Baozun (BZUN) 21 Nov 242024 Q3 Earnings call transcript

Good morning, ladies and gentlemen, and thank you for standing by for Baozun's Third Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I will now turn the meeting over to your host for today's call, Ms. Wendy Sun, Senior Director of Corporate Development and Investor Relations of Baozun. Please proceed, Wendy.

Thank you, operator. Hello, everyone, and thank you for joining us today.

Our third quarter 2024 earnings release was distributed earlier before this call and is available on our IR website at ir.baozun.com as well as on PR Newswire services.

We have also posted a PowerPoint presentation that accompanies our comments to the same IR website where they are available for your download.

On the call today from Baozun, we have Mr. Vincent Qiu, Chairman and Chief Executive Officer; Ms. Catherine Zhu, Chief Financial Officer; Ms. Arthur Yu, President of Baozun E-Commerce; and Mr. Ken Huang, Chief Financial Officer of Baozun Brand Management. Ms. Qiu will first share our business strategy and company highlights, followed by Ms. Zhu, who will discuss our financials and outlook and then by Mr. Yu and Mr. Huang to share more about our e-commerce and brand management business separately. They will all be available to answer your questions during the Q&A session that follows.

Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of the U.S. Securities Act of 1933 as amended, the U.S. Securities Exchange Act of 1934 as a mandate and the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the U.S. Securities and Exchange Commission and its announcement notice or other documents published on the website of the Stock Exchange of Hong Kong Limited. All information provided in this call is as of the date hereof and is based on assumptions that the company believes to be reasonable as of this date, and the company does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB.

In addition, we may elect to use adjusted in place of non-general accepted accounting principles or non-GAAP in order to reduce overall confusion that may cause from our discussions about financials and operations related to the GAAP grant. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Vincent Qiu. Vincent, please go ahead.

Thank you, Wendy. Hello, everyone, and thank you all for your time. I'm pleased to report that Baozun is well on track with advancing our strategic transformation.

Our total revenues grew by 13% year-over-year, reflecting the strength of our revitalized approach and consistent operational alignment. Both BEC and BBM have enhanced key growth drivers. BEC achieved a 14% revenue increase, driven by improvements in both the services and the product sales. Notably, the Douyin business grew by triple digit year-over-year, directly resulting from our strategic integration with location and our commitment to launching innovations that capitalize on emerging trends. These initiatives have strengthened our presence on Douyin, further reinforcing Baozun's leadership in digital commerce. BBM has also resumed growth with a 10% year-over-year increase, the first apple-to-apple revenue expansion since our acquisition, and in fact, following years of top line contraction from GAP brand in China.

Our efforts to build partnerships have been instrumental in integrating global resources with local insights and networks, and we anticipate sustained top line growth momentum in 2025. Hunter has also made solid progress as we continue refining product categories and optimizing our channel network. This momentum was highlighted by the recent launch of a pop-up store in Shanghai High Fashion District, Zhangyuan. The opening generated remarkable attention during Golden Week, attracting widespread visibility that drives traffic and sales. These initiatives bolster Hunter's brand equity and further underscore our brand management capabilities and the localization of brand appeal. In summary, Q3 has been a pivotal quarter of growth and progress across our business segments. I'm confident about sustaining this momentum.

Now let me pass to Catherine for financial update.

Thanks, Vincent, and hello, everyone.

Now let me share with you our third quarter 2024 financial results in more detail. Please turn to Slide #3. Baozun Group's total net revenues increased by 13% year-over-year to RMB 2.1 billion. Of this, e-commerce revenue grew 14% to RMB 1.8 billion, while brand management revenue grew 10% to RMB 331 million. Breaking down the e-commerce revenue by business model, services revenue increased by 15% to RMB 1.3 billion for the quarter. This growth was primarily driven by a 40% year-over-year increase in revenue from digital marketing and IT solutions as well as improved performance in emerging channels such as Douyin and Tencent Mini Programs. BEC product sales revenue resumed growth for the first time since the launch of our transformation plan, rising 10% year-over-year to RMB 454 million. This growth was mainly driven by stronger performance in the beauty and cosmetics categories, along with increased contributions from our self-incubated brands and those under the exclusive distribution business model. BBM product sales totaled RMB 330 million for the quarter, reflecting 11% year-over-year growth compared with the same period of last year. This growth was mainly attributable to our product segmentation and merchandising plans. Please turn to Slide #4. From a profitability perspective, our blended gross margin at the group level for product sales was 28.1% and gross profit increased by 2% to RMB 220 million. Breaking this down by our key business lines, gross margin for e-commerce product sales were 10.2% for the quarter. The decrease in gross margin for e-commerce product sales was mainly due to a higher proportion of promotional rebates, mostly cash rebates from brand partners compared to the great proportion of procurement rebates in the same period of last year. On a like-for-like comparison basis, gross margin for e-commerce expanded by approximately 500 basis points from the same period of last year. Gross margin for BBM was 52.9%, relatively flat compared to the previous quarter.

