Profit drops back to two years ago, Miniso's financial report reveals "growing pains" in the cracks

Miniso (9896.HK) has a high gross profit appearance that has torn a crack.

In the first quarter of this year, the operating income was 4.427 billion yuan, a year-on-year increase of 18.9%.

Although it exceeded the previous guidance upper limit, the net profit fell by 4.8% year-on-year to 587 million yuan, leading to a decrease in net profit margin by 3.3 percentage points to 13.3%.

Increasing revenue without increasing profit is often the beginning of a dangerous signal.

With the popularity of the "millet economy," Pop Mart (9992.HK), Card Game, and Blokus (0325.HK) have welcomed a flurry of institutional research, while the neglected Miniso seems to be facing the risk of being kicked out of the "millet circle."

However, Miniso remains relatively optimistic about its same-store expectations, believing that the annual revenue growth rate is expected to be low at first and high later.

"The low profit margin of direct-operated stores is temporary; we still believe that the operating profit margin will return to around 20% in the medium to long term," said Miniso's Chief Financial Officer Zhang Jingjing.

From a specific operational perspective, the increase in revenue without an increase in profit in the first quarter may be the result of a mismatch between investment and return timing.

But the market reacted quite violently; the day after the financial report was disclosed, both US and Hong Kong stocks fell over 17%.

In the market's view, if front-end growth is difficult to maintain, rigid expenses become hard to accept.

In recent years, Miniso has invested heavily in IP licensing, intending to break away from the "ten yuan store" label and pay the ticket for the destination of "global IP co-branded collection stores" in advance.

In terms of capital layout, with the layout for Yonghui (601933.SH) and "fat reform," as well as expectations for the development and spin-off of TOP TOY, a "Miniso system" spanning three listed companies may be emerging.

In the face of changes, is the market still willing to cast a vote of confidence for Ye Guofu?

Overseas Retreat

Miniso's current net profit performance has directly returned to the level before the brand strategy upgrade in 2023.

Two years ago, Miniso announced a positioning upgrade to "global IP co-branded collection store," shifting from extreme cost performance to interest consumption, and upgrading from a channel brand to a product brand.

This year marked the peak of market sentiment, showcasing the possibility of transitioning from a "low-price brand" to a "super brand," as well as breaking free from the "ten yuan store" prejudice.

The success of going overseas raised expectations even higher.

Overseas, the average transaction value is higher, competitive pressure is lower, and consumers are more willing to pay high prices for IP copyright products, clearly showing growth potential.

In the past two years, Miniso's revenue scale has increased by 1.5 times, with 2,200 more stores, and the growth rate of overseas stores continues to exceed that of the mainland.

But not all plots are unfolding as expected.

Miniso has three store opening models: partner model, direct-operated model, and the agency model adopted in overseas and some sinking markets.

At the beginning of its overseas exploration, Miniso mainly cooperated with well-known overseas retail companies to quickly occupy the local market.

Due to the adoption of a goods buyout system, Miniso only provides guidance and supervision, and negotiates performance targets with partners, without the need to actually participate in store operations and inventory maintenance Although the profit margin of the overseas agency model is high, significant revenue must be shared with partners.

Facing a market with greater potential, Miniso has doubled down on a direct sales model in its 2.0 version of going overseas, which carries higher risk and reward.

The main battlefield for direct sales is the North American market.

As of the end of the first quarter, the number of overseas direct stores reached 548, more than doubling compared to two years ago, with over half located in the North American market.

Due to the rapid expansion of overseas direct stores, upfront costs are impacting short-term profit performance.

In the first quarter of this year, expenses for overseas direct stores, including rent and depreciation, increased by 70% year-on-year.

Sales and distribution expenses surged by 46.7% year-on-year to 1.021 billion yuan.

Against the backdrop of stable profit margins for domestic franchises and overseas agency stores, the increasing proportion of direct stores represented by North America has dragged down operating profit margins by 3.3 percentage points year-on-year.

While new stores have yet to mature, stores opened before 2023 have not met growth expectations, with same-store sales declining by about 5% year-on-year.

In response, Miniso stated at the earnings conference that the same-store growth rate overseas was around 20% year-on-year last year, indicating some base pressure.

Additionally, due to the rapid expansion of overseas stores, the reference value of same-store growth is relatively limited. For example, in the first quarter, only 90 stores in the U.S. could be counted as same-store, while the total number of stores has exceeded 300.

Miniso has adjusted its operational strategy to optimize cost control and quickly promote the recovery of direct operating profit margins.

Starting in the second quarter, new store openings will focus on 24 core states in the U.S., enhancing operational efficiency through clustered layouts.

