Yatsen Holding Limited (YSG) Earnings Call Transcript & Summary

Thank you. Ladies and gentlemen, good day and welcome to the Yatsen second quarter 2026 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Irene Lyu, Vice President, Head of Strategic Investment and Capital Markets. Please go ahead.

Thank you, operator. Please note the discussion today will contain forward-looking statements relating to the company's future performance and are intended to qualify for the safe harbor from liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions, and other factors. Some of these risks are beyond the company's control and could cause actual results from those mentioned in today's press release and this discussion. The general discussion of the risk factors that could affect Yatsen's business and financial results is included in certain filings of the company with the Securities and Exchange Commission. The company does not undertake any obligation to update this forward-looking information except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. Please see the earnings release issued earlier today for a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results. Joining us today on the call from Yatsen's senior management are Mr. Jinfeng Huang, our Founder, Chairman, CEO, and Mr. Donghao Yang, our CFO and Director. Management will begin with prepared remarks, and the call will conclude with a Q&A session. As a reminder, this conference is being recorded. In addition, a webcast replay of this conference call will be available on Yatsen's Investor Relations website at yatsenglobal.com. I'll now turn the call over to Mr. Huang. Please go ahead, sir.

Thank you, Irene. Hello, everyone. And thank you for joining our second quarter discussion. This is our earnings conference call. We delivered a quarter of continued strategy progress with total net revenue growing 5.1% year-over-year, a challenging industry backdrop. While overall growth was more moderate than our prior expectation, our skincare portfolio delivered exceptional performance, reinforcing the effectiveness of our strategy transformation. And into the macro environment, according to the National Bureau of Statistics, beauty retail sales rose 6.6% year-over-year in the second quarter of 2026, outperforming overall retail sales of consumer goods. While the impact of the 618 shopping festival has become more moderate amid increasing promotional and more rational consumer behavior, the category continued to demonstrate strong consumption resilience. That said, the competitive landscape remained challenging with many leading participants in the domestic beauty industry, also reporting growth deceleration or revenue declines during the quarter, underscoring the broad-based headwinds facing the industry. Against this resilient market backdrop, our total net revenues remained on a steady growth trajectory, increasing 5.1% year-over-year in the second quarter. More importantly, this growth was primarily driven by the sustained momentum of our skincare portfolio, which delivered another strong quarter with revenues increasing 40.4% year-over-year, now representing 71.5% of our total net revenues. The continued strength of our skincare brands further reinforced skincare as a core pillar of our business and a key driver of our overall growth, while underscoring the effectiveness of our ongoing investment in brand building, product innovation, and channel development. With skincare now representing over 70% of the total revenues, our revenue mix has fundamentally shifted toward higher quality, more sustainable growth. At the heart of our strategy is a deep understanding of consumer needs and a strong commitment to delivering superior consumer experience. We remain focused on creating meaningful long-term value through both the products we offer and the emotional connections we build with consumers. We now walk you through the progress we made in these areas during the quarter. Our first strategy priority is to continue strengthening our R&D capabilities and advancing innovation on a strong scientific foundation. We remain firmly committed to the R&D investment, with the R&D expenses maintained at 3.3% of total net revenues in the second quarter. We also continue to make meaningful progress in strengthening our scientific capabilities and external recognition. In