MINISO Group Holding Limited. (MNSO), Q4-2022 Earnings Call Transcript

MINISO Group Holding Limited (MNSO 13.77%)
Q4 2022 Earnings Call
August 25, 2022, 8:00 a.m. ET

Contents:

  • Prepared remarks
  • Questions and answers
  • Participants in the Call

Prepared remarks:

Operator

Ladies and gentlemen, we appreciate your support and welcome to the MINISO Group Holding Limited earnings conference calls for the fourth quarter fiscal year 2022, which ended June 30, 2022. [Operator instructions]Please note that this event is being taped. I would like to now hand the conference over today to your host speaker, Mr. Eason, director of capital markets.

Please go ahead, Eason.

Eason ZhangDirector of Investor Relations

We are grateful. Hello, everyone. We are glad you’re here. We have just announced our quarterly financial results.

You can now access our Investor Relations website at www.ir.miniso.com to view earnings releases. Our founder and CEO, Mr. Jack Ye, as well as our CFO, Mr. Steven Zhang, are joining us today.

Before we move on, I want to refer you to our earnings press release, which contains Safe Harbor statements. This applies to this conference as well as forward-looking statements. We will also discuss non-IFRS measures. We have reconciled the results to the most comparable measures on the International Financial Reporting Standards in our earnings press release. You can also file with the U.S. SEC as well as the Hong Kong Stock Exchange.

I’ll now hand the call to Mr. Ye. Please proceed.

Jack YeChairman and Chief Executive Officer

[Foreign language]Thank you. Good morning, everyone. Welcome to the MINISO Group June quarter 2018 earnings conference call. This is the final quarter of fiscal year 22 and the first time that we have announced results in our dual primary listed company status in the U.S.A. and Hong Kong.

Our dedicated team made it possible. On July 13th, we completed our Hong Kong listing. Listing in Hong Kong was a significant math arrangement for prospects. It protected the interests of existing shareholders and allowed us to respond to changing regulatory environments. It will provide us with more financing channels to help drive the company’s development in the future, expand our shareholder base, and encourage the sustainable, healthy development of the business.

As the company’s representative, I want to express my gratitude for each employee’s dedication and to our shareholders who have always supported MINISO. We are confident that we will continue to create long-term value for shareholders, allowing everyone to have a better quality of life and a bit more surprise. As we have repeatedly stated in earnings conference calls, retailers are capable of surviving economic cycles. Despite the effects of the pandemic on our near-term results, our business model has proven resilient.

This quarter, we promoted our brand enhancement efforts in China. The June quarter saw a 3% increase in gross margins for domestic operations compared to the same period last year. This is because we launched a new portfolio high-gross margin consumption-based products. This quarter was difficult for the retail sector. We focused our efforts on growing our overseas business. It grew revenue by nearly 50% year-overyear and accounted to 34% of total revenue, the highest level since the pandemic. These two drivers helped us achieve a record-breaking 33.3% overall gross margin in this quarter.

Our recent business performance shows that we have much more flexibility when dealing with pandemic-related uncertainty China. We continue to harness the operating leverage of overseas businesses and further our efforts in reducing costs and improving efficiency. Our adjusted net income grew 57% year-over year to RMB 220-million in the June quarter. This figure is nearly double that of the prior year quarter. Our adjusted net profit reached 9.6%, the highest level in 10 quarters. This is a return to a level similar before the pandemic. Next, I’ll detail the progress of each business segment during the quarter.

First, I will focus on our domestic corporations. This quarter’s revenue was RMB.1.41 billion. Revenue from offline businesses was RMB.1.28 billion. This is compared to RMB.1.82 billion and RMB.1.33 billion in the same time last year. We estimate that the GMV lost as a result of the pandemic was RMB 700 millions and that the corresponding loss in accounting revenue was RMB 400million. In April and May, our sales fell by nearly 30% year-over year due to lower traffic to shopping malls. Many of these were able operate because of local government restrictions. On average, 300 AD or 12% MINISO in China were able operate in April.

