MINISO Group Holding Limited June Quarter 2023 Earnings Conference Call - Full Transcript

Now, I would like to hand the conference over to Mr. Ye, and Mr. Zhang will translate for Mr. Yeh. Please go ahead, sir.

Guofu Ye (Translated):

Hello everyone and welcome to our earnings conference call. Our overall performance once again reached new [high] as we achieved big breakthroughs in both revenue and profitability. Total revenues exceeded the RMB3 billion milestone for the first time, increasing by 40% year-over-year to RMB3.25 billion. GP margin reached 39.8%, an increase of 6.5 percentage points year-over-year.

Adjusted net profit surpassed RMB570 million, increasing by 156%. Adjusted net margin also hit a new high, reaching 17.6%, an increase of 8 percentage points year-over-year.

I'll now walk you through business updates for our three major segments, MINISO China, MINISO Overseas and TOP TOY.

MINISO China showed resilience despite the challenging consumption environment. Offline sales of MINISO China achieved 40% year-over-year growth in this quarter, whereas according to the National Bureau of Statistics, China domestic retail sales increased by only 10%. Average transaction volume increased by 18%, while average transaction value increased by more than 5% year-over-year.

Entering July, nearly one-third of MINISO stores in China achieved new sales records, marking a strong start to the September quarter. GMV increased by over 25% year-over-year, with GMV per store increasing by 14%. Average transaction volume and average transaction value increased by 10% and 3%, respectively. For the first seven months of 2023, GMV per store in China recovered to 2021 level, and around 85% of pre-COVID level in the same period of 2019, in line with our expectations at the beginning of the year.

Notably, we opened a total of 221 new stores on net basis in China during June quarter, including more than 90 of new stores in Tier-1 and Tier-2 cities. This not only sets a quarterly record for store openings for MINISO, but also represents the highest quarterly new store openings in Tier-1 and Tier-2 cities since the pandemic. Meanwhile, store closure rate in this quarter was only 1.0% below historical average.

What these two signs in store opening and closing reflect is the high confidence of our retail partners. As of June, MINISO brand had over 1,000 MINISO retail partners, with nearly 50% of stores owned by top-50 franchisees. Among them, 40 have been cooperating with us for more than six years. In the past four fiscal years, about 50% of new stores in China are owned by our top 50 partners. The average number of stores owned by them increased steadily from 27 to 33. We have been recruiting new partners as our store network penetrates into lower tier cities. The total number of retail partners increased from 754 at the beginning of 2020 to 1,022 as of now.

We are highly confident that we’ll achieve our target of opening 350 to 450 stores in China on net basis in 2023. We are also optimistic that we'll be able to expand our network in different tier cities across China. We now expect to have about 5,000 stores in China by 2027, compared to 3,325 stores we had at the end of 2022.

Let's move on to overseas. Firstly, revenue was RMB1.11 billion, a 42% year-over-year increase from the high base of last year, exceeding even our most optimistic expectations and setting a new record June quarter. Revenue from directly operated markets increased by 85%, accounting for more than 45% of our overseas revenue, up from 35% in the same period last year.

Secondly, GMV in overseas markets increased by 41% year-over-year, including a 69% growth in directly operated markets and 32% growth in distributed markets. Overall, GMV per store in overseas markets increased by over 25% year-over-year. Average store count increased by about 11%. Major overseas markets maintained rapid growth momentum, including 106% growth in North America and 46% growth in Latin America.

Third, overseas GMV per store in the June quarter recovered to 92% of the same period in 2019. This is meaningfully higher than the 75% and 68% recovery rate we saw in the previous quarter in the same period of last year. The distributed markets recovered to 95% pre-COVID levels, while the DTC market recovered to 85%. In our top-five overseas markets, GMV per store in North America was nearly twice the same period in 2019. GMV per store in Latin America, Europe, Middle East, and North Africa all recovered to about 90% of 2019 levels. Asia markets recovered to about 65%, which was the highest we have seen since the pandemic and the recovery is still very fast.

