Miniso delivers its strongest performance in history, why did the stock price drop more than 10%? | Insight Research

On November 21st, Miniso released its Q1 FY2024 earnings report, which covers the period ending September 30, 2023. The report showcases the company's strongest performance to date, with breakthroughs in revenue, gross profit margin, and net profit.

According to the report, the disclosed revenue for the period reached 3.791 billion yuan, a YoY increase of 36.7%. The overseas revenue amounted to 1.295 billion yuan, a YoY increase of 40.8%, while the domestic revenue reached 2.496 billion yuan, a YoY increase of 34.7%. The growth rate of overseas revenue exceeded that of domestic revenue.

For the first time, Miniso's gross profit margin surpassed 40%, reaching 41.8%, an increase of 6.1 percentage points. The adjusted net profit reached 640 million yuan, a YoY increase of 54%, with an adjusted net profit margin of 16.9%, an increase of 2 percentage points.

This earnings report can be summarized as "3 highs and 2 fasts": high gross profit margin (41.8%), high single-store revenue (monthly operating revenue of 211,000 yuan), fast store expansion (global store count exceeding 6,000), fast product launches (100 new products introduced in 7 days), and fast turnover (approximately 67 days for a complete turnover).

The positive performance of various operational indicators signifies that Miniso has reached a golden stage in terms of operational efficiency, market responsiveness, and innovation capabilities.

However, despite the impressive financial data, the company's stock price experienced a decline the day after the earnings announcement.

Behind the dazzling financial figures lies the market's concern about the growth rate.

The lack of improvement in the proportion of direct-operated stores in the domestic market, the further weakening of self-developed intellectual property, and the slower-than-expected overseas store expansion have cast a shadow of uncertainty over the future growth path of this small commodity empire.

With a global store count exceeding 6,000, Miniso follows a fundamental model of running a single store successfully and then rapidly replicating it. The company is currently in the stage of rapid replication and rapid growth.

During the reporting period, the number of Miniso stores continued to surge. The domestic store count reached 3,802, with a net increase of 533 stores and a QoQ net increase of 198 stores. The company achieved its annual target of adding 350 to 450 domestic stores ahead of schedule, and also reached the significant milestone of surpassing 6,000 global stores.

Out of the 6,000+ Miniso stores worldwide, only 231 are directly operated, while the rest operate under a third-party agency model.

The low proportion of directly operated stores has long been criticized as a weakness of Miniso.

Although the agency model effectively transfers operational risks to agents and reduces the company's management burden, it also means sharing profits with agents, resulting in lower profit margins for individual stores compared to the direct-operated model.

(Data source: Miniso FY24Q1 report) Therefore, many retail brands choose a direct-operated model in key markets to maintain brand consistency and control product standards, while adopting an agency model in markets pursuing rapid expansion.

Although Miniso also claims to value the direct-operated market and sees it as an important growth driver, the latest quarterly report shows that the agency model still dominates.

According to Q3 data, Miniso had 20 direct-operated stores in China, an increase of only 5 compared to the same period last year, while the number of third-party stores increased by 193.

Finding a more balanced combination between the direct-operated and agency models is still the key to Miniso's future development, as it seeks to maintain brand quality, improve profit margins, and achieve rapid and sustainable market expansion.

With rapid store expansion and increasing per-store revenue, Miniso is in a golden development period

Surprisingly, despite the rapid pace of store expansion, Miniso achieved a YoY growth of 23.8% in average per-store revenue, which also drove a YoY growth of 41.2% in total offline store revenue in China.

During the conference call, Miniso elaborated on the key factors behind its sustained same-store growth:

One is the emphasis on "opening large stores" that Miniso has always stressed. Although the investment in large stores is about twice that of regular stores, the higher average transaction value and larger customer flow actually result in better per-store sales.

This year, Miniso's "super flagship stores" in various locations worldwide, such as the flagship store in Times Square, New York, the flagship store on Beijing Road in Guangzhou, and the city image store in Ganzhou, have all achieved impressive performance.

In this quarter, Miniso continued to expand its network of "super flagship stores," and the newly opened super stores such as the Datang Bay Night City store in Xi'an and the Chuhe Hanjie Wanda store in Wuhan had a positive impact on the company's overall performance.

Having tasted success, Miniso also plans to open "super flagship stores" in major international cities such as Rome in Italy, Paris in France, and Madrid in Spain.

In addition, investment in interest-based consumption such as "big beauty and cosmetics, big IP, and big toys" has always been a focus for Miniso. These categories have a gross profit margin of around 60% and offer significant premium space, which is key to improving overall gross profit.

For example, this quarter, Miniso's co-branded products with brands like Barbie and Loopy sold well and became an important driver of revenue growth. Around 60% of the domestic sales revenue came from interest-based consumption.

However, it is worth noting that despite the significant short-term impact on brand sales and profitability, Miniso has always been labeled as "overly reliant on external IP."

The company is also aware of this and has repeatedly emphasized the importance of developing its own IP as a strategic direction. However, based on the data from this quarter, the proportion of sales revenue from Miniso's self-developed IP brands has further declined.

This should serve as a warning to Miniso that in order to truly build a "super brand" with lasting appeal, it must have its own "Loopy." On the expense side, with the upgrade of the Miniso brand, the opening of large stores, increased advertising expenses, and the expansion of the IP library and product variety, the related licensing fees have increased. Sales and distribution expenses for this quarter amounted to RMB 640.9 million (USD 87.8 million), a YoY increase of 68.1%.

According to the company's financial forecast, sales expenses are expected to continue to rise in the next quarter.

With the expansion of Miniso's revenue scale, fixed costs remaining unchanged, and additional sales generating higher profit margins, the release of operating leverage offsets the risk of rising expenses, making overall growth still controllable.

Mixed Prospects in Overseas Markets

Expanding into overseas markets is another story for Miniso and a direction that the market values.

This year, the outstanding performance of Pinduoduo and Miniso among Chinese concept stocks is characterized by the logic of Chinese products going global. Expanding products overseas means that the company's target customer base will increase in overseas markets, greatly increasing the ceiling and making it more likely to achieve market share growth in new markets.

Overseas markets also provided many highlights for this quarter's financial report. Overseas business revenue reached nearly 1.3 billion, a YoY increase of nearly 41% on a high base from the same period last year, setting a new record for third-quarter sales in overseas business.

The main overseas markets continue to experience rapid GMV growth, with the North American region growing nearly 1.6 times YoY, the Latin American market growing nearly 60% YoY, and the European market growing nearly 50% YoY.

Of particular note is that Miniso's revenue from overseas direct markets grew nearly 89% YoY, and its share in total overseas revenue increased from 34% in the same period last year to about 46%.

This is a positive sign, and Miniso also stated that "the biggest opportunity next year is the overseas direct market."

However, in terms of store expansion speed, the overseas market seems to be lagging behind the domestic market.

Miniso's overseas store openings were slow in the first half of the year, although the pace accelerated in the third quarter with a net increase of 126 stores. However, as of September 30, 2023, the cumulative net increase in stores in the overseas market was 198, which is only about half of the target of 350 to 450 store openings set at the beginning of the year. It will be challenging to achieve the remaining target within one quarter.

In history, many retail companies have experienced a decline in foot traffic in new stores after a rapid expansion phase, resulting in profit drag despite good performance in the current period. The market may also be concerned that Miniso may encounter similar situations where high growth is difficult to sustain.

Despite Miniso's bold statement that it will open more stores in overseas markets next year, the speed and quality of the company's expansion in a downturn cycle remain unknown.