This number was only about 9% lower than in May, but it still represented nearly 9%. As key cities slowly reopen, traffic in the area recovered quickly and allowed us to resume normal operations. Temporary store closures further decreased to 60 or 22% of our stores. In June, our sales rose to 94% compared to the same period last years.

This figure was almost 90% in Tier 1 cities and Tier 2 cities, while in Tier 3 cities and below we saw a year-on-year increase of nearly 1%. As an important complement to your offline channels, e-commerce revenue was RMB113 million in the quarter. We did not focus on revenue but its profitability. It has been growing steadily over the past few decades due to our control of traffic acquisition costs. The MINISO retail partner mobile application demonstrated remarkable resilience during pandemics.

MINISO retail partners are less at risk of inventory and receive their revenue share in a timely manner. As such, the working capital pressure is lower than other franchising models. Despite the immense pressure from the pandemic, the business development team added 79 stores net basis and kept the corporate store closing ratio at 1.1%. This is the lowest level in the past eight quarters. The number of China-based store closures decreased by 40 in the fiscal year 2022 compared to the preceding year. Due to tighter control measures in Tier 1 cities and Tier 2 cities in China, the new MINISO China stores were primarily from Tier 3 and lower cities for the remaining four month of 2022. MINSO retail partners dynamically adjust stall pace to reduce operational risk.

MINISO’s overseas operations reported that June quarter revenue was RMB 780 millions. This is almost half the revenue year-over-year. Revenue from our distributor model increased by more 30% year over year. Revenue from our directly operated business model grew by 70% year over year. The overseas markets were in recovery mode during the June quarter. Overall sales increased by 52% year-on-year and recovered to nearly 90% over the same period of 2019. Our distributor markets saw a 45% increase year-on-year. They have already recovered to almost 100% over the same period of 2019. Directly operated markets sales increased by nearly 80% year over year and recovered to 80% over this period in 2019. Sales in Europe increased nearly 40% year-on-year and more than doubled in the same period in 2019.

North America sales increased by almost 170% year-on-year, an increase of 13% over the same period in 2019. Sales in Latin America increased nearly 60% year-on-year, more than 10% higher than the same period in 2019. Nearly 30% of sales in North Africa and the Middle East increased year-on-year, an increase of 60% over the same period in 2019. Sales in Asian countries, including China, increased almost 50% year over year, which is nearly 60% more than the same period last year.

The only market that has not fully recovered sales to pre-COVID levels is Asia, which excludes China. Sales in the U.S. and Canada grew by almost 170% year-on-year, Mexico saw a nearly 50% increase, and India nearly tripled its sales. MINISO entered its 105 markets in June quarter and added net 57 overseas shops, compared with 35 stores during the same period last.

The post-pandemic era has now entered the overseas market. With strong demand from distributors, we have increased the pace of opening overseas shops this year. Despite the Russia/Ukraine conflict, and geopolitical tension, some of our distributors have had to delay store opening plans. We are confident that there will be more overseas stores opening in 2022 than in 2021 on a net basis. Due to the current high inflation in overseas countries, consumers are more inclined to seek out value, which creates great opportunities for us.

We have remained true to the productive team philosophy. We will continue to increase our overseas design capability by sending our domestic product teams abroad to further enhance our product design capabilities and create localized products. We have the ability to launch products in a 7-1:1 ratio in major overseas markets. Our next focus will be on Latin America, North America and Southeast Asia. We want to provide more localized products for consumers there.

We will continue to use China’s strong supply chains capabilities and export the Chinese supply chain abroad. To increase the competitiveness of our stores in certain markets, MINISO has launched the MINISO Store Image 3.1 project. We also assist overseas distributors with their operational strategies. As an example, our distributing has seen an improvement in performance by moving smokers from tourist areas into local communities. This has helped to reduce dependence on tourists.

Next, let’s talk TOP TOY. We are executing our strategy in a steady manner and have made steady progress. TOP TOY’s revenue grew by 43% over the previous year, while TOP TOY’s online business contributed 15% to its revenue for this quarter. TOP TOY has launched promotional campaigns to respond to the pandemic in China.

