Baozun Inc. (NASDAQ:BZUN) Q3 2022 Earnings Call Transcript

Baozun Inc. (NASDAQ:BZUN) Q3 2022 Earnings Call Transcript November 29, 2022

Operator: Good morning, ladies and gentlemen and thank you for standing by for Baozun’s Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. 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.

Wendy Sun: Thank you, operator. Hello, everyone and thank you for joining us today. Our third quarter 2022 earnings release was distributed earlier and is available on our IR website at ir.baozun.com as well as on Globe Newswire services. They have also posted a PowerPoint presentation that accompanies our comments to the same IR website, where they are available for download. On the call today from Baozun, we have Mr. Vincent Qiu, Chairman and Chief Executive Officer; Mr. Arthur Yu, Chief Financial Officer; Ms. Tracy Li, our Vice President of Strategic Business Development; and Ms. , President of Baozun Brand Management. Mr. Qiu will review the business operations and company highlights, followed by Mr. Yu, who will discuss financials and key operating metrics.

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 Securities Exchange Act of 1934 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. SEC and the announcement on the website of Hong Kong Stock Exchange.

The company does not take 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 and the comparisons are on year-over-year basis. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Vincent Qiu. Vincent, please go ahead.

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Vincent Qiu: Thank you, Wendy. Hello, everyone and thank you all for your time. Despite the ongoing challenging environment, we are encouraged with the resilience of business. As shown on Slide #2, in addition, we delivered double-digit growth in several categories, including luxury, fashion apparel, and FMCG. Moreover, our digital marketing and IT solutions revenue increased by 22%. While product sales continue to decline as planned as we keep optimizing distribution model, service revenue grows 4% year-over-year. Business development during the quarter was on track with a net addition of 7 brand partners for store operations. For existing client base, it’s worth noting that our business development also speaks to higher engagement in company channel and more value-added services.

Our integrated omni-channel operations help brands to timely identify evolving e-commerce trends, thus enhancing resource allocation efficiency. During the quarter, over 42% of our brand engaged with us on an omni-channel approach. We continuously develop new features and tools to augment bundled value-added service. This quarter, we launched a short video cleaning tool, which automatically converts long video or live streaming record to short videos. We also co-developed with a marketplace and AI-based outbound calling system to make proactive communications to targeted brand customers. This helps us with better purchase frequency and conversion. We expanded the regional service centers to more cities recently and added new scope to them, supported by our customer service management systems or S-ANY as a backbone.

We improved not only service quality, but also efficiency. The new module named S-ANY, which means event anywhere, has been developed and reported on to S-ANY for centrally managed content creation tool during the quarter. Despite the short-term headwinds from macro environment, we are glad to see that brand partners still take China as one of the most critical markets with a lot of potential. We continue to see a trend of digital transformation such as the rapid convergence between online and offline or OmO continues. Along with the digital transformation trend and the emphasis on our China-for-China strategy, brands are investing in IT solutions for the long-term. As such, our technology-related revenue sees notable growth with a sound pipeline for additional growth.

In light of the strong demand, we officially launched BOCDOP, a Baozun omni-channel digital operation platform, a package solution with powerful customization capabilities. BOCDOP is centered on multiple channel order fulfillments and delivers powerful omni-channel D2C, data intelligence and decision support functionalities to our brand partners. Following many years of nonstop investment in technology, we started expanding upstream in recent years and target to evolve into a technology-driven omni-channel commerce player. Early this November, we announced our acquisition of Gap Greater China, one of the largest American specialty apparel brands. Along with the acquisition, we launched Baozun Brand Management, a new line of business that we see as a strategic addition that naturally flows from our core e-commerce service and technology offering.

The acquisition is a good fit to develop BBM since we have worked with the brand for many years. We love it and believe in it. It has only been a few weeks since our announcement and we are still in the process of finalizing the acquisition. It is encouraging that since the news was there, many other brands have come to us to discuss about China-for-China strategy and about our technology-driven approach. It has become obvious that our brand management offering clearly can add more to our value proposition and it differentiates us from traditional service providers. While it will take time and hard work to fully actualize our vision, we believe a closed loop demand to supply value chain as well as integrated offline and online commerce will make brands unique and much more successful than before.

I shall now hand over the call to Arthur to go over our financials. Thank you.