Country-wise, GMV per store in Mexico is 10% higher than pre-COVID level. In the first half of 2023, 4,000 new SKUs were launched in Mexico and became a major driver of its local sales. GMV per store in the US was twice the pre-COVID level since the grand opening of our first global flagship store at Times Square on May 20. It has consistently been setting new sales records.

Fourth, profit margin of overseas businesses is substantially improving, thanks to the operating leverage. This quarter, overseas markets contributed more than 40% of total operating profit, meaningfully higher than approximately 25% in the last quarter.

Margin expansion was especially apparent in the US market, along with a rapid revenue growth and refined unit economics. About 90% of our stores there was already profitable in June, significantly driving up the operating profit margin for overseas directly operating markets.

In the first half of 2023, 72 new stores were opened in overseas markets on a net basis. The second half of the current year tends to be the peak season for store opening and sales. Recently, store opening has accelerated. In July, we added 38 overseas stores. We are still positive with the target of 350 to 450 additions in overseas markets in 2023.

Since the beginning of this year, I have spent the majority of my time in overseas markets. During this period, I had a lot of deep thinking about MINISO's value proposition and I would like to take this opportunity today to share with you. In the past 10 years since our inception, MINISO leveraged China's unmatched supply chains.

We used to position our products at three highs and three lows, meaning high appealing, high quality and high frequency, and low cost, low markup and low prices. We relied on this cost leadership strategy for a very rapid growth.

2023 marks the first year of MINISO's brand upgrade. Its value proposition has never been clearer in my mind. Facing new changes and new trends both, at home and abroad, we cannot survive by relying solely on cost advantages. In addition to that, we also need to differentiate our product offerings as much as we can to engage in global competition.

So I have renewed MINISO’s brand positioning to a global value-retailer offering lifestyle products featuring IP design. So how should we think about this positioning? The first message I want to deliver is that we attach great importance to the design of every single product. We have developed a lot of trendy lifestyle products that resonate with young consumers. By focusing on creating more interest-driven content, just like Nike has been doing in promoting better design in sportswear.

In addition to that, we should become IP powerhouse such as Disney, and make lifestyle products more [fashionable] by featuring IPs. By leveraging consumer demand to guide product design, we can always develop products that are truly unique or are believed to offer more value than similar IP products.

Only in this way can we continuously design best-selling products that also resonate with our consumers. We are now cooperating with 80 IP licensors, compared to 17 when we listed in the US three years ago. Take the recent blockbuster Barbie series as an example.

A half of related SKUs we had in store were sold out within the first five days of launch. The collaboration generated immense buzz on social media platforms, including Xiaohongshu, while related topics received over 13 million comments, as well as Weibo, While the topic accumulated nearly 300 million views as it became another phenomenal article branding event for us.

Third, we will stick to the value-for-money proposition, MINISO believes in our happy philosophy as we offer creative and high-quality products to global consumers at an affordable price. This is in line with our commitment to make it easy for consumers to enjoy a happy and quality life. Leveraging China's efficient supply chain and design capabilities we have accumulated during the past 10 years, MINISO is able to offer global consumers budget-friendly products and build our customer-friendly image. This value-for-money proposition enables us great advantages in navigating through economic cycles.

We have identified two product strategies for the overseas market, globalization and IP strategy. To accomplish these two strategies successfully, we need to consistently drive product and design innovations. That means we need to offer emotional resonance with consumers by providing good-looking, fun and useful products, among which we believe three categories will be key to our success. These are big beauties, big toys, and big IP products.

In this year, perfumes, IP-related plush toys, and IP-related blind boxes acted as our killer categories and have generated explosive growth in the overseas market, opening up new avenues for our future growth.

Lastly, we will implement the super store strategy. I believe super stores play a key role in growing mindshare among consumers and strengthening our brand as they contribute to larger sales. For example, our recently opened flagship store on Beijing Road of Guangzhou refreshed the sales record of single store in China for years. This is particularly impressive given the ongoing weakness of consumption in China.

