Yatsen Holding Limited (YSG) CEO Jinfeng Huang on Q4 2021 Results – Earnings Call Transcript
Yatsen Holding Limited (NYSE:YSG) Q4 2021 Earnings Conference Call March 10, 2022 7:30 AM ET
Irene Lyu – Head, Strategic Investment and Capital Markets
Jinfeng Huang – Founder, Chairman and Chief Executive Officer
Donghao Yang – Director and Chief Financial Officer
Conference Call Participants
Dustin Wei – Morgan Stanley
Christine Cho – Goldman Sachs
Louise Li – Bank of America
Ladies and gentlemen, good day and welcome to the Yatsen Fourth Quarter and Full Year 2021 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Irene Lyu, Head of Strategic Investment and Capital Markets. Please go ahead.
Thank you, operator. Please note that 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 to differ materially from those mentioned in today’s press release and this discussion.
A 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. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today.
Joining us today on the call from Yatsen’s senior management are Mr. Jinfeng Huang, our Founder, Chairman and CEO; and Mr. Donghao Yang, our Director and CFO. Management will begin with prepared remarks and the call will conclude with a Q&A session. As a reminder, this conference call is being recorded and the webcast replay will be available on Yatsen’s Investor Relations website at ir.yatsenglobal.com.
I will now turn the call over to Mr. Jinfeng Huang. Please go ahead.
Thank you, Irene and thank you everyone for participating in Yatsen’s conference call for the fourth quarter and full year of 2021. Last year, we celebrated our first year as a public company as well as our 5th anniversary since our establishment. In all aspects, 2021 was an important year of change, marked by challenges in the market and the start of our evolution to the next stage of strategy focus. In order to provide everyone with a clear picture of our overall strategy and direction, let me take a moment to talk about our development history.
For most of our first 5 years of development, the Chinese color cosmetic market, especially, the online portion experienced rapid growth. As a result, we focus on increasing market share, achieving high revenue growth, and establishing Perfect Diary as the leading hot spot color cosmetic brand in China in this first phase of our development. We have largely achieved this goal by late 2020. More importantly, in the quarter, we have built a highly capable team with good background of capability necessary to run a highly digitalized business model covering R&D, supply chain, brand management, technology and online/offline operation. However, as the color cosmetics market started to decelerate in 2020 and then experienced low growth in the second half of 2021, competition also intensified among our domestic and global players.
Given such market developments, we evolved our business focus to take a more balanced and holistic approach to sustainable growth. This new phase of our development, which began last year includes building a diversified brand portfolio covering different price tiers within color cosmetics and skincare category, upgrading our R&D capabilities and promoting iconic durable brands with reduced discounts and promotions. Why we believe this is the right approach for Yatsen. The positive impact from our strategy evolution will take several quarters to take effect.
Our financial results may not show improvement in liner fashion from quarter to quarter. With this context in mind, let me go over our financial highlights for 2021. Total net revenue for full year 2021 grew by 11.6% to RMB5.8 billion. While we began on a strong note in the first half of 2021, we experienced a significant deceleration in the second half, particularly during the fourth quarter when total net revenue declined by 22.1% year-over-year. Our total net revenue from color cosmetic brands, including Perfect Diary, Little Ondine, and Pink Bear declined by 33.9% year-over-year in the fourth quarter. Although, on a full year basis, they were down by only 2.3% compared with the prior year.
Flattish consumer demand, the high prior year base for comparison and our conscious decision to limit the discounts and promotions contributed to this performance. One of 2021’s bright spot was the robust performance of our skincare brands, which in aggregate struggled in size compared to 2020. Exhibiting particularly strong growth during the fourth quarter, full year total net revenues from our skincare brands surged by 327.7% on a year-over-year basis, representing 21.3% of total net revenue compared with 4% in the prior year period.
We believe the outperformance of skincare relative to color cosmetics validates our strategy of acquiring a number of solid skincare brands since 2020. Despite the competitive dynamics, we did not keep ground on gross margin. Our full year gross margins increased by 2.5 percentage points to 66.8% compared with 64.3% in the prior year. In the fourth quarter, we achieved a gross margin of 65% compared with 66% in the prior year period due to RMB47.7 million of inventory provision booked at the year-end. Without inventory provision, we would have achieved a gross margin of 68.1% and 68.3% for the fourth quarter and the full year 2021, respectively, 4.8 percentage points and 3.6 percentage points higher than prior year period on a comparable basis.
