The operator of Perfect Diary cosmetics stores lowered its second-quarter revenue guidance by 10%, putting the figure back in contraction territory
Key Takeaways:
- Yatsen lowered its revenue guidance by 10% for the three months to 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, resuming a trend of the last three years after it briefly grew for two consecutive quarters
By Doug Young
Yatsen Holding Ltd.’s (YSG.US) difficult climb back to growth took a turn for the worse this week, as the cosmetics seller abruptly cut its second-quarter revenue forecast announced less than two months ago. The operator of the popular Perfect Diary chain called its 10% downward adjustment “prudent,” perhaps hoping to calm investor concerns.
If that was its intent, it seemed to work. The company’s stock actually rose 3.5% on Wednesday after the announcement, and continued to tick up slightly on Thursday. The shares have been quite volatile this year, reflecting a wobbly Chinese economy that seems to show signs of life one moment, only to stumble the next. The stock traded as low as $2 in late March, only to rally and rise as high as $4.84 a month later.
It’s been on a roll lately with a 35% rally over the last two weeks, suggesting that investors were perhaps expecting even worse than the latest revenue outlook downgrade.
Yatsen said it now expects to report second-quarter revenue of between 772.7 million yuan ($106 million) and 815.6 million yuan, which is about 10% lower than the 858.6 million yuan to 901.5 million yuan it forecast on May 22. The adjustment was symbolically significant because it moved Yatsen squarely back into revenue contraction territory, since the updated figure represents a year-on-year decline of 5% to 10%. By comparison, the earlier forecast would have been flat to up as much as 5% year-on-year.
Yatsen’s revenue peaked in 2021 and has been on a steady downward track ever since, including an 8% decline last year, as the company was hit by a double-whammy of strict Covid restrictions that dampened consumption, and China’s rapid economic slowdown after years of breakneck growth. It finally returned to revenue growth in last year’s fourth quarter, when the figure rose 6.7% on a post-pandemic rebound. But the momentum quickly faded in this year’s first quarter when the figure 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 polled by Yahoo Finance still expect the company to report 5.4% revenue growth this year, though we could quite possibly see that change based on what Yatsen says when it provides more color on its situation in its second-quarter results next month.
So, what happened in the space of less than two months to undercut the company’s forecast so much? After all, more than half of the three-month period was already in the history books when Yatsen made its original forecast. That suggests that business must have been especially weak in the second half of May and into June.
Yatsen didn’t say what was behind the sudden business drop-off. But two factors look likely, led by weak industrywide sales during this year’s June 18 shopping festival. The other factor looks tied to upcoming price hikes by at least one of Yatsen’s foreign rivals, which may have led consumers stock up on those products, to Yatsen’s detriment, before prices went up.
Shopping fest blues
The weak showing for this year’s June 18 shopping fest looks like the bigger culprit behind Yatsen’s revenue downgrade. The festival is the second largest online shopping event in China, behind only the Single’s Day festival on Nov. 11 each year. The older Nov. 11 event had risen rapidly since its transformation into a shopping holiday about a decade ago, leading many to liken it to Black Friday in the West.
But last year’s Single’s Day was quite low-key compared to earlier times, and this year’s June 18 event was similar. In a bid to keep revenue growing, many e-commerce merchants extended the start of this year’s June 18 festival to as early as May 20. On its first-quarter earnings call in May, Yatsen executives pointed out the earlier starting date, and added that the festival “was going to last a lot longer than the previous year.”
Thus, the extended festival period corresponds almost exactly to the time between Yatsen’s release of its original revenue forecast and the end of the second quarter. The company hasn’t commented on its own sales during the festival, but retail data provider Syntun reported revenue from the festival fell 7% this year to 742.8 billion yuan year-on-year – marking the first decline since it began tracking the event in 2016.
The other factor we mentioned reportedly saw Estee Lauder raise its prices in China by 10% to 20% on July 1. A scramble by Chinese consumers to buy Estee Lauder and other products set for increases may have helped to fuel a national 18.7% jump in China’s cosmetics sales to 40.6 billion yuan in May, representing the fastest growth in more than a year and a record for that month.
Despite the broader monthly sales spike, Yatsen clearly wasn’t one of the beneficiaries. The company has been trying to follow the latest consumption trends by shifting its focus away from its traditional Perfect Diary stores toward online shopping. As it does that, its number of traditional brick-and-mortar stores fell by more than half to 123 by the end of last September from 286 in 2021.
The company has only been profitable once on an annual basis in its published financial data, and that was in 2019 shortly before its IPO. Its stock has lost about two-thirds of its value since then, which is actually better than many internet and tech stocks that have lost 90% or more of their value.
After all of this year’s stock volatility, Yatsen shares currently trade at a price-to-sales (P/S) ratio of 0.83, well behind domestic peers Shanghai Chicmax (2145.HK) and Proya Cosmetics (603605.SH) at 3.65 and 4.48, respectively, and also far behind global giant L’Oreal’s (OR.PA) 5.26. We should commend Yatsen for being so quick to lower its revenue forecast, and it appears investors also appreciate the update. Now, all eyes will be watching for the company’s third-quarter forecast, which is likely to come out next month, and whether it points to a revenue rebound or an acceleration of the current contraction.
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