In terms of products, the company is strengthening inventory refinement, establishing a project team to address tariffs and the high growth in the U.S., and making targeted product adjustments based on store formats and positioning, with a focus on creating popular product series.

Miniso stated that same-store sales in the U.S. for April and May have significantly improved.

However, tariffs remain a Damocles sword hanging overhead.

Miniso has clearly stated that 80% of its overseas supply chain relies on the stronghold of China.

To cope with the tariff turmoil, Miniso has made inventory reserves in the U.S. for 3-6 months and is working to reduce dependence on a single supply chain, with North American procurement now reaching 40%.

Ye Guofu also mentioned that beyond North America, markets in Europe, Southeast Asia, Latin America, and the Middle East are strengthening deep cooperation with agents through flexible optimization of cooperation models.

Domestic Growth Bottleneck

If increasing direct investment overseas is a short-term pain for profit decline, then Miniso's long-term challenge remains the emerging bottleneck in the domestic market.

Before fully transitioning to an IP strategy, Miniso had already shown signs of poor sales in first- and second-tier cities.

In 2024, Miniso's store openings in first-tier city malls are nearing saturation, with a national mall penetration rate reaching 66%, and the ceiling for store numbers is becoming apparent.

As expansion becomes difficult, same-store revenue is a crucial factor anchoring performance growth and influencing valuation.

Signs of price increases with reduced volume and declining same-store sales have begun to appear in 2024, with same-store GMV shifting from a 30-35% growth in 2023 to an 8-9% decline In the first quarter, same-store sales growth narrowed to around 5% compared to the high single digits in the fourth quarter of last year, with transaction volumes still lower than the same period last year.

The variance among different stores is widening, and the performance decline of tail franchisees may be more severe.

Eliminating underperforming stores has become a response strategy, with Miniso eliminating over a hundred domestic underperforming stores in the first quarter.

Most of the closures were low-performing stores operating for more than three years and under 200 square meters; meanwhile, the average area of new stores is nearly 300 square meters, with an average monthly sales of nearly 400,000.

At the same time, the average store efficiency of newly opened stores in the first quarter increased by 27% year-on-year.

“Opening large stores and closing small stores” is currently a key strategy.

The reason is that large stores have better market performance at this stage.

Super stores, represented by flagship stores, require about twice the initial investment of ordinary stores, but their sales are three times that of ordinary stores, with a 7% higher average transaction value and a 20-day shorter inventory cycle; the payback period is also significantly shorter than that of ordinary stores.

As of now, Miniso has opened 8 of its highest-level store format, MINISO LAND, with another 15 in preparation; 43 flagship stores have been opened, with 150 more in preparation, most of which are franchise stores.

Miniso stated that the domestic scale still maintains a double-digit growth expectation, hoping for more growth from same-store sales rather than insisting on the existing target of adding 200-300 new stores domestically.

The trend of same-store recovery is still continuing.

Ye Guofu stated at the earnings meeting that during the May Day Golden Week, the performance of stores turned from negative to positive.

As of May 20, the same-store sales decline for Miniso narrowed to around 2.5%. The company maintains its guidance for the year that existing domestic stores will turn positive.

IP or Channels

Miniso is one of the earliest players to benefit from the IP boom.

The success of the Marvel collaboration in 2019 made Ye Guofu see the development opportunities brought by IP benefits.

“Many products have prices increased by more than 30% compared to non-IP products and are still in high demand,” Ye Guofu noted.

In the following three years, the proportion of IP products gradually increased, and Miniso's gross profit margin rose from around 25% to 40%.

In the fourth quarter of last year, benefiting from the overseas holiday sales peak, Miniso's gross profit margin reached a historical high of 47%.

From the perspective of store sales, the increase in the proportion of IP products leads to a rise in average prices, attracting new fans and repeat purchases, while category expansion brings an increase in the price of single orders, all of which are expected to enhance sales performance.

However, the business model of leveraging IP carries significant risks.

By collaborating widely with well-known IPs, Miniso launches over 10,000 new IP products globally each year, providing consumers with a continuous sense of freshness. Top-tier IPs often enjoy good traffic endowments, serving as a safety net for product sales.

Accompanying this is the high and rising cost of IP licensing; in 2024, Miniso's IP licensing-related expenses are expected to reach 421 million yuan, a nearly 30% year-on-year increase, exceeding the revenue growth rate during the same period.

The market heat of niche and ordinary IPs is difficult to predict, while top-tier IPs are not only expensive but often come with non-exclusive licenses The temporary sales heat does not possess scarcity or fan stickiness.

Some co-branded products that were sold out at launch were found being sold at discounted prices on e-commerce platforms less than six months later.