We ended the year with a cash balance of approximately RMB3.1 billion, giving us ample flexibility to pursue our strategy goals. As we look forward to implementing our strategy evolution during the rest of 2022, we will focus on the following execution area. First, on brand building. For our color cosmetic brands, we plan to build brand equity with compelling high impact marketing while limiting discounts and promotion. Our successful 2021 China Growth Campaign for Perfect Diary is a great example of our focused brand building approach. We partnered with Cosmo Magazine to create content showcasing the dreams and aspirations of a diverse group of women across different locations and demography, reinforcing our products broad appeal while establishing our company as the face and future of modern Chinese feminine beauty.
On the other hand, our skincare brands were build on last year’s momentum. Capitalizing on their brand strength and existing skin products, in 2021, we significantly boosted revenue from Galenic, Eve Lom and DR. WU by employing our Yatsen-based playbook for rapid scaling brands via e-commerce channels. In 2022, we intend to bring these brands to the next level. To achieve their net growth rates, we will continue to evaluate – elevate our skincare brands, develop the new compelling product, and win the heart of the new customers.
We understand that building an enduring category-defining prestige beauty brand is by no means easy, nor quick and we remain committed to growing our skincare brands while increasing gross margins and brand level profitability throughout 2022. Second, we will continue to strengthen our R&D capabilities. While we believe it will be our major differentiator as we upgrade our product offers, we increased R&D spending by 136% in 2021, representing 2.4% of net revenues compared with 1.3% in the prior year. Inherent of output, we increased the number of total patents by 7.1% to 118 patents, including 39 in invention patents.
We also developed several proprietary formulations, including smarter technology, key components of our newly launched Perfect Diary Pearl Loose Powder setting and a nano targeting delivery system used in DR. WU’s new Mandelic multiple acid renewal mask as well as our patent anti-skin darkening technology in our Little Ondine Longwear Foundation product. We significantly expanded our capabilities in the fundamental research applied with rich and efficacy testing by recruiting top talent for our global peers and a renewed research institution as well as through R&D collaborations under our open lab collaboration framework with leading institutions, such as the Ruijin Hospital, one of Shanghai’s premier hospitals and Sun Yat-Sen University.
This year, we look forward to building more partnerships to help us identify and commercialize the best innovation from both local and global universities and research institutions for the China beauty market. Our next step is to double our focus on sustainable growth. One aspect of this strategy is to optimize profitability across all of our channels both offline and online. To this end, we plan to offer high ROI requirement for traffic expenses on our traditional e-commerce channel.
Moreover after significantly increasing our Douyin live streaming revenue by more than 200% on a year-over-year basis in the fourth quarter, we plan to further enhance our operational efficiency and product mix offering on this critical sales channel in 2022. For our offline stores, we intend to take a multi-pronged approach in order to boost output and improve profitability. We plan to print certain alert experiment with – and fine-tune the different store format and ensure greater support for offline channels from a product and promotion standpoint.
In addition, we plan to explore incremental revenue opportunities for various brands by increasing our exposure to offline and online third-party distributors. We are also looking at our operating expenses in identifying ways to improve efficiency and adjusting our variable and fixed cost base in line with our adjusted revenue scale. As I mentioned previously, we plan to optimize our sales and marketing expenses by raising the ROI requirements of our traffic expenses as well as refine our general administrative expenses and fixed assets booking. Given the deleveraging effect from the top line adjustments throughout the year, the impact from this initiative may take some time to materialize. Still we expect the cumulative effect from continued margin improvement and cost optimization to have a positive outcome on our bottom line over time.
Lastly, the final aspect of our sustainable growth strategy is our commitment to ESG best practices and pursuing our CSR goals in line with our corporate values. We are in the early stage of a comprehensive review of our supply chain, procurement and manufacturing process. To identify areas, we can upgrade with industry-leading ESG practices and have already implemented a number of eco-friendly initiatives. This year, we joined the Roundtable on Sustainable Palm Oil to promote the sourcing and the use of Sustainable Palm Oil in our supply chain and conducted cradle to grave carbon footprint assessment for our core products.
