hours, again, demonstrating TOP TOY's strong abilities of rapid product development and IP co-branding. Behind this collaboration is TOP TOY's never ending exploration to capture a various trending topics among young people to reshape consuming [Inaudible] and to enlarge addressable market of art toys.

[Foreign language] Next, I would like to introduce the strategic upgrade of MINISO brand. During the past eight years, MINISO brand has become a global household name demonstrated by our entrance into 99 countries and regions and our massive network of more than 5,000 stores worldwide. Enabling hundreds of millions of consumers around the world to enjoy life sticker surprise every year. It is very important for us to keep our strategy and brand positioning up-to-date.

And after careful deliberations, we have made the decision that 2022 will be the first year of an arrow to strategically upgrade MINISO brand. [Foreign language] In China, we plan to further upgrade MINISO brand with a value proposition of wonderful life on the basis of our established advantages in product quality and affordability. With the core of our brand upgrade strategy being from product recognition to brand recognition. We'll make efforts in the following three aspects closely around the topic of interest based consumption timing.

[Foreign language] Product wise, the upgrade does not necessarily mean raising prices of all of MINISO products. We currently estimate that prices of about 70% of our products will remain stable, and MINISO's brand promise to offer consumers value and affordability is not going to change. While new products will be more focused on interest based consumption by offering more [Inaudible] and playfulness than we used to. We believe the strategic upgrade in product philosophy will drive steady offering such new products, which have high premium and will fuel our future growth.

We are also building a robust pipeline of new blockbuster products of strategic importance to effectively capture more consumer mindshare. [Foreign language] Marketing wise, we plan to take a systematic approach and first launch branding campaigns in Tier 1 to two cities to enhance our brand image as a global brand. By leveraging our edges in appealing usefulness and playfulness products, and sticking to our core strategy of product driven brand upgrades. And we strive to build a value proposition and brand image representing wonderful life among consumers.

[Foreign language] We'll continue to penetrate into lower tier cities. In Tier 1 to two cities, will focus on optimizing the margin profile MINISO stores with key initiatives such as product mix optimization, brand image upgrade, and price range extension. We are also committed to omni channel strategy, enhance operations in private traffic and WeChat mini program, and ultimately drive business growth across online and offline channels. [Foreign language] When I found that MINISO branding just starting, it was a time when e-commerce was booming and the brick and mortar retail industry was experiencing a cold water, just like today, the pandemic has changed consumers shopping patterns and habits.

But neither the rising of e-commerce nor the pandemic or change consumers pursue a wonderful life. And it is the promise of MINISO's brand and reason behind our path to success that we enable consumers to enjoy life status surprise. Looking ahead in post-pandemic era, we are more capable and highly competent in constantly delivering long-term values to consumers and investors with our content offerings of products that are more appealing, useful and playful. That concludes my remarks.

I will now turn the call over to our CFO for financial review.

Steven Zhang -- Chief Financial Officer

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

Revenue in the quarter was RMB 2.77 billion, increased by 21% year over year and the 5% quarter-over-quarter. Above the high end of our guidance range of RMB 2.5 billion to RMB 2.7 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 RMB 2.06 billion increased by 12% year over year.

Revenue generated from the domestic operation over MINISO brand was RMB 1.88 billion increased by 6% year over year. Revenue generated from TOP TOY was RMB [Inaudible] compared to RMB 3 million in the same period of 2020. Revenue generated from our international operations was RMB 717 million and increased by 55% year over year, reflecting a consistent improvement of our sales and recovery in overseas markets as a whole. From quarter-over-quarter perspective, revenue from our domestic operations remain flat.

We estimated that the GMV loss follows influence the store in China during this quarter was a comparable to that in the previous quarter. Revenue from international operations increased by 15% sequentially. Gross profit was RMB 863 million, increased by 34% year over year, and a 19% quarter-over-quarter. Gross margin was 31.1%, compared to 28% a year ago and 27.4% of quarter growth.

Also, year over year and quarter-over-quarter increase was primarily due to; One, revenue recognition, a contribution of international operation increase from 21.1% in the same period of 2020 to 25.9% in this quarter. As you know, international operation typically has higher gross margin than domestic operation. And the number two, our expanding [Inaudible] and the IP product offerings and is associate a high gross margin in this quarter. Selling and the distribution expense were RMB 371 million, increased by 21% year over year, and a 15% quarter-over-quarter.

The year over year increase was primarily attributed to increase of personnel-related expense, licensing expense and the marketing expense, in line with the year over year revenue growth and the brand awareness improvement for both the MINISO and the TOP TOY. The quarter-over-quarter increase was primarily attributed to increases in licensing expense and the rental related expense. G&A expense were RMB 215 million increased by 34% year over year and the 7% quarter-over-quarter. Both the year over year and quarter-over-quarter increase was primarily due to increased depreciation and amortization expense of land use rights related to our headquarter building project, and to a laser extend increased personnel-related expense and their professional service fee.

Turning to our profitability. Operating profit was RMB 255 million, increased by 371% year over year, and the 20% quarter-over-quarter. Operating margin was 9.2%, compared to 2.4% a year ago and 8% a quarter ago. Adjusted net profit was RMB 240 million, increased by 155% year over year, and a 16% quarter-over-quarter.