May, Yatsen's Global Innovation R&D Center was recognized as a national high-tech enterprise and received the specialized, sophisticated, distinctive, and innovative designation in Shanghai. More recently, in July, DR. WU once again demonstrated the depth of its scientific capabilities, with 3 research studies published in international SCI index journals. Covering innovative approach to oily and acne-prone skin, new insights into the mechanism underlying post-acne marks, clinical evidence supporting the combination of our mandelic acid serum with Adapalene. These studies further validated the depth and breadth of our scientific research capabilities. On the product front, we continue to build on the strengths of our existing franchise while deepening our expertise in targeted skincare solutions. Galénic further extended its [ Couture Renovation Cellular ] line with the launch of the Reviving Eye Cream, expanding the franchise into the delicate eye care category. DR. WU also expanded its skincare portfolio with 3 new essence masks for oil control, hydration, and soothing care. At Eve Lom, we further expanded the second-generation [ Vital Do ] collection with the [ Vital Do ] Fresh Hydration Cream and Skin Infusion Serum. These launches reflect our continued focus on leveraging established product franchises and scientific expertise to address evolving consumer needs and create sustainable growth opportunities. Our second strategy priority is to further strengthen brand equity across our portfolio through high-impact consumer engagement and differentiated brand experiences. In late May, DR. WU partnered with CCTV.com for a dedicated live streaming event, which attracted a cumulative audience of 178 million viewers and generated a significant uplift in sales, further expanding the brand's reach and consumer engagement. For Galénic, the brand is brightening your summer campaign to consumers through a pop-up experience on Wuzhizhou Island in Sanya in July. Eve Lom participated in the British Beauty Festival, further elevating its heritage and premium positioning. While these initiatives help to broaden our brand's reach and deepen consumer engagement across key markets and touch points, our third strategy priority is to enhance the quality and sustainability of our profitability. In the second quarter, our gross margin was impacted by higher inventory provision in the color cosmetic business associated with the company's proactive brand portfolio optimization and SKU exit rationalization. Excluding the impact of this one-time inventory provisions, the underlying gross margin would have remained broadly stable year-over-year. Selling and marketing expenses as a percentage of net revenues rose, primarily driven by strategic investment in high-growth channels, particularly Douyin. At the same time, we remained focused on addressing structural obsolescence challenges in color cosmetics, where fast-changing consumer trends, high SKU complexity, and ongoing promotion intensity require disciplined management and a more focused approach to resource allocation. We are actively streamlining our color cosmetic portfolio to improve profitability, and we refocus our resources on the higher growth skincare business. Looking ahead, we will continue to optimize our cost structure, refine resource allocation across channels, and unlock greater operating leverage from our fixed overhead. Furthermore, we are accelerating integration of AI across our operational workflow to drive continuous productivity gains. Together, these initiatives will further elevate our earnings quality and solidify the foundation of more sustainable long-term profitable growth. Thank you. Ladies and gentlemen, please hold while we reconnect with our speaker. Thank you. Yes, just looking at it. So finally, I am delighted to share a leadership update. Effective today, Ms. Wang Li has been appointed as the company's Chief Financial Officer. Ms. Wang comes with a proven track record of over 15 years in the consumer and beauty industry, most recently serving as CFO of Proya Cosmetics. Her experience and financial expertise will further support our ongoing efforts to optimize our cost structure, improve resource allocation, and drive sustainable profitable growth. With that, I will now turn the call over to our CFO, Donghao Yang, to discuss our financial details.

