MINISO Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 12, 2024

There are 5 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Minnesota's earnings conference call for the December quarter of 2023. At this time, all participants are in a listen only mode. After the management's prepared remarks, we will conduct a question and answer Before joining this session, please mark your name and institution and be kindly noted that this event is being recorded. We have announced our quarterly financial results earlier today. An earnings release is now available on our Investor Relations website at ir.munisou.com.

Operator

Joining us today are our Founder and CEO, Mr. Jack Ye and our CFO, Mr. Yisim Zhang. Before we continue, I would like to refer you to the Safe Harbor statement in our earnings press release, which also applies to this call as we will be marking forward looking statements. Please also note that we will discuss non IFRS financial measures today, which we have explained and reconciled it to the most comparable measures reported under the International Financial Reporting

Speaker 1

Reporting in progress.

Operator

In the company's earnings release and filings with the U. S. SEC and Hong Kong Stock Exchange. The currency unit is Chinese yuan unless otherwise stated. In addition, we have prepared a PowerPoint presentation for today's call, which contains financial and operational information for this quarter.

Operator

If you are using Zoom meetings, you should be seeing it right now. You can also revisit it on our IR website later. Now, I would like to hand over the conference to Mr. Ye and Ms. Alice Hsien from Minso IR team to translate the Hello, everyone, and welcome to MINISOBIR's December quarter 2023's earnings call.

Operator

Our overall performance once again reached new highs during this quarter. We capped off the year of 2023 with brilliant outcome. Total revenue hit RMB3.84 billion and set a new report once again, increasing by 54% year over year. Gross margin growth to 43.1 percent with an increase of 3.1 percentage points compared to the same period in 2022. Our adjusted net profit increased RMB660 1,000,000, breaking our record once again.

Operator

And adjusted net profit margin reached 17.2%. Excluding the foreign exchange impacts, adjusted net profit margin reached 17.4%, which span a new report as well. For calendar year 2023, total revenue reached RMB13.8 billion with a year over year increase of around 40%. Gross margin reached 41.2 percent with an increase of 6.3 percentage points. Our adjusted net profit margin reached RMB2.36 billion, representing an increase of around 110% year over year.

Operator

2023 is much a year full of new records for MINISO. We continuously report new heights in every aspect of our operations. We firstly exceeded RMB3 1,000,000,000 in revenue for the June quarter this year, and hopefully, we can break through ourselves by reaching RMB4 1,000,000,000, 5,000,000,000 or even higher in the future. Total store count exceeded 6,000 in the Q3. Our gross margin also achieved breakthroughs again and again, reflecting the success of our IT strategy and brand upgrade strategy.

Operator

Our net profit margin also keep climbing, which was through the work of our asset light models and the efforts in controlling expenses. Hi. All these financial metrics are music parts. I was always thinking how to outperform our past achievements. I fully agreed and resonated with Warren Buffett's words.

Operator

Although I am already in my 90s, I truly do feel like dancing to work every morning simply because of our immersed love for my work. I love running in Minnesota and feel great happiness without tiredness every day. For me, there is no job in the world with more fun than running in Minnesota. Moreover, my journey is not voluntary. Rather, it is bolstered by the strength of a powerful team within our company.

Operator

We understand and appreciate each other very much and fight for the same goal. In the year of 2023, we were thrilled to see that much more investors showed up in our shareholder league. I would like to express my sincere gratitude to our shareholders and hopefully deliver more value of our business operations with a long term perspective. Despite these uncertainties in our global expansion, globalization is a process of responding to challenge our fair rights. It is about riding the waves instead of seeking a definitely certain shore.

Operator

Chore. For the calendar year 2023, our overseas revenue contributed 34% of the total revenue. Having entered into 110 overseas so far, we presented as a globally operated enterprise. We are committed to fully diversifying the business layout of Minnesota to increase our risk resistance capabilities. Now I will walk you through business updates for our 3 major segments, Minister of China, Miso Overseas and Top Let's start with Minnesota China.

Operator

Offline sales increased by 66% year over year compared with an increase of 8% in domestic retail sales of consumers' goods. According to National Bureau of Statistics of China, on a comparable basis, same store sales increased by around 32% year over year.

