Yatsen Has A Bruise Under His Eye From Shopping Blues – Bamboo Works

Cosmetics store operator Perfect Diary lowers second-quarter revenue forecast by 10%, returning to decline

Key conclusions:

• Jaceń cut its revenue forecast by 10% for the three months through June, likely due to poor performance during the recent June 18 online shopping festival
• The revised forecast means the company’s revenue has begun to contract again, continuing the trend of the past three years after two consecutive quarters of short-lived growth

By Doug Young

Yatsen Holding Ltd. (YSG.US) The tough return to growth took a turn for the worse this week as the cosmetics retailer suddenly cut second-quarter revenue guidance was announced less than two months ago. The operator of popular Perfect Diary chains called its 10 percent downward revision “cautious,” perhaps hoping to calm investor concerns.

If that was the intention, it clearly worked. The company’s shares actually rose 3.5% on Wednesday after the announcement and were still up slightly on Thursday. The stock has been quite volatile this year, reflecting China’s shaky economy, which seems to show signs of life one moment and stumble the next. The stock traded at just $2 in late March, only to rebound a month later to $4.84.

The company has been on a good run lately, up 35% over the past two weeks, which may suggest that investors were expecting even worse results than those implied by the recent revenue forecast cut.

Yatsen said it now expects to report second-quarter revenue of 772.7 million yuan ($106 million) to 815.6 million yuan, down about 10% from the 858.6 million yuan to 901.5 million yuan it forecast on May 22. The revision was symbolically significant because it moved Yatsen back into revenue decline territory, as the updated number implies a year-over-year decline of 5% to 10%. By comparison, its earlier forecast would have been flat or up as much as 5% year-over-year.

Yatsen’s revenue peaked in 2021 and has been in steady decline ever since, including an 8% drop last year as the company was hit by the double whammy of strict Covid-related lockdowns that sapped consumption and a sharp economic slowdown in China after years of breakneck growth. It finally returned to revenue growth in the fourth quarter of last year, when the number rose 6.7% in a post-pandemic rebound. But that momentum quickly faded in the first quarter of this year, when the number rose just 1%. So in some ways, the revised forecast is just the latest sign that the company’s brief post-pandemic rebound has run out of steam.

Two analysts surveyed by Yahoo Finance still expect the company to post 5.4% revenue growth this year, though we could see that forecast change based on what Yatsen says next month as he details the company’s situation in its second-quarter earnings call.

So what happened in less than two months to throw the company’s forecast into such disarray? After all, more than half of the three-month period was already in the history books when Yatsen issued his original forecast. That suggests business must have been particularly weak in the second half of May and into June.

Yatsen did not say what caused the sudden drop in sales. But two factors seem likely, led by weak sales across the industry during this year’s June 18 shopping festival. A second factor appears to be related to impending price increases by at least one of Yatsen’s foreign rivals, which may have prompted consumers to stock up on those products, to Yatsen’s detriment, before prices rose.

Shopping Festival Blues

The weak performance of this year’s June 18 shopping festival seems to be a bigger culprit for Yatsen’s revenue decline. The festival is the second-largest online shopping event in China, behind Singles’ Day, which takes place every year on Nov. 11. The older Nov. 11 event has quickly grown in popularity since being transformed into a shopping holiday about a decade ago, prompting many to compare it to Black Friday in the West.

But last year’s Singles Day was fairly low-key compared to previous years, and this year’s June 18 event was similar. To keep revenues up, many e-commerce retailers extended the start of this year’s June 18 festival to May 20. During a first-quarter earnings call in May, Yatsen executives noted the earlier start date and added that the festival “will run significantly longer than last year.”

So the extended festival period almost exactly matches the time between Yatsen’s original revenue forecast and the end of the second quarter. The company did not comment on its sales during the festival, but retail data provider Syntun said revenue from the festival fell 7% this year to 742.8 billion yuan year over year — the first decline since it began tracking the event in 2016.

Another factor we mentioned reportedly played a role in Estee Lauder raising prices in China by 10% to 20% on July 1. Chinese consumers’ eagerness to buy Estee Lauder and other products that had their prices raised may have contributed to China’s cosmetics sales increasing by 18.7% to 40.6 billion yuan in May, the fastest growth in more than a year and a record for that month.

Despite the broader monthly sales growth, Yatsen was clearly not one of the beneficiaries. The company is trying to keep up with the latest consumer trends, shifting focus from brick-and-mortar Perfect Diary stores to online shopping. As a result, the number of brick-and-mortar stores fell by more than half to 123 at the end of September last year from 286 in 2021.

The company has been profitable only once in a year of reported financials, and that was in 2019, shortly before its IPO. Its shares have lost about two-thirds of their value since then, which is actually a better performance than many internet and technology stocks that have lost 90% or more of their value.

After all of this year’s stock volatility, Yatsen shares are currently trading at a price-to-sales (P/S) ratio of 0.83, well below domestic peers Shanghai Chicmax (2145.HK) and Proya Cosmetics (603605.SH) at 3.65 and 4.48 respectively, which is also a result far behind the global giant L’Oreal (OR.PA) 5.26. We should applaud Yatsen for lowering his revenue forecast so quickly, and investors seem to appreciate the update as well. All eyes will now be on the company’s third-quarter guidance, likely due next month, and whether it indicates a rebound in revenue or an acceleration of the current decline.

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