Compared to Pop Mart, which mainly has stores concentrated in first- and second-tier cities, Miniso's larger customer base and higher price sensitivity determine that Miniso must seek a balance between cost-effectiveness and IP premium.

Miniso believes its core competitiveness lies in its efficient supply chain and IP operation capabilities.

For example, it is optimizing its product structure, categorizing "travel" as the fourth major strategic category based on plush toys, blind boxes, and perfumes, and will focus on the high-potential and emotionally strong categories of ACG (Anime, Comic, and Games) and pets.

However, from a fundamental perspective, Miniso's key moat is still not IP but channels.

This business model itself is not difficult to replicate.

Comprehensive retail stores like KKV and GreenParty are all preparatory troops for IP collective sales. Both have continuously introduced multiple popular IPs to enhance their competitiveness in the economy of the grain.

Efforts to develop proprietary IP have yet to form a significant impact.

Only a few proprietary IPs, such as "DUN," have achieved sales exceeding 100 million.

The company stated that the newly launched Jipute Bear IP is expected to achieve sales of 400-500 million this year, yet this is still less than one-fifth of Pop Mart's Molly.

"Miniso System" Awaiting Cultivation

Currently, the financial expenses brought about by a series of capital operations are also affecting Miniso's profit performance.

In the first quarter, Miniso's financial costs reached 49 million yuan, nearly doubling compared to the same period last year.

At the beginning of the year, Miniso issued $550 million in convertible bonds, determining a 0.5% coupon rate and a 7-year term.

Combined with financial derivatives, this has led to corresponding fair value fluctuations and accrued interest costs under the effective interest method each quarter.

The bank loan costs generated by Yonghui Superstores' "snake swallowing elephant" transaction in September last year corresponded to borrowing interest expenses with an annualized interest rate of less than 3%.

This transaction has been questioned by the market, and although the company has repeatedly stated that the adjusted store performance is better than expected, there has been no visible feedback to Miniso.

It can be observed that Ye Guofu and Miniso's investment of energy in Yonghui is indeed increasing.

In March of this year, Miniso founder, chairman, and CEO Ye Guofu entered the Yonghui board of directors, serving as the head of the newly established reform leadership group.

Three days later, Yonghui announced that the reform leadership group would act in the capacity of CEO, making Ye Guofu the de facto decision-maker at Yonghui.

At the end of the month, Ye Guofu attended the Yonghui Supply Chain Conference, stating, "If any procurement troubles you, just message me directly on WeChat." At the supplier conference, Ye Guofu left his personal email on the screen, welcoming suppliers to directly report procurement corruption.

Around the same time, Miniso's skincare line head Lai Shuzhen was parachuted into Yonghui's merchandise center, becoming the head of the standard products department.

Lai Shuzhen proposed that promoting IP co-branding is one of Yonghui's future marketing support methods for brand partners.

When acquiring Yonghui, Miniso stated that it would not control the board of directors and would not consolidate financial statements.

Currently, Yonghui is still in a loss state, but its stock price has risen more than 1.2 times compared to before Miniso's acquisition. Starting from the second quarter, Yonghui will account for Miniso's financial statements in terms of investment gains and losses, which is expected to boost Miniso's paper profits Miniso's another card on the capital line is TOP TOY.

TOP TOY is in a high growth phase, with total revenue of 340 million yuan in the first quarter, a year-on-year increase of 59%.

The growth in performance is mainly driven by store openings, with the current number of stores reaching 280, an increase of over 43% year-on-year, including 40 directly-operated stores and 240 partner stores.

Globalization is underway, with a goal of having overseas sales account for more than half in the next five years, covering over 40 countries.

In March of this year, TOP TOY announced plans for an IPO, which was not unexpected.

With Pop Mart's strong performance in the Hong Kong stock market and the successful listing of Blokus, many IP derivative companies, including Card Game and 52TOYS, are aiming for a listing in Hong Kong, boosting performance development.

Compared to the beginning of this year, Miniso's total liabilities nearly doubled by the end of the first quarter, rising from 7.765 billion yuan to 15.508 billion yuan, and the debt-to-asset ratio increased from 42.85% to 59.22%.

At this stage, pushing TOP TOY to the capital market can help accelerate expansion on one hand, and alleviate Miniso's investment pressure on the other.

Referring to the recently filed 52TOYS, high authorization costs and intensified market competition are suppressing the profit performance of trendy toy retail companies.

In 2024, 52TOYS' gross profit margin is not expected to exceed 40%, and the adjusted net profit margin is only 5%.

If TOP TOY successfully goes public, it may become the third listed company in Ye Guofu's capital portfolio.

At that time, a "Miniso system" spanning A-shares, Hong Kong stocks, retail venues, and IP trendy toys may emerge