Adjusted net margin was 7.7%, the highest in recent seven quarters, compared to 3.7% a year ago, and a 6.9%% a quarter ago. Adjusted basic and diluted earnings per ADS were RMB 0.72 in this quarter, compared to RMB 0.28 a year ago, and RMB 0.60 a quarter ago. Turning to our balance sheet. As of December end, the combined the balance of our cash, cash equivalents, restricted cash and other investment was RMB 5.37 billion, compared to RMB 6.14 billion as of end of September.

Turning to a working capital. Turnover of inventories and a trade receivable remained stable on both year over year and quarter-over-quarter base. Looking ahead into March quarter of 2022, we expect our total revenue to be between RMB 2.4 billion to RMB 2.7 billion, which would represent an increase over 7.7% to 21.1 year over year. In calendar year 2022, we currently expect to open about 400 MINISO stores in China and about 350 stores in overseas market.

As we continue to operate at a time of significant uncertainty in regards to the timetable of a pandemic, a recovery in our major market, we remain cautious in our outlook in terms of the sales and the stores expansion and the May update and adjustments in the operational plan based on the latest development of the pandemic. We are encouraged by our efficient working capital management and the strong recovery in both top line and the bottom line in this quarter. Before we move to Q&A section, I would like to [Inaudible] our financial strategy, which has led us to the above mentioned of result and the idea of a disciplined investment run through it. The same idea will also apply to the strategic update of the MINISO brand.

We have developed a thorough financial plan on this project, and we will have this plan quickly test in a small scale before it is implemented a nationwide. We will also closely monitoring the performance and the gather feedback from the consumers throughout the process, to ensure we remain committed to MINISO brand promise of enabling everyone to enjoy life's little surprise with a product that are more appearing, more useful and the more playful. That concludes our prepared remarks operator, we are now ready to tackle questions.

Questions & Answers:

Operator

[Operator instructions] Your first question today comes from the line of Michelle Cheng from Goldman Sachs. Live open. Please go ahead.

Michelle Cheng -- Goldman Sachs -- Analyst

[Foreign language] I have two questions for management. One is for the brand upgrade. Chairman just mentioned that they are focusing on the brand upgrade. Specifically, 70% of the products will be still with stable price, but 30% of the product likely to have a more premium offering.

So what exactly are these product line? And also since we are penetrating the lower tier cities, so how do we balance these penetration strategies versus the brand upgrade strategy? And second question is about overseas expansion. So we have 350 stores opening target this year. So, which areas will be the focus? And specifically U.S., what kind of a store [Inaudible] are we focusing on? And also what will be the impact on the margins? Thank you.

Guofu Ye -- Chairman and Chief Executive Officer

[Foreign language] OK. I'm Michelle, this is Mr. Ye, and thank you for your question. In terms of your questions, how to balance the brand upgrade and maintain all valid points.

Here's my answer. I think brand upgrading is not incompatible with maintaining no cost performance or maintaining our products affordability. Basically, the strategic upgrades of MINISO brand, you should not -- It shouldn't be simply integrated as product wise, product price increase. For MINISO, I think it is necessary to maintain our affordability to consumers, especially in offline channels.

But simply emphasizing affordability and cost performance we are into, homogeneous competition and especially in China's online channels, e-commerce landscape, so which is detrimental to our long-term development of MINISO brand. So we must differentiate MINISO brand from the competition. So what differentiates -- can differentiates MINISO brand? I think, we believe that all value lies in providing, as we mentioned, more appealing, more useful, and more playful products, and offer consumers a wonderful lifestyle that our products represent. And in terms of your questions on the the pricing strategy in lower tier cities, the answer is we will not raise prices across the board.

As we mentioned, currently, we only expect about 70% of our overall products will remain stable in price and for other new products. We will focus on interest based consumption and we all have different pricing strategy. So what we want to stress here again is that, we will still adhere to our affordability of both products, we'll now significantly increase the price, but we appropriately adjust pricing strategy on some products. For example, we have adjusted the price of IP products in 2021, and the preliminary results from the past several quarters is very satisfactory.

And for our stock category, for example, such as [Inaudible], consumers of these products are less sensitive to price and have higher recognition of IP or either brand, and we have shared or a few times that MINISO stores in the lower tier cities market have no -- in terms of cross-selling read, in terms of ASP, we have no significant increase into Tier 1 to two cities. So that means that consumers in the local tier market, they choose MINISO's products, not simply because our products are cheap, but because they like the products themselves. So in the implementation process of the strategic upgrade, we will conduct a partial test and the quick tests or trial and error. And in this whole process, we constantly adjust and optimize the pricing strategy.

So we hope that of the brand upgrade is completed, when consumers come to MINISO stores, we will not be that we are getting more expensive, but we are getting more -- we offer more value than we used to. And in terms of second question about the overseas development. So based [Audio gap]

Steven Zhang -- Chief Financial Officer

OK. Thank you for question, Michelle. This is Steven, CFO. Based on the latest developments of the current overseas pandemic recovery, we expect a net increase of 350 MINISO stores overseas in calendar year 2022.