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Arthur Yu: Okay. Thank you, Vincent and hello everyone. Please turn to Slide 4. During the quarter, our total GMV increased by 16% to RMB18.6 billion, mainly due to outstanding performance of one leading electronics brand. Excluding this brand, the adjusted GMV would have been flat on a year-over-year basis. Total revenues declined by 8% to RMB1.7 billion, of which product sales declined by 29%, while service revenue increased by 4% compared with the same period of last year. Now, let’s turn to Slide #5 for a breakdown of revenue. Despite a decline in total revenue, several categories, including apparel and FMCG achieved double-digit growth. The value-added services has shown more resilience in this quarter, where digital marketing and IT solutions increased by 22% and warehousing and fulfillment service revenue declined by only 7%.

Overall, the contribution from value-added service increased to 23% of total revenue in this quarter. Please turn to Slide #6. In this quarter, our cost of products decreased by 30% to RMB415 million, mainly due to continued efforts in optimizing product sales business. As a result despite a reduction of 29% in product sales revenue, the gross margin for product sales improved by 175 bps to 16.6%. Moreover, our overall gross margin improved by 800 bps to 76.2% driven by a combination of a higher service revenue mix and improving gross profit margin. Now turning to Slide #7, our non-GAAP income from operations was RMB17 million during the quarter, representing a non-GAAP operating profit margin of 1%. Non-GAAP net income was breakeven this quarter, mainly impacted by unfavorable exchange rate movements.

Once again, we have prepared waterfall diagrams depicting our analysis of how our top line and bottom line evolved year-over-year. As a reminder, this analysis is unaudited and should solely be used as supporting members to aid discussion. First, on Slide #8, this diagram shows our net revenue walk from quarter three 2021 to quarter three 2022. In red, you can see the biggest item impacting our revenue this quarter was product sales, as we continued our efforts to optimize low-quality distribution revenue. Revenue from DM and IT services, which we view as value-added services, grew by 22% this quarter. Revenue from warehouse and logistics declined by 7%, mainly due to our decision to de-invest a subsidiary in the business, which I will address more later.

Excluding such investment, revenue from warehouse and logistics should have been a slight increase year-over-year. On a positive note, this initiative led to better profitability. Now please turn to Slide #9 for the indicative walk of non-GAAP operating profits. As mentioned earlier, the combination of higher COVID-related cost and general operating deleverage due to lower revenue resulting in less profit for online store operation businesses, generally across all categories. However, as shown, non-GAAP operating profit from digital marketing and IT improved by RMB30 million year-over-year. In addition, the optimization of low-quality distribution business contributed RMB3 million and profits from warehouse and logistics business improved slightly by RMB1 million.

We also generated a positive savings of RMB3 million from back office cost optimization. In cost optimization, we continue to gain higher efficiencies by centralizing our operating capabilities, rationalizing incentives and consolidating office footprint. More significantly, this quarter, we selected more cities such as Jinan, Chengdu and Enshi to expand the scope and scale of our regional service center. Now approximately 60% of our customer service staff are located in regional service centers. By placing customer service staff in regional centers, increased service flexibility and agility to better cope against COVID-induced top line. Moreover, we expanded beyond customer service and added more operating functions at regional service centers and live stream studios.

We also further deepened our cooperation with Cainiao to leverage already established infrastructure and network. As you may recall, in the second quarter, we began to manage Cainiao’s warehouses in the apparel category, got business referrals in luxury and premium sectors and also launched the mall solution for some of our key sportswear brands. Motivated by the synergies and after further careful evaluation, we decided to reduce our shareholding of Baobida, a last-mile delivery agency to minimize duplication with Cainiao. As you may recall last year, priority to our strategic alliance with Cainiao, we invested into Baobida to expand our logistics capabilities. However, now with Cainiao alliance, we decided to wait on our investment to a minority holding in Baobida.

Now turning to Slide #10 about our cash flow, as of September 30, 2022, our cash and cash equivalents totaled RMB2.9 billion. In light of macro uncertainty, we continue to improve working capital efficiency. During the quarter, we launched new initiatives to further advance our back-end process to improve inventory management, billing and collection activities. Historically, in order to prepare for the Double 11 festival, the first quarter typically require peak operating cash flow. This third quarter benefiting from the progress in our inventory procurement planning, we were able to narrow the operating cash outflow to only RMB113 million compared with RMB740 million a year ago. During the quarter, we repurchased approximately 700,000 ADS for approximately $6.1 million.