Now turning to bottom line items. Please refer to Slide #5.

During the quarter, our adjusted loss from operations totaled RMB 85 million, an improvement of RMB 5 million from a loss of RMB 90 million a year ago. This included an adjusted operating loss of RMB 30 million from e-commerce segment, an improvement of RMB 10 million compared with RMB 40 million in the same period of last year. BBM's adjusted operating loss totaled RMB 55 million compared to RMB 50 million in the same period of last year.

Our adjusted net loss attributable to shareholders for the quarter was RMB 67 million, an improvement of 12.5% year-over-year from RMB 76 million in the same period of last year.

As of September 30, 2024, our cash and cash equivalents, restricted cash and short-term investments totaled $2.7 billion.

Lastly, we continue to execute our share repurchase program. Year-to-date, we have repurchased approximately 8.6 million ADS for $9.9 million through the open market, reflecting our confidence in the company's future. Please note that our stock repurchase program must adhere to applicable U.S. and Hong Kong statutory and regulations as well as compliance requirements of NASDAQ and Hong Kong Stock Exchange, including, but not limited to, daily trading volume, trading windows and impact on management's voting rights. Year-to-date, we have repurchased approximately 6% of our total shares outstanding at the beginning of the year.

As of today, the remaining amount of shares as authorized by our Board, our share repurchase program effective through January 2025 is $10 million.

Let me now pass the call over to Arthur to update you on BEC, our e-commerce business.

Okay. Thank you, Vincent and Catherine, and hello, everyone.

We are glad to report that BEC continued its growth in quarter 3, achieving a 14% year-over-year revenue increase.

Our services revenue further accelerated its upward trend and grew 15% year-over-year. Product sales also made a notable recovery to achieve a 10% year-over-year growth following years of contraction. We believe the improving top line momentum reflects the progress of our strategy to transform BEC business towards a healthier, more diversified and resilient model.

Now please turn to Slide #6 for operational highlights on services.

Our core categories, including apparel and luxury, displayed consistent growth, setting a solid foundation for service revenues.

Our brand partners are actively engaging with us on creative content and omnichannel marketing to boost brand awareness online.

Our continued innovations in digital marketing had earned up several prestigious industry recognitions, including the top-notch award of Best E-commerce Agency of the Year at the recent ROI Festival.

In terms of omnichannel expansion, our Douyin business achieved triple-digit growth year-over-year. We focused on brand-centric live streaming and delivered several high-impact projects. This included a brand live stream for a leading luxury automotive brand and a sales-driven live stream for an international theme park brand.

In addition, we hosted multiple high-profile fashion show live streams, significantly enhancing both brand visibility and sales conversion for our brand partners.

Beyond Douyin, we also recorded high growth on emerging platforms like Tencent's Mini Program and Little Red Book.

As a right partner on Little Red Book, we have made it a strategic focal point and we will continue to upgrade operations and marketing services to drive substantial growth for our clients on this rising content-driven platform.

Now turning to product sales as highlighted on Slide #7. The growth turnaround in product sales was mainly driven by our efforts in prioritizing high-quality business lines and the completion of optimization of low-margin projects in previous quarters. Categories such as beauty and cosmetics, kids and baby and home and furnishing achieved strong double-digit growth.

We also expanded our category metrics with new initiatives in apparel and trendy toys, further strengthening our diversification and business resilience.

Regarding our exclusive distribution business, we are focusing on channel expansion and brand marketing. Among the brands we operate, the British high-end kitchenware brand, Joseph & Joseph sales performance this quarter far exceeded our expectations. We anticipate continued top line growth and improved profitability for our product sales business in the coming quarters.

In addition to building a healthy top line growth, we also implemented efficiency-enhancing measures through the application of AIGC tools.

During the quarter, we launched our intelligent customer service assistant, S-Whiz to quickly understand and respond to consumer needs, delivering personalized, high-quality service.

Finally, let me provide a quick update on the recent Double 11 shopping festival.