In particular, the opening performance of Times Square flagship store was unbelievably strong and it has upgraded our understanding of our business, including for me and the whole management team. It helped us have a better understanding of the market potential in the US and have strengthened our confidence in further developing and making investments there. The super store concept is potentially a new path towards improving per store sales for us.

Now, let me brief you on recent developments from TOP TOY. Total revenue increased by 81% year-over-year with an increase of 46% year-over-year in per store sales and an increase of 24% of average store count.

I believe that high-quality growth is just ahead of us. In the June quarter, TOP TOY's product mix has been optimized as our exclusive products accounted for one-third of total sales, reaching the goal we set about two years ago. Merchandise GP margin was about 46%, 5 percentage points higher than the same period last year. Accounting GP margins continued to increase to a comparable level MINISO China one year ago. This is a reasonable comparison as both businesses employ an [SLR] business model, while we mainly attract partners to invest in stores. So, when sales reach a certain scale, operational leverage will kick in and drive our profit.

I now turn it over to Eason for a review of our financial performance in June quarter and fiscal year 2023.

Eason Zhang: Thank you, [Jack]. Hello, everyone. Thank you again for joining us today. I’ll walk you through our financial results for June quarter. Please note that all numbers are in renminbi unless otherwise stated. And I will also refer to some non-IFRS measures, which have excluded share-based compensation expenses.

Revenue was RMB3.25 billion, representing an increase of 40% year-over-year. Revenue from China was RMB2.14 billion, up 39% year-over-year. The increase was driven by a growth of 42% in revenue from MINISO's offline stores and a growth of 81% in revenue from TOP TOY. The 42% year-over-year growth of MINISO 's offline business was the result of a 9% growth in average store count and a 31% growth in per store sales. However, on a more comparable basis, per store sales increased by about 25%, excluding the impact of store closure last year.

The 81% year-over-year growth of TOP TOY was the result of 24% growth in average store count and a 46% growth in per store sales. On a more comparable basis, per store sales increased by about 30%, excluding the impact of store closure last year.

Revenue from overseas markets was RMB1.11 billion, up 42% year-over-year, driven by an increase of 11% in average store count and a growth of about 28% in average revenue per MINISO store in overseas markets.

Revenue from [distributed] markets was about RMB609 million, an increase of about 20% year-over-year.

Revenue from directly-operated markets was about RMB 506 million, an increase of about 85% year-over-year, accounting for 45% of overseas revenue, as compared to 35% last year.

For full-fiscal year 2023, revenue was RMB11.5 billion, up 14% year-over-year. Of these, revenue from overseas markets was about RMB3.82 billion, up 45% year-over-year. Gross profit in the June quarter was RMB1.3 billion, up 68% year-over-year.

Gross margin was 39.8%, compared to 33.3% in the same period of last year. The year-over-year increase was due to three reasons. One, GP margin in China increased by about 6 percentage points, thanks to our continuous effort in brand upgrade. Two, GP margin in overseas markets increased by another 6 percentage points, thanks to product optimization and higher revenue contribution from directly-operated markets. And three, GP margin of TOP TOY increased by 10 percentage points, due to product optimization.

SG&A expense as a percentage of revenue was 19%, down from 22.7% in the same period of last year. Selling and distribution expense was about RMB458 million, increased by 33% year-over-year, driven by, one, increased IP licensing expenses, number two, increased personnel-related expenses, and number three, increased marketing expenses, mainly in connection with our strategic brand upgrade of MINISO in China.

Going forward, we will continue to see marketing expense increase for a while, but we are highly confident to make sure the total SG&A expense maintained at a reasonable and controllable level of revenue. G&A expense was RMB161 million, decreasing by 10% year-over-year.

Turning to profitability, operating profit was RMB 690 million, increasing by 154%. Operating margin in this quarter was 22%, the first time ever for us to reach such a high level. For fiscal year 2023, operating margin has reached nearly 20% too.

Adjusted net profit in this quarter was RMB 571 million, increasing by 156% year-over-year. For full fiscal year, adjusted net profit was about RMB 1.85 billion, up 155% year-over-year. Adjusted net margin in this quarter was 17.6%, compared to 9.6% in the same period of 2022.