Speaker 2

During

Operator

2023, GMV of Minasol offline stores in China enjoyed a year over year increase of about 40%, powered by over a 25% increase in the same store sales. During 2024, GMV of Minasil offline sales in China decreased by nearly 13% during the 1st 2 months, albeit a high base of last year because of the pent up demand. And the same store sales was over 95% of the same period last year, the best recovery rate demonstrating the resilience of Linasol as always. In February, 1369 stores or 1 third of MINISO store in China refreshed their self records. In addition, same store sales during Chinese spring festival increased by around 10%, setting solid foundation for growth in the Q1 of 2024.

Operator

We will be tracking these trends, staying alert and taking positive measures to profit the macro headwinds. 1st and second tier cities. For the year of 2023, we opened 601 next new stores in China. Value both fee and quality in our growth of store numbers. Meanwhile, we will stably optimize and healthy and comprehensive global municipal store network.

Operator

Consequently, we will pay more attention to store location or actively establish ministore store metrics and conduct a more efficient store expansion and store network distribution. We also pay attention to enhance our store U. E. As we implement flagship store strategy, newly opened store of 2023 was 14% larger than the average, while their sales were 30% higher than the average. Meanwhile, the closer range of municipal stores in China of 2023 was around 4%, representing a historical low.

Operator

In 2024, we expect to open 350 to 450 new stores on a net basis in China, focusing on high quality growth and lean operations. Moving on to our progress on the international front. Firstly, overseas revenue was about RMB1.5 billion, another historical high. The 51% year over year growth of revenue exceeded our most optimistic expectation. Notably, revenue from directly operated markets increased around 90% and has increased by more than 80% for 3 consecutive quarters, contributing over 50% of overseas revenue for the first time.

Operator

For the year of 2023, overseas revenue increased around 47 percent year over year, including an 83% increase in directly operated markets and 24% increase in distributors' markets. Directly operated markets and a 27% increase in distributor markets. Major markets maintained strong momentum, including a 110% increase in South America, followed by Europe, which is another key market in the next 5 years, achieving 70% increase in this quarter and a 14% increase in Latin America, a 21% increase in Asia, excluding China. For the year of 2023, we witnessed a 120% increase in North America, 70% increase in Europe, 50% increase in Latin America and a 26% increase in Asia, excluding China. Firstly, same store sales in overseas markets during December quarter increased by 90% year over year, including 39 percent increase in directly operated markets and 30% increase in distributors markets.

Operator

In terms of major overseas markets, such as North America, it experienced a 49% increase. We also witnessed a 23% increase in Latin America and a 12% increase in Asia countries, excluding China. For 2023, same store sales in overseas markets increased by 26%, including a 45% increase in directly operated markets and a 22% increase in distributors' markets. Later overseas markets such as North America, it experienced a 75% increase, and we also witnessed a 34% increase in Latin America and an 18% increase in Asia, excluding China. Opened 174 new stores on a net basis in overseas markets in the Q4, achieving a new record since 2019.

Operator

For the years of 2023, we opened 372 new stores on a net basis, in line with our guidance. In 2024, we expect to open 550 to 650 net new stores in overseas markets with the majority in Asia, excluding China and Latin America, followed by Europe and North America. In January, April submitted our 2024 Investor Day and shared development strategy for the next 5 years with the investors from a long term perspective. We brought up our mission of lightest fun and our vision to become the world's number 1 IP Design Retail Group with 3 strategies: products innovation with IP design, affordability and globalization. From the product innovation perspective, we will effort our IP strategy and support and focus our efforts in strategy categories.

Operator

We are committed to satisfying the demand driven by interest consumption for the worldwide consumer by placing emphasis on affordability of IP products. We adopt dual engine practice on super IP strategy. On one hand, we continuously collaborated with global top IPs. On the other hand, we were focused on incumbent self designed IPs and generate unique brand advantage. I have confidence that IP market is of great potential.

Operator

We win its fast growth in IP product sales contribution in overseas market from the previous quarters. The IP product sales contribution of the year 2023 already is 40%. While developing strategy strategic category stick is an important measure in products innovation as well. Strategic categories represented by blend boxes, disposable products for toppings, plush toys, fragrance and perfumes increased about 70% in sales year over year. Buying affordable products to consumers in Minnesota for value for the whole time.