Our total order value reached a record high with double-digit year-over-year growth. Among all brand partners we participate in the campaign, more than half achieved year-over-year growth and 20% of the brands more than doubled their gross sales. Across channels, including Tmall, JD, Douyin and VIP Shop, we all achieved double-digit growth.

While the recent Double 11 was encouraging, the record high return rate also dragged down overall operating efficiency.

As we headed into quarter 4, we remain cautious due to persistent macroeconomic pressures and a slower-than-expected consumer recovery.

We are committed to helping brands succeed in the competitive market in China.

Now I will pass to Ken for an update on BBM.

Thank you, Yu, and thank you all. Please turn to Slide #8 for additional insights into BBM's progress through Q3. I'm pleased to report that BBM achieved a 10% year-over-year revenue growth, making the first top line turnaround for GAP in recent years, on an apple-to-apple basis. More encouragingly, Q3 demonstrated a steady sales momentum with sequential improvements from July through September. This growth reflects the early success of our strategic initiatives despite the ongoing macro challenges. Close collaboration with GAP Inc.'s global resources remains central to our development plan. This close partnership enables us to tailor products to local preferences while preserving global brand integrity.

We also incorporated global campaigns such as [indiscernible] for regional appeal to create a seamless and satisfying experience for our customers.

We continue to optimize planning and execution across design and supply chains to enhance efficiency and consistency from concept to delivery, ensuring better alignment of product availability with demand.

During the quarter, we introduced the channel-specific exclusive products and implemented a more strategic pricing reason aligned with the product life cycle. On Douyin, in particular, we participated in the Super Brand Show for both adult and kids and baby, which drove the channel to account for over 40% of our online sales for the quarter.

We expect exclusive products to continue being a major driver of our online sales in the coming months. This approach enabled us to achieve higher conversions while maintaining stable gross margins. In Q3, we opened 24 new stores, including high-performing stores such as Urumqi, Xi'an, Shaoxing as well as Beijing and Shanghai. These new stores delivered strong conversion rates, healthy gross margins and impressive monthly productivity in terms of sales per square meter.

As mentioned in our previous communication, we continue to fine-tune our new store opening philosophy to maximize store productivity while capitalizing on opportunities in emerging markets.

Additionally, we have enriched the shopping environment to be family-friendly and enjoyable for all ages.

Going forward, our expansion strategy will focus on quality locations, high-traffic neighborhood areas in emerging cities. At the same time, we are leveraging local partnerships in new Tier 1 and Tier 2 cities to ensure that new openings align with market demand and the long-term potential. We believe collaborating with strong local partners will not only enhance our success, but also mitigate market risks. A recent nationwide roadshow with existing and potential landlords and franchise partners highlighted their increased confidence and commitment to the brand goals. They expressed appreciation for GAP's consistent brand identity and our flexibility in localizing products and operations.

We are on track to meet our annual target of 50 new stores, increasing total store footage year-over-year by the end of 2024.

Additionally, we opened 2 new Hunter stores, 1 in Shanghai and 1 in Singapore, bringing the total number of offline stores to 146 under our management by the end of Q3. In summary, despite the challenges of a gradual consumer recovery, we remain disciplined in our strategic direction.

Our focus on localized engagement, coupled with GAP's global brand strength positions us well to expand our footprint, drive top line growth and maintain healthy gross margins. That concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

[Operator Instructions] The first question today comes from Alicia Yap with Citigroup.

I have 2 questions.

First is that, can management elaborate the overall performance during this year's Singles' Day, specifically, which category performed better than your expectation and which category performing slightly worse than your expectation? And then how is your GAP China sales during the Singles' Day? Also wondering if there's any differentiated shopping behavior that you observed this year compared to the previous year? And then second question is related to your advertising tool.

So with more platforms rolling out the AI advertising tool, so how will Baozun actually embrace the AI technology to capture even bigger opportunity? So have you seen or do you anticipate there could be more smaller brands, especially the domestic brands might be more eager or need to seek help from Baozun on helping them to do the better targeting digital ad campaign in the future?

Let me provide some answers for the 2 questions.

The first one regarding the performance of the Singles' Day for this year, I think we delivered actually a solid performance from our own perspective.

So basically, the categories which are our strength like the apparel, sports and luxury, all performed pretty well during the Double 11 campaign. The ones which are not meeting our expectation are the small appliance and also travel, which is the hotel and theme park, which are slightly below our expectation. The key character for this year is actually [indiscernible] true omnichannel Double 11.