For fiscal year, adjusted net margin was 16.1%, compared to 7.2% in last year. As of June 30, 2023, we had a strong cash position of RMB7.3 billion, compared to RMB5.8 billion one year ago.

Turning to capital allocation strategy, we have established a dividend policy of paying out no less than 50% of adjusted net profit in the future. For fiscal year 2023, the Board of Directors approved a cash dividend in a month of US$0.412 per ADS, about 50% of our adjusted EPS of 0.81. The aggregate amount of cash to be paid is approximately RMB128.5 million, or RMB931.7 million.

MINISO aims to be a world-class company. Our capital allocation strategy in the future will balance new growth opportunities and our commitment to bring stable return to shareholders. So, June quarter has witnessed too many breakthroughs and new heights in each major aspect of our operations.

Looking forward into the September quarter, we expect our sales will continue to grow strongly on a year-over-year basis, driven by better store-level performance and store network expansion. Meanwhile, our margin profile will continue to optimize on a year-over-year basis.

Thank you. And this concludes our prepared remarks. We are now ready to take questions.

Q&A

Operator: Thank you, sir. The first question today comes from the lines of Michelle Cheng from Goldman Sachs. Line is open. Please go ahead.

Michelle Cheng: Now perhaps three questions. Well, first two is for Mr. Ye. The first one is the IP performance has been very strong this year. And , can you share with – the sales contributions from IP product this year and whether we have any target for the future. And regarding cooperation method with partners is there any difference between the domestic market and the overseas market?

And My second question is about the China per store GMP upside. Given -- Is there around 15% gap versus pre-COVID level and do we have any specific strategies to drive further improvement?

And third question is about the OP margin for overseas. This quarter, we have 35% revenue from overseas and 40% contribution from operating profits for overseas business. So, can you share with us what is the driver for DTC and also the distribution model and how should we think about the margin upside for the overseas business? Thank you.

Guofu Ye (Translated): Okay Michelle, thank you for your first question. So, we will continue to enlarge our cooperation with strong IPs with global influence in line with our strategic direction of brand upgrade and will be helpful in expanding our sales. Specifically, in the overseas market, we will stick to our big IP product strategy and we will continue to fund the strong IPs in each important market we are in. And that will be one of our focus too.

For the target of IP sales, we do not have specific numbers at this moment. But my personal estimate is that in the near-future, it will be stabilized at about 25% to 30%. In the first half, the IP contribution was about 25%, about 1 percentage point higher than the same period last year. But compared to 2019, it has been 10 percentage higher. And I would say, at least -- for a while, the percentage contribution will be 25% to 30%. But in the future, we will dynamically change the contribution from IP based on the market change.

And there is no significant difference between our cooperation model in China and overseas market. We specifically found that IPs in the US or from Japan has global appeal among our customers.

And we will cooperate with our IP licensors in terms of product authorization, in terms of marketing, in terms of shopping experience, and store experience, and in all these aspects. We will leverage IP to empower us in terms of branding power and product power. Thank you.

In terms of your second question, you are right that with the progress of our brand upgrade, we will stick to our big store strategy or flagship store strategy. By the end of June, we – the average store size of MINISO China store is about 180 square meter and this number has been stabilized during the past several years. But with the improvements of our branding power and our product, it has created [indecipherable] some conditions of our big stores opening.

As I shared earlier, only by opening big stores can we – increasing our mind share among our customer as these big stores contribute a larger sales. And by opening big stores or flagship also common experience that we have learned from the big retailers, the advanced retailers from European countries and the US.

So, in the first six months we have opened a dozens of big stores that has demonstration effect. For example the flagship stores our Beijing Road and Chunxi Road, now in our store portfolio we have about 100 flagship store, or big stores, large stores.

On average, the initial CapEx is about 2 times of ordinary stores. In the first six months the per store sales has been very great of these big stores, because our per store sales is 3 times of that of ordinary stores 7% higher with inventory turnover days of about 30 days. It’s about 20 days less than the ordinary stores.