Operator

During 2023, I have become more confident than ever with our advantage in supply chain and IP design after traveling a lot in our overseas market. In 2024, we will speed up an establishment in global supply chain and strengthen our covering in the global suppliers of food quality in order to improve product delivery and anti risk availability of supply chains. These measures will help us in maintaining our competitive advantage in terms of cost saving in our future operations. Nowadays, there are about 24% overseas suppliers, among 1400 global suppliers that we have worked with, including cosmetic suppliers from Korea, supply suppliers from Vietnam, craft shop supplier from India, skincare products from Europe and snacks and toys suppliers from North America. We now have stable and long term collaborations with all these suppliers of above mentioned categories.

Speaker 2

The

Operator

first one is to optimize globalization of our store network. Recently, we developed our focus and support to Eric markets. The newly opened auction of Oxford Street store and catering store in London offset new sales records of all European stores. Moving forward, we expect to see more stores like these to be opened in Europe, which will be one of our key markets of our growth. The second one is products globalization.

Operator

The differentiation in global products will be the engine for store EUE improvement. We will focus on strategic characteristics and carry out customized R and D of products according to local condition, providing our customers with popular products of municipal features, local usage experience and sense of aesthetic. The third one is talent globalization. As of December 31, 2023, percentage of overseas employees exceed 50%, which demonstrate our results in globalization. We will continue to exert effort in talent pool establishments to better compete overseas development of high speed and potential.

Operator

Let's move on to top 4. Quarterly revenue achieved a 90% year over year increase with a quarter over quarter increase of 26% and a year over year increase of 31%. Moving forward in 2024, Toptai will run into 2 key strategies, which are speeding up in store expansion and optimizing its margin profile. In 2024, we will actively expand the layout of the top 1 store network aiming to establish a recognizable and distinctive brand store networks.

Speaker 2

Earnings

Operator

to profitability. On one hand, Toksvai will continue to increase the contribution of cell to ballast products actively. On the other hand, it will conduct a greater control on cost and expenses, improve self forecast capability, conduct reasonable manufacturing arrangement and inventory management and conduct lean reform in supply chains. We expect that Toptoys will continue to improve its market shares and enhance its role in Toptoys market. Year 2020 will be the start of our development strategy for the next 5 years and the year for all of us to fight and thrive.

Operator

We embrace challenge and opportunities with great hearts by emphasizing our products innovation, affordability, globalization strategy and seeking to resolve our orientation, long term wins and belief in victories. I will now turn the call over to Yigoo for a review of our financial performance in December quarter of 2023.

Speaker 2

Thank you, Jack. Hello, everyone. Thank you again for joining us today. I will walk you through our financial results for the December quarter. Please note that all numbers are in renminbi terms unless otherwise noted.

Speaker 2

And I'll also refer to some non IFRS measures, which have excluded share based compensation expenses. Revenue was RMB3.84 billion, representing an increase of 54% year over year. Revenue from China was CNY2.35 billion, up 56% year over year. The increase was driven by: number 1, a growth of 63% in revenue from minisource offline stores and number 2, a growth of 9% from Top Toy. The 63% year over year growth of Miniso offline business from China was a result of a 17% growth in average store count and a 39% growth in per store sales.

Speaker 2

The 90% year over year growth of Top Toy was a result of a 19% growth in our retail accounts and nearly 60% growth in principal revenue. Revenue from overseas markets was CNY1.49 billion, up 51% year over year, driven by an increase of 16% in store count and a growth of 31% in personal sales. Revenue from distributed markets was around RMB723 1,000,000 increased by 26% year over year. Revenue from directly operated markets was around RMB771 1,000,000, an increase of around 86% year over year, accounting for over 50% of our overseas revenue as compared to 42% in the same period of last year. Gross profit in this quarter was CNY1.66 billion, up 66 percent year over year.

Speaker 2

Gross margin was 43.1%, increasing by about 3.1 percentage points in the same period of 2022. The year over year increase was mainly due to two reasons. Firstly, we witnessed high gross margin in overseas markets contributed by product optimization and higher revenue contribution from directly operated overseas markets. Secondly, we also witnessed higher gross margin of Minnesot and Top Toy brand due to a shift in product mix toward more profitable products. SG and A expenses as a percentage of revenue was around 23%, above 1 percentage points, up from 22% in the same quarter of 2022.