The merchandise gross margin of TOP TOYs was approximately 42% in June quarter. Although lower than previous quarters it is still quite high. The mix of TOP TOYs products and some third-party products is moving towards a more reasonable level, even though it is quarterly. This is due in part to our consistent product strategy. TOP TOY sales were nearly 20% owned by proprietary products and the gross margins of proprietary products are still over 60%. Our key operating metrics for the 2022 fiscal year have shown that we are in a healthy growth area.

On a net basis, we added 514 stores, representing 11% growth year-on-year. Revenue exceeded RMB 10 Billion, up 11% year on year. Gross profit grew by 26% to RMB 3 billion. Gross margin was at 30.4%, an increase of 3.6 percentage point year-over-year. Adjusted net profit RMB720 million was up 51% year-on-year and net margin was 7.2%, nearly two percentage points higher year on year.

We are optimistic about our future revenue growth and profit growth in the 2023 fiscal year. This optimism is despite continuing uncertainty from the pandemic. Our long-term confidence with China’s economic development is also a positive outlook. Our commitment to globalized development and our unwavering ambitions for our retail business. As you may have seen, we sent a letter of apology last Wednesday. We acknowledged the wrong marketing tactic and set out a corrective plan. We will be strictly following the regulations of both the exchanges as a dual listed company in the future. This gives us a greater compliance requirement for the company moving forward.

We are constantly improving the compliance standards that govern our operations in order to ensure the long-term success of our core business. These are my prepared remarks. I will now give it to the CFO for financial review.

Steven ZhangChief Financial Officer

Hello, everyone. Thank you for joining us today. I will walk through the financial results for the June quarter and the entire fiscal year 2022. All numbers are shown in RMB unless stated otherwise.

I will also refer some non-IFRS measures. This excludes the share-based compensation expenses. The June quarter revenue was RMB2.3 billion higher than the midpoint of our guidance range (RMB 2.1 billion to RMB 2.5 billion), which indicates a better-than expected performance in our domestic operations in June. China generated RMB 1.5 billion in revenue, which included RMB1.4 billion from MINISO grants, RMB95 million from TOP TOY and RMB28 million from other sources. MINISO brand saw a 23% decline in revenue year-over-year, consistent with declining trends of GMV traffic and offline traffic to shopping centers.

TOP TOY’s revenue increased by 33% over the previous year. Due to the high concentration of TOP TOYs stores in Tier 1 cities and Tier 2, TOP TOYs sales were significantly affected by the omicron virus outbreak. As we mentioned in our May call, the short-term impact of the pandemic is not likely. However, we continued to implement our strategy and achieved steady performance in TOP TOYs business model products as well as a single channel strategy. The overseas market’s revenue increased by 49% over the previous year to RMB785 million.

Looking at the financial year 2020, we can see that the year-over year increase in revenue was also around 50%. This shows that the recovery trends of our overseas operations are very evident. Total revenue for fiscal year 2022 reached 10.1 million, an increase of over 11% compared to fiscal year 2020. The domestic revenue was RMB7.4 billion, which is 2% more than a year earlier. This is due to the spread and severity of omicron in China.

TOP TOY’s revenue was RMB 447million, which is a 355% increase year-over-year. In June quarter, gross profit was RMB772 million, which is an increase by 21% year-over-year. Gross margin was 33.3% in June quarter, compared with 25.8% in the same period 2021. The year-over-year growth in gross margin was due to three factors.

It was first due to the revenue mix change. This quarter, almost eight markets contributed 34% to total revenues. This is the highest level since the December 2019 quarter. We also launched the more profitable product related to MINISO strategic brand upgrade in this quarter. And the third reason is about the inventory clearance activities throughout the year that aim to take all the negative impact of the pandemic in ‎Guangdong.

Our full-year gross profit was RMB 3.0 billion, an increase of 26% year-over-year. Gross margin was at 30.4% in fiscal year 2021, as opposed to 26.8% in fiscal year 2021. The June quarter’s selling and distribution expenses were 346 million. This is an increase of 31% year-over-year. The year-overyear increase was primarily due first to the increase in our largest expense in relation to our recovery international operations.