So, in general, in terms of our OI and payback, these large stores will be far better than ordinary stores.

Eason Zhang: And Michelle, this is Eason. About your third question about the OP margin improvements. I think, first of all, you have to know that what percentage OP margin contribution is the one before the allocation of third quarter [overhang], because there’s always some [overhang] in third quarters that even allocatable to each BU.

And for the OP margin of overseas business, I’ll say now currently is between the 22% of the group level and about nearly 30% of MINISO China is between them. I’ll say whenever the OP margin of overseas business is above the average, the group level is profit contribution will be higher than this revenue contribution. And if you look at the comparison between this quarter and last quarter, I’ll say the source from the improvement is mainly from the operating leverage.

If you look at expense structure in both, directly operated markets and distributor markets in this quarter, we will see that the expense ratio, the OpEx ratio decreased about several percentage points compared to last quarter. So, in general, the OP margin of Overseas market in this quarter has improved by about 5 percentage points on a quarter-over-quarter basis.

And the last point I would add is, I would say it’s not the first time that we have seen OP margin contribution of overseas market surpassed 40%. As we shared earlier, before the pandemic when the overseas market contributed about 35% or nearly 40% revenue contribution, then we already saw a nearly 40% or over 40% of margin contribution. And I would say because the directly operated markets of our overseas business is still picking up operational leverage, so the overall profit contribution from overseas market I would say we were not surprised to see it will fluctuate for a while. Thank you.

Operator: Thank you. The question is from the line of Anne Ling from Jefferies. Line is open please go ahead.

Anne Ling: My first question is on the superstore strategy, just a follow-up question regarding like whether we will be opening superstore or how many of these store in the future will be operated by the franchise? And in the future, what is our target for these superstore in our 300 to 400 new store opening for this year for both China as well as for the overseas market.

And the second question has come out from is actually for the US market. How much of the sales contribution is from the US as a percentage to the overseas sales? And in terms of the per store performance, how different is it so far versus the China market. I remember that in the past and it’s been gradually building up, which in the future will help drive the sales as well as the profitability.

Guofu Ye (Translated): Thank you, Anne. For first question about the large store strategy, I’d say we’ll stick to this strategy. In my design, we have blueprint that in the future, we do believe that each city or each provincial city in China has a flagship store that represents MINISO’s brand image, so my best guess is, we should have [by – 500] such stores and there’s no such thing that this store should be directly operated or franchisee operated.

The first thing – the first and foremost in [Technical Difficulty] we should find the optimum allocation and we will suggest every of our MINISO’s overseas market to open suitable flagship stores. Because as I said, the big store strategy is critical for our future success, because it can brings our – it brings MINISO’s brand image and our store performance to a new highs and it also has a demonstration effect or its peer stores among the same [Technical Difficulty] market. So, for example in the US market, our flagship stores there we can deliver like 1.3 to 1.4 million sales record four our Guangzhou Beijing Road flagship stores, we may have 5 million sales per month and all these are new sales record from MINISO universe.

And for your second question about the US market specifically, I’ll say the US market for the past three quarters, it has two quarters ranked the first [combined] revenue contribution in overseas market. And in June quarter, it’s the second largest in terms of revenue contribution. And this revenue contribution of our overseas market is high teens and its revenue contribution of our total services like mid-single digit during the past several quarters.

And you are right that we have a lot of potential in terms of store operations, in terms of product optimizations, in terms of unit economics in the US, in the near-term. And as I shared in our prepared remarks, the unit economics of the US stores has been improved a lot. For example, the OpEx ratio of US stores during the past 12 months decreased by about 20 percentage points and that is one big thing that turned this business into a profitable one. Thank you.

Anne Ling: 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 Yu: So, there has been mention in announcement that China is targeting for store in 2027. So, what’s the allocation or geography allocation of the new store and do we have any mid-term plan for the overseas market, which may have greater potential in the long-term. And second one is on the China store unit economics post COVID, so what are the detailed GP margin of the expense breaking down as well as payback period? Thank you.