To-date, with our share buyback effort, we repurchased a cumulative total of $68 million in the last 9 months. Lastly, the voluntary conversion into a primary listing status on the main board of the stock exchange of Hong Kong Limited became effective on the November 1. Baozun is now a due primary leasing company on both Hong Kong Stock Exchange and the NASDAQ Global Select market. This marks a significant milestone in our capital market journey. Overall, our effectiveness in maintaining operations and supporting our partners’ success during this period of macro uncertainty underscores the durability and strength of our business model. Throughout this year, we prioritized the cost transformation and working capital efficiency and our efforts are bearing fruits in terms of higher gross margin, lower operating expense and better cash flows.

The establishment of Baozun Brand Management, along with the acquisition of Gap Greater China will provide us with good opportunity for future growth. This is my financial review section and that concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

Operator: Thank you. Our first question comes from the line of Alicia Yap from Citi. Please go ahead. Your line is open.

Alicia Yap: Hi, thank you. Good evening management. Thanks for taking my questions. I have two questions. First, if management can share with us any preliminary color that you are seeing in terms of the consumption sentiment and across all the channels post a single stage. So in relation to that, how should we think about the overall GMV and revenue growth for the fourth quarter and if management also have any preliminary view on the 2023 outlook? Second question is your digital marketing and IT solution is actually doing pretty well. If you can elaborate a little bit what type of the brand’s customer and the operation metrics like the take rate that you can share with us related to this service? And will this revenue line continue to deliver decent growth in the coming quarters? So how should we think about that? Thank you.

Arthur Yu: Okay. Thank you, Alicia. So maybe, Tracy can comment on the Double 11 performance and the consumption segment. And I can answer about the view of Q4 and next year. If that’s okay? Tracy?

Tracy Li: No problem. Thanks for the question. I think right now, the China consumer is still very largely impact from the COVID-19 and also you can see in recent 2 months, actually from the logistics point of view, there is still a lot of lockdown and the impact on that. But on the Double 11 number, we can see the overhead number is still under pressure, which means there is no big increase. But the is a very important window we see the trends on different categories. So on that part, actually, I can summarize some of the observation from our core from our BI system and also from the public system. We see from the consumption trend, the upward consumption, home improvement, self-scale and the sports lifestyle are the four heated schemes.

Take the sport lifestyle scheme for example, the sales of the category outdoor, sports equipment, huger and also the sports footwear were listed by range from 28% to 9% year-on-year increase representative. And also, you can see the fitness mountain climbing, skinny, urban sports, camping, and the running and basketball contributes most of the category. And also, we can see the luxury and also previous screwy bags and luggage has been several €“ I mean a few of the categories are still reached steady growth in the past four quarters. So I think among these four areas, we still can see the opportunity for next year. But also, there are also down trends category like the fashion accessories and also men’s and women’s footwear. And this has been reflected over two or three quarters decline in most of the daily sales and the big promotion.

So for all of those part, we still need a steady growth way to sickout. And besides the category shift, I think we also see the platform pay more attention on the user retention and the acceleration of private domain new business incrementals like Alisports and doing newly added store member enrollment benefits, the membership compound and membership gifts. And all of this have gave our potential to collaborate brands and platform together on the digital marketing and also interactive technology related. So I think on that part, we can back to other parts to talk about our next year’s plan, yes.

Arthur Yu: Okay. Thank you, Tracy. In regarding to the Q4 outlook, our current view is from the GMV perspective. We see some good momentum in electronics and FMCG. But we also see some strong headwinds in terms of the apparel and sportswear. So overall, we believe our Q4 GMV will be in line with the market, which is likely to be flat year-over-year. In terms of the revenue, at this moment, we still see the optimization of the low-quality product sales will continue unless the market sentiment pick up. So from a revenue perspective, we think there will be a low decline year-over-year. The main contributor factor is the product sales, which we continue to optimize. In terms of the next year, I think it’s a little bit too early to comment because there are still some very big factor, which is in the overall micro kind of condition and also the COVID policy.

But our view for next year from a current perspective is conservative. And we want to plan on a conservative basis for the next year as well, i.e., to focus on the quality inside of focus on the growth. But on the €“ on your second question, Alicia, regarding the digital marketing and IT solutions, i.e., overview on the value-added service. I think that’s one of the areas we see there is a quite strong momentum from our client base. So basically, at this moment, our brand partners start to focus on the medium and long-term investments of the business in China. So therefore, we have seen a strong kind of the pipeline from the value-added service like the IT solutions like the digital marketing and the market-related kind of proposals from our offerings.

So we think that will continue. And given the investments into the technology in the last few years, I think Baozun is well positioned to take on those opportunities at the current market situation. Okay?