And about 35% of these will come from Asia, which, well, we heavily affected by the pandemic in 2021. But we noted a improved recovery in the December quarter, and Asia is also our biggest overseas market. So with countries like India, the -- we have continue to open new stores in the past year and about 30% of them are from Europe, the Middle East, and North Africa. So the number of stores in these two regions have grown very fast in the past two years, best past two years and the recovery of the pandemic is also better than other areas.

And another 30% well from America, including a 20% from Latin America and 10% from North America. And yes, we will open more direct open operated stores in the 10 and under new concept in North America, especially in the U.S., and the remaining 5% of these new additions that will be from other markets. Thank you. And in terms of your questions on the U.S.

market. So in terms of Germany, the North American market was up more than 10% in the December quarter sequentially, and first store basis averages of per store and it was up 10% from the same period in 2019, including the United States market, up 11% from the same period in 2019. And in terms of the store opening. So in the December quarter, we added 18 stores in the U.S.

market, and by end of December we had about 53 stores open at the U.S. So the performance of the 10 and under stores in the past several months has exceeded our expectation. And so, combined the positive impact of holiday spending in December, for example, the sales of this month's U.S. market, it exceeded the our original plan by nearly 60%.

But let's say, we'll still wait and see. We need to look, observe longer period, and refined the business model and we are at the present stage, we are not in a hurry to make profits for us is strategically important to us.

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 Yu -- Bank of America Merrill Lynch -- Analyst

So, first question is on a year-to-date recover rate for both domestic and overseas market. And could you please give us some guidance on 2022 revenue growth? Second question is on a competitive landscape. So the COVID has been going on for two years. Have you seen any changes in competitive landscape in both online and offline markets? Thank you.

Steven Zhang -- Chief Financial Officer

This is Steven. Thank you for those questions. Yes, we have given this store opening guidance in our prepared remarks. So to conclude, we will be asking you to open -- to open 400 new stores in China on net basis and 350 stores in overseas market on net basis.

And meanwhile, we also currently estimate that in the calendar year 2022, no matter it is in China or overseas markets, it will still continue to recover from the pandemic. Although there may be some fluctuations, but I think the big trend here is that recovery. The topic here is recovery. And at the same time, we also believe that our e-commerce business can maintain high double-digit annual growth rate in next year and TOP TOY, art toy business, it will be tough for his second full year and we'll have a growth rate that's more than 100%.

But based on all these assumptions, I think you in calendar 2022, our top line, we all have a double digit gross compared to calendar year 2021. But I want to stress here that we do not give the annual guidance a revenue. So this is basically a estimate based on assumptions I mentioned. And according to that based on our business model, that is quite clear and quite forceful.

So I think if we can deliver that top line growth, our wealth line growth will be absolutely well. It will be a very good result in 2022. In terms of your questions on recent developments of our business. So in terms of overseas markets, basically it stabilized with the recent quarters, but considering the December quarter, we have no holiday seasons and holiday spendings and in the March quarter, we absolutely will see a sequential decline in the overseas market.

But compared to normalized years before pandemic, I think the current situation we saw, obviously overseas market is quite stable. And in terms in China market, and I think, as all you may have realized that in recent months in China, the resurgence of local cases of pandemic has influenced the whole offline retail industry, and many cities have reported increase in cases, and we have got to prepare for these, the pandemic resurgence in domestic operations. So that is why we gave this top line guidance for the March quarter with great large based of its operations.

Guofu Ye -- Chairman and Chief Executive Officer

And Lucy, this is Mr. Ye. Answer your second questions about the competition. So during the pandemic with I think we did the three things, right.

The first is that we adopted a more robust business, more robust business strategy and control the expansion rate of overseas. And we did not did not crasher our overseas distributors. But instead, we took various measures to actively help distributors to clear their inventory stock image. And secondly, we also have actively expanded our online channels, and we have made it clarify that the omnichannel strategy will be the key driver in the future.

And online now accounts for about more than 10% of company's revenue for several quarters. And the third thing is that, we can began to penetrate into lower tier cities in China and to, well, the pandemic impact is less severe now compared to [Inaudible] And we continue to bring stable returns to our retail partners. So getting these things, read things done right, help us in China, we continue to make sure a reality housing stock rose [Inaudible]every year. And at the same time, we make sure that our retail partners have a good return on their investment.

Over the past two years, our retail partners, the total numbers of our retail partners has continued to increase, and the average number for average numbers of [Inaudible] retail partners has remained stable, as we've mentioned in previous quarters. So in terms of overseas, we have seen that some competitors in some overseas markets have exited the markets. They have quit their business, quit the competition because the pandemic has seriously affected their business and operations there. So, I think after the pandemic, we will undoubtedly gain a larger market share in these markets.

Thank you.

Operator

There are no more questions. Thank you once again for joining us today. If you have any further questions, please contact MINISO investor relations team. Our contact information can be found on today's press release.

See you next quarter. Have a nice day.

Duration: 75 minutes

Call participants:

Eason Zhang -- Director of Capital Markets

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

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