Thank you, David, and hello, everyone. I am also very delighted to welcome Ms. Wang as she joins the company. I look forward to working closely with her to ensure a smooth transition. Before I discuss our financial details, I would like to clarify that all financial numbers presented today are in RMB amounts and all percentage changes refer to year-over-year changes unless otherwise noted. So, net revenues for the second quarter of 2026 increased by 5.1% to RMB 1.14 billion from RMB 1.09 billion for the prior year period. This was primarily due to a 40.4% year-over-year increase in net revenues from skincare brands, partially offset by a 35.8% year-over-year decrease in net revenues from our color cosmetics brands, which reflected the company's proactive brand portfolio optimization and deliberate SKU rationalization as part of its strategic initiatives. Gross profits for the second quarter of 2026 decreased by 0.8% to RMB 843.8 million from RMB 850.4 million for the prior year period. Gross margin for the second quarter of 2026 decreased to 73.9% from 78.3% for the prior year period, primarily due to higher inventory provisions in the color cosmetics business associated with brand portfolio optimization and SKU rationalization efforts. Total operating expenses for the second quarter of 2026 increased by 7.7% to RMB 975.7 million from RMB 905.9 million for the prior year period. As a percentage of total net revenues, total operating expenses for the second quarter of 2026 were 85.4% as compared with 83.4% for the prior year period. Fulfillment expenses for the second quarter of 2026 were RMB 56.1 million as compared with RMB 63.3 million for the prior year period. As a percentage of total net revenues, fulfillment expenses for the second quarter of 2026 decreased to 4.9% from 5.8% for the prior year period. The decrease was primarily attributable to further improvements in logistics efficiency. Selling and marketing expenses for the second quarter of 2026 were RMB 807.3 million as compared with RMB 722.4 million for the prior year period. As a percentage of total net revenues, selling and marketing expenses for the second quarter of 2026 increased to 70.7% from 66.5% for the prior year period. This was primarily driven by strategic investments, broadening consumer awareness, and building long-term brand equity of our core skincare brand, coupled with higher traffic acquisition costs on the Douyin platform as the company capitalized on the channel's strong growth momentum. General and administrative expenses for the second quarter of 2026 were RMB 74.8 million as compared with RMB 84.1 million for the prior year period. As a percentage of total net revenues, general and administrative expenses for the second quarter of 2026 were 6.8% as compared with 7.7% for the prior year period. This was primarily driven by lower share-based compensation expenses. Research and development expenses for the second quarter of 2026 were RMB 37.3 million, as compared with RMB 36.1 million for the prior year period. As a percentage of total net revenues, research and development expenses for the second quarter of 2026 were 3.3%, consistent with the prior period. Loss from operations for the second quarter of 2026 was RMB 131.9 million as compared with RMB 55.5 million for the prior year period. The operating loss margin was 11.5% as compared with 5.1% for the prior year period. Non-GAAP loss from operations for the second quarter of 2026 was RMB 112.1 million as compared with RMB 20.4 million for the prior year period. The non-GAAP operating loss margin was 9.8% as compared with 1.9% for the prior year period. Net loss for the second quarter of 2026 was RMB 90.8 million as compared with RMB 19.5 million for the prior year period. Net loss margin was 8% as compared with 1.8% for the prior year period. Net loss attributable to Yatsen's ordinary shareholders per diluted ADS for the second quarter of 2026 was RMB 0.97 as compared with RMB 0.19 for the prior year period. Non-GAAP net loss for the second quarter of 2026 was RMB 99.4 million as compared with non-GAAP net income of RMB 11.5 million for the prior year period. Non-GAAP net loss margin was 8.7% as compared with non-GAAP net income margin of 1.1% for the prior year period. Non-GAAP net loss attributable to Yatsen's ordinary shareholders per diluted ADS for the second quarter of 2026 was RMB 1.06 as compared with non-GAAP net income attributable to Yatsen's ordinary shareholders per diluted ADS of RMB 0.13 for the prior year period. As of June 30, 2026, the company had cash, restricted cash and short-term investments of RMB 1.06 billion as compared with RMB 1.05 billion as of December 31, 2025. Cash used in operating activities for the second quarter of 2026 was RMB 78 million as compared with net cash generated from operating activities of RMB 77.7 million for the prior period. Looking at our business outlook for the third quarter of 2026, we expect our total net revenues to be between RMB 898.6 million and RMB 998.4 million, representing a year-over-year decrease of approximately 0% to 10%. These forecasts reflect the company's current and preliminary views on the market and operational conditions, which are subject to change. With that, I would now like to open the call to Q&A. Operator?

We will now begin the question and answer session. [Operator Instructions] The first question today comes from [ Maggie Huang ] with CICC. Please go ahead.

This is [ Maggie Huang ] from CICC. I have 2 questions. My first question is about our channel expansion strategy for our skincare brands going forward. My second question is that we are seeing online traffic costs rising. So how would the company respond to this trend and what strategies will be adopted to further improve our marketing efficiency? That's my 2 questions. Thank you.