So basically, as I mentioned earlier, all the major channels and us has shown a double-digit growth, which means our business model is towards more omnichannel business model. And also, there is a character which we have seen is the period of Double 11 has become longer and also the return rate and cancellation rate has been higher.

So this is giving the campaign period more challenging, but the service provider like Baozun actually stand-out during this period because our service capability and also our infrastructure and IT provides a stable service to the brand, which they really like.

So this is what I would like to further comment on Double 11.

Regarding to AIGC, we actually started to apply the AIGC technology to our business operation a couple of years ago. And from our perspective, AI will help the business from 2 aspects. Number one is improve the efficiency.

As I mentioned in the prepared notes, so in this quarter, we successfully adopted a new tool called S-Whiz, which is helping our customer service agents to simplify the way they do work, improving the service quality at the same time, reducing the average lead time for each of operations.

So this is one. And the second thing, the AI can help our operation is to give a better informed decision-making tool to our brand. And from Baozun, we recently pushed out what we call Baozun Business Intelligence, which are helping the brand to collect and analyze the market data to inform them with a better merchandising and planning strategy.

So those are how we applied the AIGC tools in the day-to-day operations, and we have seen the good results from those.

Maybe Ken can address the GAP related question.

Yes. And for the sales of GAP's performance on Double 11, I can explain. The final ranking in men's apparel on Tmall actually increased 3 positions compared to last year. The sales on both GMV and net sales increased by double digits. And this performance is not only on Tmall platform. This year, we even performed stronger on JD and other platforms.

So in total, we are satisfied with our performance of GAP sales on Double 11.

The next question comes from Frank Tao with CMBIS.

I have a question regarding your business operating strategy. We've noticed a slowdown trend in the GMV growth rate of live streaming e-commerce platforms this year. And I would like to ask how does management see this trend? And will there be some adjustment to your business operating strategy in the coming quarters?

I will comment and then maybe Vincent can add more if it is required.

So basically, from my point of view, as I mentioned, we are already omnichannel operations.

So the trend in the different channels will not fundamentally change our operations because what we are now offering the service and solution to our brand is to helping them to better planning which EC platform should they put more resource and emphasize going forward to do the e-commerce business. And based on that, we have developed a lot of tool and a lot of the analysis to help them make a decision in terms of how to decide or where to put resource on to.

So this is the first one. And second one, given our stronghold is on Tmall and during this year's Double 11 and 618, we have seen a strong recovery in terms of the overall Tmall performance. That is also a good sign, which is helping us to drive our business forward.

Yes.

So right now, our capability is already established across all the channels and all the service components. That means that we have the capability to deliver services to each of the platforms in -- no matter it is a streaming e-commerce or not.

So we support all the channels. And just as Arthur mentioned, our business intelligence right now can have a close look of all the channel dynamics and tell us a little about the future trends.

So we can allocate resources depends on the judgment for the future potential of each of the platforms to get a better result.

The next question comes from Thomas Chong with Jefferies.

I have 2 questions. My first question is about -- so how is the monthly sales performance in recent months post Double 11? And my second question is how should we think about like the outlook for categories like luxury, apparel, FMCG and consumer electronics appliance?

I think given this year's Double 11, there's a lot of heavy promotion and big discounts given by all the platform. Post Double 11, we have seen a softening sales from all categories. But with the weather getting colder, especially for the apparel category, we hope there will be a recovery in terms of the sales going into the December.

So this is the overall.

In terms of the luxury apparel and FMCG categories, I think overall, we have seen the growth rate being flat year-over-year. And our outlook into the next year is relatively cautious. Having said that, I think what Baozun has been doing is to be able to provide a high-quality service for the brand partners we operate.

Given the current market condition, all the brand partners are starting to put a lot of emphasis in terms of their infrastructure and capability building, which means they like the partners like Baozun, who has a very good capability across all the omnichannel, which helps them to become a partner to help them to make a decision in terms of how to drive the business forward. And I think with that, we think even though the overall market outlook is relatively cautious, but under this market, there are huge opportunity for Baozun to operate and to succeed.

[Operator Instructions] The next question comes from [indiscernible].

I have 2 questions.

The first is that JD.com has also invested a lot in the clothing category for this year's Double 11 campaign, and the growth rate is also very impressive.

So how is Baozun's layout in this channel? And my second question is that we have seen many media reported that the return rate of the Ralph Lauren brand is very high.

So what are Baozun's comments on this? And has there been a significant increase in consumer return rates, especially in the clothing category and for the brands operated by Baozun?