Slim heel lipstick, furthermore our Eve Lom brand has incorporated biodegradable materials into its products and participates in the European the greenbox packaging recycling scheme. We look forward to releasing more details about our ESG efforts in our first annual ESG report later this year. From a CSR standpoint, we have identified the empowerment of women through the promotion of Chinese feminine beauty and the protection of beauty in nature as twin goals for the company. This year Yatsen partnered with the China Women’s Development Foundation to launch the Shape Your Beauty public welfare training program in Sichuan province, which have lower income female entrepreneurs, smarter professional beauty skills, empowering them to create and build their own business in the beauty industry.
We also offered outstanding program graduate and provide financial support for potential start-up. With this program, we are embracing our social responsibilities facilitating positive social development and proudly introducing a more Made in China beauty products to the world. In December 2021, Yatsen, was honored to be recognized for its ESG contributions in the 2021 Chinese Enterprise CSR Ranking by type. I hope I now have presented a clear picture of the vision and strategy focus for Yatsen this year.
I can now overstate the team’s commitment to this evolutionary process and its importance to our future long-term growth. We consider ourselves fortunate to encounter these challenges at still early stage of our development. We believe overcoming these challenges will make us stronger in the long run.
With that, I will now turn the call over to our CFO, Donghao Yang, to discuss our financial performance. Thank you everyone.
Thank you, David and hello everyone. Before I get started, I would like to clarify that all financial numbers presented today are in renminbi amounts, and all percentage changes refer to year-over-year changes unless otherwise noted. Total net revenues for the fourth quarter of 2021 decreased by 22.1% to RMB1.53 billion from RMB1.96 billion in the prior year period. The decrease was due to the decrease in sales from our color cosmetic brands, partially offset by the increase in sales from our skincare brands.
Gross profit for the fourth quarter of 2021 decreased by 23.7% to RMB993 million from RMB1.3 billion in the prior year period. Gross margin decreased to 65% from 66.3% in the prior year period. The decrease was primarily attributable to an inventory provision that was charged at the end of the quarter, partially offset by one, increased sales from our higher gross margin product; and two, more disciplined pricing and discount policies. Total operating expenses for the fourth quarter of 2021 decreased by 47.3% to RMB1.49 billion from RMB2.83 billion in the prior year period.
As a percentage of total net revenues, total operating expenses decreased to 97.8% compared with 144.5% in the prior year period. Fulfillment expenses for the fourth quarter of 2021 were RMB123.1 million compared with RMB144.7 million in the prior year period. As a percentage of total net revenues, fulfillment expenses increased to 8.1% from 7.4% in the prior year period. The increase was primarily attributable to the lower customer service cost efficiency resulting from a lower level of revenue. Selling and marketing expenses for the fourth quarter of 2021 were RMB1.08 billion as compared with RMB1.38 billion in the prior year period. As a percentage of total net revenues, selling and marketing expenses for the fourth quarter of 2021 increased to 70.7% from 70.3% in the prior year period. The increase was primarily attributable to the expenses related to offline stores optimization and an increase in branding expenses, partially offset by a decrease in online traffic expenses.
General and administrative expenses for the fourth quarter of 2021 were RMB248.7 million compared with RMB1.29 billion in the prior year period. As a percentage of total net revenue, general and administrative expenses decreased to 16.3% from 65.6% in the prior year period. The decrease was primarily attributable to a decrease in share-based compensation expenses compared with the prior period when a large share-based compensation expense triggered by the IPO was recognized for US GAAP reporting purposes.
Research and development expenses for the fourth quarter of 2021 were RMB43.3 million compared with RMB25.6 million in the prior year period. As a percentage of total net revenues, research and development expenses increased to 2.8% from 1.3% in the prior year period. The increase was primarily attributable to an increase in personnel costs and share-based compensation expenses, which reflect our commitment to enhance our research and development capability. Loss from operations for the fourth quarter of 2021 decreased by 67.3% to RMB501.8 million from RMB1.53 billion in the prior year period. The operating loss margin was 32.8% compared with 78.2% in the prior year period.