Speaker 2

Selling and distribution expense were around RMB701 1,000,000, increasing by about 71% year over year. There are three reasons: number 1, increased personnel related expenses, logistic expenses and IP licensing expenses in relation to the growth of the company's business number 2, increased depreciation expense of the right of use assets in relation to directly operated stores and number 3, increased promotion and advertising expenses, mainly in connection with brand upgrade and the opening of new stores in overseas markets. G and A expenses were RMB186 1,000,000, representing a year over year increase of about 32%, driven by increased personnel related expense in relation to the growth of our business. Turning to profitability. Operating profit in this quarter was CNY765 1,000,000, an increase of 71% year over year.

Speaker 2

Operating margin was nearly 20% compared to 18% in the same quarter of 2022. Adjusted net profit in this quarter was CNY660 1,000,000, increasing by 77% year over year. Adjusted net margin was 17.2% compared to 15% in the same period last year and 16.9% in the previous quarter. Excluding FX impacts, adjusted net margin in this quarter would be 17 0.4%, another new record in this quarter. Turning to cash position.

Speaker 2

As of December 31, 2023, we had a strong cash position of RMB6.9 billion. Free cash flow for CY23 is about RMB1.97 billion, up 100 and 15% year over year. Return on equity or ROE is about 28% for CY23 compared to 15% in 2022, thanks to higher net margin and improved asset turnover. In longer term, we are confident to increase gross margin steadily by leveraging our core capabilities in IP product development, supply chain integration and globalization. We also optimized our expense structure and pursue a sustainable margin profile.

Speaker 2

And our border approved a cash dividend of approximately CNY 650 1,000,000 in this quarter. About 50% of our adjusted net profit during the second half of twenty twenty three. Since our win became a public company in 2020, we have returned about RMB2.8 billion in cash to our shareholders, accounting for about 50% of our adjusted net income from 2019 to 2023. Our capital allocation strategy in the future will continue to balance growth and our commitment to bringing stable and possible return to our shareholders. Thank you.

Speaker 2

And this concludes our prepared remarks. Operator, we are ready to take questions.

Operator

The first line is coming from Goldman Sachs, Ms. Xiaochun. Please go

Speaker 1

ahead. So I have three questions for the management. So for the first one, minisoul domestic business, can you share with us the GMV per store or same store sales trend post the holiday? And given we had high base last year, so how should we think about the same store GMV per store trend into 2024? And second question about the overseas operation.

Speaker 1

So it's good to see management talk about the supply chain global supply chain strategy. But can you share with us more color about the localization sourcing or some diversification of the sourcing from the non China market? And thirdly, for the overseas market, we have very strong performance in U. S. And Latin America, etcetera.

Speaker 1

And so is there any strategy we can discuss to improve the operational performance for those market that get behind like in Asia markets? Thank you.

Speaker 2

Thank you, Michelle. This is Jack. I will answer your first question. For the domestic sales trends, so the 1st 2 months in this year in China, we see total GMV increased by about 30%. And our goal is to reach about 15% year over year growth for the whole quarter.

Speaker 2

For same store sales, for the 1st 2 months, we have recovered to about 95% of last year. And we still see room of improvement for the in the whole quarter. So that we can see what happened in March. And usually, the months after CMY is a low season for our China business. So for this year, it will still happen.

Speaker 2

It will still be the case. But what's positive on this is we have seen the month on month trends for this March is a little bit lower than last year. That means we have seen a stronger post COY months this year. And for same store sales growth, yes, this will be our one of our key focus in our operations in China. So in addition to lean operations, we still have 3 directions.

Speaker 2

The first is to improve our productivity in innovation and development. And productivity power is one of our core capabilities. And we currently estimate that we can fine tune our products, our construction product structure to improve our sales, especially for the interest consumption based products. We are going to improve their sales contribution and it will benefit our same store sales, including buying books, flash toys and other IP related products. The second direction is to improve our channels.

Speaker 2

We now notice that for the nearly 4,000 minutiae stores in China, we still have some structure opportunities. For example, twothree of our domestic stores are within 100 to 200 square meters at this moment And its first store sales is obviously lower than our standard store, about 200 to 300 square meters and our flagship store 300 to 500 square meters. So since this year, we will begin to upgrade some of these smaller stores, increase its area and improve its sales. And the 3rd direction is to improve our brand awareness, including number 1, we will continue of our brand upgrades. We want to open a batch of new stores with higher performance with better image and better operations.