Second, increase personnel-related expenses. Third, increase the licensing expense for our newly launched IT products. This is partially offset by our lower promotion and advertising expense due to our reduced marketing efforts in China to take full advantage of COVID-19. For the entire year, the selling and distribution expense was RMB1.4 billion. This represents an increase of 29% over last year. The first increase in personnel-related expense was the main reason for the year-overyear increase.

Second, an increase in license costs due to our expanding IT library and enriching offering IT products. Third, increase promotion and advertisement expense, which mainly relate to a strategical update of MINISO in China. G&A expenses in June quarter were RMB180 million, a decrease of 5% over the previous year. The primary reason for the decrease in year over year was lower personnel-related expenses.

G&A expenses for the full year were RMB 785 millions, an increase of 19% over the previous year. The year-overyear increase was primarily due, first, to an increase of depreciation & amortization pays, mainly due to the company’s land rights and second, to an increased personnel-related cost. These expenses were partly offset by a decrease at the Office operating expense due to expense control measures taken in China to take all of the resurgence in COVID-19. Profitability is the next issue. The June quarter operating profits were RMB 272 millions, an increase of 45% over the previous year.

Operating margin was 11.7% compared to 7.6% a year ago. Operating profit for the full fiscal year 2022 was RMB 882 millions, an increase of 120% over the previous year. Operating margin was 8.7% in fiscal year 2021, while it was 4.4% in fiscal year 2021. Adjusted net profit for June quarter was RMB 233 million, a 57% increase year-over-year.

Adjusted net margin was 9.6%. This compares to a 5.7% increase in the same period of 2021. The adjusted net profit for the entire year was RMB 723,3 million, which is 51% more than the year before. The adjusted net margin was 7.2% in fiscal year 2021, while it was 5.3% in fiscal 2019. In June quarter, adjusted basic and modified earnings for ADS were 0.72, which was up 50% year over the previous year.

The adjusted basic and diluted earnings per ADS for the full year were 2.40 and 2.36, respectively. This represents an increase of 43% and 40% respectively year over year. As far as cash position, we had RMB 5.8 billion at the end of June. Our board of directors approved a special cash distribution in the amount of $53.5 million, or RMB 360 millions, up 20% year-over-year. In the future, our capital allocations revenue will be balanced between the new growth opportunity as well as our commitment to bringing stable returns to shareholders.

To return to working capital, the turnover of inventory remains stable as well as trade receivable. We follow the Hong Kong Stock Exchange’s standard practice. We won’t be providing guidance on revenue growth for the future. However, we have seen encouraging sales and recovery in China as we approach the end of the September quarter. This has stabilized at a healthy rate over the past few weeks.

We expect our bottom line performance to improve in the next quarter. This will be due to our disciplined execution and brand upgrade. Also, our steady recovery of overseas operations will help us continue our normalization. Our prepared remarks are now closed. Operator, we are now open to taking questions.

Questions and Answers

Operator

We are grateful. We now move on to the question-and answer session. Michelle Cheng, Goldman Sachs, will be answering your first question. Please proceed.

Michelle ChengGoldman Sachs — Analyst

[Foreign language]So, my question is about brand enhancements. In the past quarters, brand upgrades have significantly increased the gross margin. Can management comment on strategies for the second half? What is the gross margin update, and are there any operating costs for the brand upgrade as well? We appreciate your understanding.

Jack YeChairman and Chief Executive Officer

[Foreign language] OK. Michelle, thank-you for your question. This is Jack. Please feel free to ask any questions as we communicated in our March call. All MINISO brands strategic upgrades will count starting in three weeks in product, channel, and marketing.

We will continue to increase our gross margin for new products, especially inter-based products that are not part of our regular based. As you know, domestic gross margin increased by 3% year over year this quarter to approximately 54%, compared to Q1 last years. Our current plan is to increase our gross merchandise margin by five percentage points to close to 60% by the end fiscal year 2023. This will be achieved by this time next year. We plan to optimize offline business in Tier 1 and Tier 2 cities, and to assist retail partners in reducing operational risk.