Non-GAAP loss from operations for the fourth quarter of 2021 increased by 25.3% to RMB360.9 million from RMB288 million in the prior year period. Non-GAAP operating loss margin was 23.6% compared with 14.7% in the prior year period. Net loss for the fourth quarter of 2021 decreased by 69% to RMB475.1 million from RMB1.53 billion in the prior year period. Net loss margin was 31.1% compared with 78.1% in the prior year period. Non-GAAP net loss for the fourth quarter of 2021 increased by 17.8% to RMB336.3 million from RMB285.4 million. Non-GAAP net loss margin was 22% compared with 14.5% in the prior year period.
Net loss attributable to Yatsen’s ordinary shareholders per diluted ADS for the fourth quarter of 2021 decreased to RMB0.75 from RMB4.04 in the prior year period. Non-GAAP net loss attributable to Yatsen’s ordinary shareholders per diluted ADS for the fourth quarter of 2021 decreased to RMB0.53 from RMB0.72 in the prior year period. As of December 31, 2021, the company had cash and cash equivalents and restricted cash of RMB3.14 billion compared with RMB5.73 billion as of December 31, 2020.
For the quarter ended December 31, 2021, net cash used in operating activities was RMB250 million. Looking at our business outlook for the first quarter of 2022, we expect our total net revenues to be between RMB866.7 million and RMB938.9 million, representing a year-over-year decline of approximately 35% to 40%, primarily attributable to our continued focus on operating margins improvement and limits on discounts and promotions as well as a high base of comparison to the prior year period, which benefited from the release of pent-up demand due to COVID-19 recovery. This forecast reflects our current and preliminary view of the market and operational condition, which is subject to change.
With that, I would now like to open the call to Q&A.
[Operator Instructions] Our first question comes from Dustin Wei from Morgan Stanley. Please go ahead.
Thank you for taking my questions. The first question is regarding the guidance. So what’s the assumptions behind this negative 35% to 40% guide for the first quarter? Is there any color, like by brand or by channel? And we know that management wouldn’t comment on the full year kind of guidance for ‘22, but should we extrapolate the first quarter ‘22 guidance to the full year? That’s the first question on guidance. And then second question is on the OpEx optimization. So could you provide a little more details about what kind of the spending that’s being saved? Maybe can you provide us with some of the examples and how many more efforts that we are going to see for 2022? And also with this kind of ROI being gradually improving, do we have sort of the evidence or operating metrics to show actually for the main brand like Perfect Diary? They are still being able to sort of gain the new quality customer. I think on the one hand, the Perfect Diary brand is sort of reducing some of those non-quality party hunter for the customer by reducing the promotion. So are they being able to gain the new customer? And the third sort of set of the question is that, is there any target sort of by the key channel and by the key brands, for example, like the Tmall or Douyin or the target for the color cosmetics and skincare in 2022? Thank you very much.
Hi, Dustin, I’m not sure if I can catch up on all the questions you’ve asked. Let me try. The first one, well, as we’ve explained in the announcement, Q1 guidance for year-over-year 35% to 40% decline is actually based on our estimate of this quarter’s performance. A couple of reasons why we’re going to have this negative 35%, 40% decline. First of all, last year, Q1, we still had some pent-up demand from our customers which came from actually the COVID-19 situation started in the first half of 2020 when a lot of our customers were actually staying at home. They were not able to go to school or factory. So they didn’t have nearly as much need for color make-up. So that’s one reason. Another reason is our current focus is primarily on brand building. So, a number of things. We will dramatically cut our promotions and the connectivity. And as a result of that, our short-term sales will be affected significantly. So as to the full year guidance, actually, it’s the company’s policy not to provide any sales guidance beyond the next quarter. So Dustin, I’m sorry. So you’ve asked too many questions. Can you please remind me of some of your other questions?
Sure. No, no. Thanks a lot. So just a follow on with the guidance. Would you provide a little more color behind this like 35% to 40% decline by channel or like by brand? Any more color beyond this number?
So Dustin, sorry about that. We are not providing any color or more detailed color beyond this guidance. So this is a guidance policy only for the sales for the next quarter.
And I know you don’t really provide a full year kind of guide, but you mentioned sort of high base in the first quarter. So what I’m understanding for the second half of last year, the base won’t be that high already. So sort of should we still extrapolate this like sort of the decline level in the first quarter to the full year or it would be a little too much?
Well, I think the only thing I can tell you here is we’re going to work really hard for the remaining quarters this year. And of course, a lower base from last year will definitely help with our year-over-year performance comparison. But again, so far, we’re not in a position to provide any further guidance for the full year sales number.