Speaker 2

And number 2, meanwhile, we plan to build Minasoft's own store metrics. Now we are trying different directions, including minisource IP land, minisource go and various store types. And now all of these are in pipeline. Thank you. Okay.

Speaker 2

Michelle, for the number second question, here's our initial thoughts. Our thinking of this issue has always been consistent. That is, from a longer term perspective, we are always optimistic about our prospectors in North American market, in European market and so on, especially the North American markets. So for these questions, I think as a business owner, as entrepreneur, we should think big, think long, think longer. So first of all, we are in consumer sector, so not in a sensitive industry.

Speaker 2

Secondly, we have always believed that if there is any trade friction because all of the American offline retailers, they rely on Chinese spies so much that so this will be industry wide implication and influence. So the American consumers will pay for this at the end of the day. So if there is any of this policy, it won't be a long term policy. Finally, we'll make full proposition on this. So first is that our pricing strategy is cost plus markup because we have enough cost advantage and uniqueness in IP and our self owned brand.

Speaker 2

So these three advantages decide that we have pricing power for our products. So we can transmit all the negative influence to the ending price. The second is we have been preparing ourselves in supply chain. Now for the U. S.

Speaker 2

Market, our local sourcing has accounted for 30% and it will increase in this year. And we have also cooperated with a lot of qualified overseas suppliers. As we shared, about 24% of our overseas of our suppliers are locating overseas. And we are doing prepositions in other aspects, but now I'm not at liberty to share more and we'll share more after this project is done. Thank you.

Speaker 2

Okay. Three things to add on these questions. So we have very ambitious goal for the next 10 to 20 years, I think. If we do well enough, so Minasol USA is will be a business like US10 $1,000,000,000 or even US30 $1,000,000,000 dollars So we have this imagination, but it is still a small fraction of the whole US consumption world. So number 1, we are not like e commerce players, right?

Speaker 2

So we're not that sensitive. And number 2, if this is industry wide influence, It will benefit players with cost advantage such as Minnesota. And number 3, we contributed to local offline retail environment and ecosystem by adding diversity. We are not a barbarian at the gate. We are not the broker and so on?

Speaker 2

Thank you. We shared on Investor Day that we want to focus key markets such as Europe and North America Because in addition to the USA, the European market in the next 5 years will embrace huge developments. Our initial goal is that by the end of the next 5 years, our store network can reach we have thousands of stores in Europe. So in addition to doing well in our existing distributor market in Europe, we will also try different ways to open directly operate flagship stores. We try to participate in operations or try to set up JVs with our distributors in various ways to support local market.

Speaker 2

Meanwhile, we have still have a lot of wide space in Europe. A lot of countries we haven't had one single MIMO store and that's our next stage planning. So except Europe, we now have 2 thirds of overseas stores in Asian countries and Latin American countries. For example, in Latin American countries, this is a market that has the highest operational efficiency in Minnesota's ecosystem. Now in terms of personal sales, our top 5 overseas market 4 of our top 5 markets located in Latin America.

Speaker 2

Now in this market, we have 5 15 MISO stores, but this is a market with 516,000,000 population. So we believe we can have about 2,008 100 stores in there. For Asian countries, now it accounts for about onethree of our GMV in overseas markets. Although the same store sales or personal sales recoveries still lagged behind its peers, but for CY23, it still contributed about 40% of our overseas revenue. For the past 4 quarters in 2023, postal sales recovery rates in Asian countries recovered steadily from 67% in Q1 to 75% in Q2 and to 79% in Q3 and further improved to 82% in Q4.

Speaker 2

We have high confidence to further improve our personal sales in this area and to further enlarge our business. In general, we don't want to limit ourselves in overseas market and we should think long. And our strategy for overseas market in the future is to focus on key markets such as Europe and U. S. Markets and fully diversify the whole overseas operations by using our flexible store models.

Speaker 2

Thank you.

Operator

Next line is coming from Bank of America, Ms. Lucy Yu. Please go ahead.

Speaker 1

So the first question is about increasing support for distributors in Europe market. Could you please elaborate how are we going to support them? And what is the strategy difference between U. S. And EU?