In terms of marketing, the original marketing plan was in the September quarter. The budget was approximately RMB 50million. However, due to the current domestic situation and the possibility of an outbreak, we will continue to restrict control measures for some time. To save money, we have decided to postpone or delay market comparisons. This will have a positive impact on the September quarter profit.

I hope that this answers your question. We are grateful.

Michelle ChengGoldman Sachs — Analyst

[Foreign language]

Operator

Thank you. The next question comes from Anne Ling, Jefferies. Your line is open. Please proceed.

Anne LingJefferies — Analyst

[Foreign language]Let me now translate this in English. Let’s just talk about your letter to the public. “the Japanese interest”. What strategy should we use to change the operation? We are concerned about how these changes might impact your image, performance, or brand equity as a consumer. This is true for both domestic and international clients. I would like to know more about your plan. We are grateful.

Jack YeChairman and Chief Executive Officer

[Foreign language] OK. Thank you, Anne, for your question. This is Jack. Your question was about the correction program for this event.

We have three specific actions. The first is to improve the internal control environment for our distributors in overseas markets. This includes, but not limited to, the sensitive political issues. Our headquarters will be a globalized headquarters for branding. All the marketing personnel in overseas markets report to headquarters. The headquarter will also organize trainings for frontline staff.

The second is operational. The correction plan has a time frame that the rectification must be completed by March next years. The third comes down to product level. So we will be exploring more Chinese culture and China’s traditional elements embedded products. We also plan to launch a number of Chinese IT products for overseas markets.

The second question, about the impact on our sales, is in Chinese market. In domestic markets, we have not seen any impact from China and other overseas markets. In China, the total GMV in July was 95% of last years. If you look at the first three months of August, you will see that it was planned year-over-year. As we mentioned, the net income from sales in China has been a recovery from foot traffic to shopping centers where our ASP remains — either gross or single digit.

In terms of the overseas market, take a look at July and the first 3 weeks of August. The GMV of overseas distributors grew by between 30% and 40% year-overyear. Our directly operated business saw a 50% increase in year-over-year sales. Thank you for your question.

Anne LingJefferies — Analyst

[Foreign language]Is there an additional cost?

Jack YeChairman and Chief Executive Officer

[Foreign language]

Anne LingJefferies — Analyst

[Foreign language]

Eason ZhangDirector of Investor Relations

Anne, thank you. This is Steven. Let’s quickly translate for Steven. The interim control measures will be there, but we don’t believe it will significantly increase our related expense and will not affect our earnings. We appreciate your understanding.

Operator

Thank you. The next question comes from Lucy Yu, Bank of America Merrill Lynch. Your line is open. Please proceed.

Lucy YuBank of America Merrill Lynch — Analyst

[Foreign language]We are now facing possible recession in the U.S. and Europe. Should we be concerned about the effects of recession on our businesses and how it will affect our plans for overseas expansion? Thank you.

Jack YeChairman and Chief Executive Officer

[Foreign language]Lucy, thank you. This is Jack. This is Jack. In answer to your question regarding the store expansion in overseas markets, we can say that we often see a strong demand for our overseas distributors and that the pipeline has also been strong.

However, we must also be open about the fact that the Russia/Ukraine Complex and evolving geopolitical threats in some of our overseas markets are currently impacting in different aspects and ways on our distributor store-opening plan. Some of these have delayed store expansion plans in this quarter. However, the net additions to our overseas markets over the past several years (fiscal year 2020 to 2022) was 375, 121, and 163 stores, respectively. We are quite certain that in fiscal year 2023, our net additions in overseas markets will be significantly higher than in 2022. We appreciate your understanding.

Lucy YuBank of America Merrill Lynch — Analyst

[Foreign language]

Operator

[Operator signoff]

Duration: 0 minutes

Participants in the call:

Eason ZhangDirector of Investor Relations

Jack YeChairman and Chief Executive Officer

Steven ZhangChief Financial Officer

Michelle ChengGoldman Sachs — Analyst

Anne LingJefferies — Analyst

Lucy YuBank of America Merrill Lynch — Analyst

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Source: MINISO Group Holding Limited, (MNSO), Q4 2022 Earnings call Transcript

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