Guofu Ye (Translated): Okay. Thank you, Lucy, for the first question about the store opening potential. In China, our target is to have 5,000 stores by year end of 2027. We have strong track record and we have high confidence to achieve that goal.

And in terms of our overseas potential, I’ll say from my perspective, we do not have any worry or concern about the store opening overseas market for at least the next 10 years. My personal observation in this year, I have spent a lot of time in overseas market is that, in a lot of countries in overseas market, we can open one MINISO, at least one MINISO stores for each 100,000 people in overseas market.

And for your second question about the payback of the domestic stores. We strongly believe that the payback period for most of our franchises has been shortened during the past several months. There are several reasons. The first is our better store performance during the first half of this year. And the second reason is the optimization of sales expense structure i.e. the rent level decreased starting first optimized and then there are other savings in their cost too. So, I’ll estimate that our franchisees on average, their margin profile has improved significantly compared to one year ago, two year ago, especially in Tier-1 cities.

In this year, we have observed that in Tier-1 cities our MINISO stores, their sales per store increased by 30%, more than 30% on a year-over-year basis. It’s higher than the 20% of the average year-over-year growth. And for the new stores in Tier-1 cities in this year, we’re [of the bet] their average rents level has decreased by single digit compared to last three years.

As mid-tier just to share – in the first half, we have opened a batch of demonstrated big stores. So, the big stores, their average payback period is far, far less than the ordinary stores. So, I would say as my last point to your question that the big stores will also help increase the [indecipherable] of our franchises. Thank you.

Operator: Thank you. The next question is from the line of Samuel Wang from UBS. Line is open. Please go ahead.

Samuel Wang: So, we saw from the announcement that our July sales also very strong with domestic growth above 25%, overseas growth 50%. So, what are the reasons and drivers behind that. Thank you.

Eason Zhang: Thank you Samuel. This is Eason. Yes. Our domestic sales increased by more than 25% in July month. It’s between 25% to 30%, driven by two drivers. The first is the per store sales of MINISO China increased by mid-teens during the same period, and we have also decent of store number growth. So, on a single store basis, the mid-teens per store sales increase was major from a low single digit of ASP high and a high single-digit or about 10% of traffic improvement and the overseas market, we also mentioned in the earnings release that the GMV increased by about 50% and our I’ll say our overseas directly operated market see a continued high growth rate comparable to the June quarter.

And in overseas market, we also see the drivers also come from traffic and ASP high. Thank you.

Operator: Thank you. The next question is from Jingru Song from Industrial Securities. Line is open. Please go ahead.

Jingru Song: I will have two questions. The first question is about how to improve our supply chain and about the oversea supply speed and control inventory SKU. And the second question is how do we forecast the ASP, seems like it increased by 3% year-on-year this time. How do we forecast about the overseas ASP on the next year and the domestic ASP on the next year? Thank you.

Guofu Ye (Translated): Okay. Thank you for questions. In terms of in our overseas supply chain expansion plan, we have two points to add here. The first is that we will stick to our accumulated resources in China, so China will definitely will be the major supplier supply chain based, but we are still exploring new partners in southeast Asian countries such as Vietnam and so on.

Second, we will increase the percentage of direct sourcing in local market such as the US market. For example, we have been proactively increasing the percentage IP related snacks in the US market,

I would say in China it is around RMB35, right. And now it is about RMB37 in the June quarter.

For overseas market, I’d say we have a rough --number that on average the ASP in the overseas market is about 2 times or a little bit higher than China's ASP. In specific countries like in European countries, in the US, I would say this number is about 3 times or even higher than that of China.

In our rapid growth markets such as the US, in Canada and so on, we still see our ASP increasing at a very fast speed. Thank you.

Operator: Thank you once again for joining us today and our conference call now comes to an end. If you have any further questions, please contact the MINISO IR team. Our contact information can be found on today's press release. We will see you in the next quarter. Have a nice day. Goodbye.