Speaker 1

And second one is on unit economics in domestic market, especially that was the 1st year of reopening. So how should we compare the probability of per store versus 2019? And last one is on Q1 guidance. Mr. Yih already guided for China GMV of 15% growth.

Speaker 1

So how should we think about the overseas GMV growth in the Q1? Thank you.

Speaker 2

So European market is very good. Now currently, we use flexible ways to cooperate and to enhance our support to local distributors, including JV or including cooperating with our store operations. I think the European market as a whole is a very good market, including the average GDP per capita, average consumer spending and so on. So I think it's a comparable market in terms of size and the prospectus with the U. S.

Speaker 2

Market. Population wise, for European as a whole, it has nearly 700,000,000 population. So more than 470,000,000 of that in the North American market. So in longer term, we think European market is still very important growth engine for Minnesota's overseas business. That's correct.

Speaker 2

So for your second question about the store UE, let's say that's very good question. As we shared on our Investor Day, the same store sales of the whole CY23 in China was nearly 90 5% compared to the pre COVID times, I. E. 2019 times. And we still maintain a very healthy payback period for our franchisees, our retail partners within 1 year.

Speaker 2

And for the Q1, about the guidance, I think hi, Lucy, you mean the guidance for top line and bottom line, right?

Speaker 1

Yes. Top line for overseas and break that down into wholesale versus DTC. If you can give any guidance on the margins, that would be great. Thanks.

Speaker 2

Okay. Yes, I think we still see very healthy growth for the 1st 2 months in our overseas market. GMV increased about 40% on a year over year basis. And although we still have 2 to 3 weeks to end this quarter, now we believe overseas market as a whole can maintain year over year growth about 95% to 45% year over year growth rate, including 60% to 70% increase in DTC market and about high teens to low 20s in our wholesale markets. About the margins, I think there's still uncertainty here.

Speaker 2

We're still what you see because it depends on the margin profile of our DTC market. So for the Q1 as a whole, it's usually a low season for all overseas markets. So if you look at the past several years, Q1 usually has about low teens or to low 20s Q o Q decline compared to the previous quarter, Q4. But we have observed better performance in this Q1 because of the DTC market. You may notice that we opened a lot of new stores in the Q4 last year.

Speaker 2

So that means the revenue contribution from the DTC market in this quarter will be significant higher than that in last year. So because the DTC market is still in its early stage and it's apparently not in a fully normalized margin profile. So it may dilute some of our operation margin as a whole. But we have high confidence that if we think long with the increase of the DTCs in a sales scale, it will include positive impact to our operation margin. Hopefully, we can use leverage sales leverage.

Speaker 2

We can have better control on rents, labor quotes, promotional and advertising expenses and so on to improve the margin profile for the overseas DTC market. And at the end of the day to improve the whole operation margin of the company. So in general, we are quite positive of our margin profile for the whole year. Thank

Speaker 1

you.

Operator

The third line is coming from UBS, Mr. Samuel Wang. Please go ahead.

Speaker 3

I have two questions. The first is regarding the SG and A ratio. I noticed that in the Q4 last year, our SG and A ratio is actually around 23% to 24% of our total sales. In the past, I think our guidance is generally 20% to 22% of the revenue. I understand that D2C is one of the main reasons.

Speaker 3

So just to check for 2,004, is that a new norm for us to forecast SG and A ratio given we are also very aggressive on D2C sales expansion? So that's the first question. The second question is regarding the distributors strategy in China market. We aim to increase their store area for them. And do we have any pushbacks?

Speaker 3

And how do we persuade them to expand their store networks? And do we have any quantified number of how many big format stores we are going to open in 2024? Thank you.

Speaker 2

Thank you. Samuel, this is Yi Sen. For your first question about the SG and A trend. So first of all, in the December quarter, we have seen it increased. But if you look at the whole SG and A ratio as percentage of revenue, it increased like 1 percentage points compared to the same period last year, right?

Speaker 2

The year over year improvements are majorly in relation to our newly opened direct stores, especially in the key markets such as the North America, including increased rental related expenses and people expenses and store opening related marketing expenses and so on. So as I shared in my answer to Lucy's question, we if you look at the whole year, we feel positive about the improvement of the whole operational margin of our DTC market. So with the revenue contribution of the DTC market increased And if we successfully increase improve its margin profile, it will contribute positively to the whole operation margin to the company as a whole. But if you look at this problem on a quarterly perspective, it is still it will have some uncertain because, for example, you investment you put investments such as store rents, marketing expense in this quarter, but the store will have to open until next several quarters. So it will obviously impact this quarter's P and L.