Yes, we have also seen a good performance from JD platform. And Baozun has been working very closely with JD as a strategic partner to drive the growth of the apparel and sports category. And in 2023 and 2024, we have been voted as the most high-level strategic partner, [Foreign Language] partner, which means we have achieved a result they think we are a good partner to them.

So basically, from a performance-wise, our GAP brand is one of the top performing brands in JD. And also from a luxury brand perspective, top 10 brands operating in JD, 5 of them are operated by Baozun.

So this means how we help JD to push that forward. But having said that, overall size in terms of the apparel and sports category on JD is small, still very small compared with Tmall, which represents a huge opportunity for Baozun to further succeed in this platform.

Now turning to Ralph Lauren.

So we also noticed the news about the high return and cancellation for Ralph Lauren.

We are very sorry to see that, but we are not in a position to comment. This is our brand business. But what I can share with you is how we help Ralph Lauren to smooth the negative impact in terms of the cancellation because we operate the technology in terms of e-commerce for Ralph Lauren. And during the Double 11 period, once there is a cancellation, our system can help the Ralph Lauren business to put the product back on to the shelf within a very short period, sometimes only within a couple of minutes, which means even though there is a high cancellation rate, but the impact to the brand is very minimal.

So as a result, the cancellation rate is very high, but the impact to the business is minimized to the levels which are not impacting business hugely. And what I can share with you is the net GMV target on Ralph Lauren for Baozun, we have exceeded that target.

So yes, and also the brands are happy with our service.

In terms of the overall apparel, high return on cancellation is still an issue, even though we tried from an operation perspective to solve that problem, but still from this year's overall performance, we still see a high single-digit increase in terms of the return and cancellation rate overall. I hope that answers your question.

That's very clear. And I want to ask 1 more question.

We have seen that the output of BBM department is quite encouraging compared to our observations for brands in apparel industry.

So can management share more about the top line trends as well?

For BBM, I think first is the big portion is still GAP, but also Hunter also performing very well on Q3. And for GAP, as explained before, because our online growth in Q3 is very encouraging, especially our performance on Douyin Super brand show as well as our product and commercial strategy, such like what you asked the question about JD, when a brand are facing the different platform strategies, this requires the brand to have a more flexible product strategy and also commercial strategy to be more faster responsive to the platform. And this flexibility in Baozun BBM help us to increase our online sales higher than our expectations. And for offline, although the overall traffic is not fully recovered, but quarter-to-quarter it is improving. And with our expansion into the new Tier 1 and Tier 2 cities and the new store performance, especially the sales per square meters also help us to increase our sales performance. I hope this answers your questions.

[Operator Instructions] The next question comes from Jack Hou with Huatai Securities.

I have 2 questions for you.

The first one is about with this year Double 11 promotion, maybe we saw a slightly warming consumption sentiment versus third quarter. We all know Baozun operates many brands and many categories.

So how does Baozun expect the consumption trend and opportunities in the next year? And I have a follow-up on our outlook for next year as well as we're approaching the end of this year, could management share some color on our outlook for next year, maybe on top line and margin?

I will take the first question.

For the second one, Vince and maybe Catherine can add on in terms of outlook for Baozun.

So the first one, in terms of the outlook for consumption, we think for next year, the overall consumption will further stabilize.

So after the up and downs during the COVID period, a lot of the brands has choose to be cautious on the China market. From Baozun perspective, we have seen the brands want to spend more money in terms of building their internal capability, which we will put more emphasis on helping them to do so. And from our own perspective, we will focus more on service quality and innovation as a key to maintain our stronghold in terms of apparel, luxury and sports. At the same time, we will use our capability in those core categories to expand into other new categories, which to drive the growth.

So this is from Baozun perspective. Vincent and Catherine, do you want to comment on the outlook?

Sure. Yes, the second one, yes.

Looking forward, we think 2 things. Number one is that we are seeing that more and more policies and initiatives from the government. We think this will better the economy in general.

So we have a reason to be a little more optimistic for next year. And also, I think most importantly, our focus will be in optimizing our operations to make our own business better. This is even more important than the others.

So I think next year for us, in all the aspects of the business operations, we will look into the potential seriously and make that to be realized more in 2025.

This concludes our question-and-answer session. I would like to turn the conference back over to the company for any closing remarks.

Thank you, operator. On behalf of Baozun management team, we would like to thank you all for your participation in today's call.

If you require any further information, feel free to reach out to us. Thank you for joining us today. This concludes the call.

The conference has now concluded. Thank you for attending today's presentation.

You may now disconnect.