Speaker 2

So I strongly suggest you look at this question at least on a yearly basis. And for your second question about the channel upgrade, Yes, we do have a plan, but it's not finalized yet. We now have nearly 4,000 stores and nearly twothree are within 100 to 200 square meters. So at the end of the day, we want to upgrade all of that, but we should take the measures step by step. And it has to depend on the availability of the neighborhood in the shopping malls and depend on the negotiations with franchisees, that is business, right?

Speaker 2

You have to make negotiations and it has some uncertainties. Thank you.

Operator

The 4th line is coming from Jefferies. It's Anne Lin. Please go ahead.

Speaker 4

So my first question is on like whether for the Minaso brand where you have a segment margin of 22.6% for the half year And on a half on half basis, improved like by 0.2 percentage point. So we're just wondering whether there's any breakdown or idea in terms of the margin difference between the domestic market versus the overseas market and overseas market like between direct operator and the wholesale business.

Speaker 2

Okay. Thank you, Ann. About the breakdown, I mean, I think you mean the OP margin, right?

Speaker 4

[SPEAKER DOCTOR. RICHARD GLICKMAN:]

Speaker 2

Richard Glickman:] Yes. Yes. I think it's a dynamic mix. For the 22.6%, we do not disclose them. Maybe it's after your calculation, but that's close to our management accounts.

Speaker 2

So among this mix, we have in the Ministry of China, which obviously is SLI and with higher OP margin, higher OP margin because the GP margin in China is nearly around 38% to nearly 40%. And the expense structure is quite light for this business. So obviously, it can have nearly 30% or so OP margin. But for our overseas market, especially for DTC markets, since it's at its early stage and its margin profile is not that stable and it fluctuates on quarterly basis. So we do not think that this is right time to discuss this part of margin.

Speaker 2

Thank you.

Speaker 4

So my question is regarding the European operation, which is not part of the direct operated business. So moving forward, how are we going to are we going to reclassified it or like how do we look at the European market? Oh, that's very

Speaker 2

good question. And the sales growth is

Speaker 4

to break down, yeah.

Speaker 2

Yes. That's very good question. And I think if you look at the whole overseas markets of Minnesota, I think the best thing we noticed that is we have a very quite flexible business model among different markets. For Europe, you are right that all of our markets now are operated by our distributor partners. And Ms.

Speaker 2

Jie mentioned that hopefully by the end of next 5 years, we will have thousands of stores in European markets. And we have seen we are quite confident with the possibilities to achieve this goal. And margin wise, you are right that it will contribute to positive impact on the whole OP margin. Actually, we have continuously witnessed this trend go on during the past 3 to 4 months. Well, we see as we increase the proportion of IP products exported to these wholesale market, we have seen the whole margin profile of distributor market improved, including increase in GP margin and increase the sales leverage and so on.

Speaker 4

Got it. Got it. On behalf of So my last question is on the U. S. Market where we have a very good performance and so far, but at this stage now it's still a directly operated market where we run our own store.

Speaker 4

So when will we start like our franchise business model in the US? Thank you.

Speaker 2

That's a very good question. Yes. We have been quite open to consider various options in growing our U. S. Market.

Speaker 2

But now, more than 9% of our stores there are our directly operated. In the future, we are open, still open to explore various possibilities. But at this moment, we want to do it by ourselves because if you look at the wholesale market, the DTC market and overseas markets, obviously, when we want to accelerate the growth of a certain market, the best way is to do it by yourself because you can have more control on the whole business, right? So at this moment, the U. S.

Speaker 2

Market is at its momentum. So we want to see this momentum and we want to know, to find out how well can we optimize the OP margin and how large can we enlarge the addressable market at first, but in the future we are still open.

Speaker 4

Not at this stage.

Speaker 2

Yes, but not at this time. Thank you.

Speaker 4

Okay, got it. Thank you.

Operator

Thank you all again for joining our call today. Now we shall conclude our call. We will see you in the next quarter. Goodbye.

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Earnings Conference Call
MINISO Group Q2 2024
00:00 / 00:00