Okay, thank you. And my sort of second question, if I may, is then in terms of the OpEx optimization. So just want to know, is there any operational examples, like, what kind of the cost that’s being saved? And can they be done more effectively in ‘22? And also, I kind of understand that we are reducing the discount. So we also kind of cut the sales. But I think those sales being cut is more on the sort of lower quality side. We stopped doing excessive like discounting. But is there any evidence suggesting like because our new products, better R&D, so we can still gain the new customer in a more quality way with even higher gross margin? So I guess, what I’m trying to get is that after this kind of high base being washed out, can the brands that we have or the company has can still have that kind of sustainable organic growth?
Yes, exactly. We believe so. So the costs that we’re cutting the most are actually, number one, traffic. So we’re aiming at a much higher ROI than with the previous quarters. And secondly, we’re trying to optimize our headcount. That will help us save some costs. But again, since the sales numbers are declining year-over-year, to some extent that will offset some of our efforts from a percentage point – set point.
From the customer’s perspective, I think the diversity of our brand portfolio is really differentiating from 1 year ago, because right now, the percentage of the skincare brands is taking – is getting higher. And also, we have some high-end brands, including Galenic and Eve Lom, which are appealing to the higher – consumers with higher affordability and also higher age. So right now, we see the diversified of our customer base is differentiating from the majority part coming from Perfect Diary. So that’s one of the operational evidence we see for our customer base. And on the other hand is the incremental of the growth – the sales growth coming from the skincare brands will help us to improve the gross margin and also improve the retention rate of the consumers, which we see that will help us to gradually reach to a profitability growth model. So that’s what we see about the customer base change.
Thanks a lot, David. And may I just ask the last question about sort of the channel, your view on Douyin. Could you elaborate a little more and maybe on Tmall and also maybe some of the core brands, is there going to be some of the difference in terms of product launch or like marketing? Give us some of the examples that can – that would be really helpful? Thank you.
Sure. So, in the first month and second month of this year, the color cosmetic sales in Tmall declined by 2.4% and our skincare, it’s almost the same percentage of decline, like 2.8%. So, if you look at the traditional e-commerce channels, we see the – looking forward, we think it will not be the main growth drivers for our brand portfolio. So, right now, our company is devoting more and more talent and resources into Douyin, and we see a quite remarkable growth in the last quarter – in the fourth quarter last year. And also recently, we also see a very remarkable and also confidence coming from the operation in Douyin as well. So, looking forward, we think the percentage of Douyin, of our total revenue will continue to grow. And also, we are also going to diversify our sales channel in online and offline through the distribution – through the distributor model as well.
Okay. Thank you very much.
Our next question comes from Christine Cho from Goldman Sachs. Please go ahead.
Thank you, Jinfeng and Donghao. Two quick questions. One, just at a high level, I was wondering what do you need to see for really color make-up to rebound as the industry? And if there is any kind of surprises year-to-date when thinking about the color make-up market that has surprised you compared to for example six months ago? That would be great to hear your thoughts there. And then secondly, if there is any major product pipeline that is upcoming in the next few quarters, it would be great if you can give us some color there as well? Thank you.
Hi Christine, can you clarify on your first question, the second end of your question?
Yes. Just at a high level, what are some of the things that you need to see for the color make-up category or the overall industry to re-accelerate? Is there really just the base to go away? Is it – do you feel like the product registration has been slowing this year generally across the industry? Does that have to accelerate? Does it have to be around the offline recovery, for example, from the COVID restrictions, or what are some of the building blocks that you need to see for the whole category to re-accelerate in your view?
Okay. So, for the market development, especially on the color cosmetics, I think there are a few factors influencing the slower growth rate of this market. First is the COVID impact still last right now. So, it’s like the consumers wearing the mask, we see the lip category is not growing as fast as before. Second, I think for the make-up market, after several years fast growth with the high base, I think right now the market is resuming to a more sustainable and at a lower growth rate. And also what we see it here from the suppliers’ perspective because of the softer market demand and also some of the more competitive market landscape, we see – we didn’t see so many new brands emerge in this category. And this will also influence – have some negative influence on driving the consumers’ demand on buying the make-up product. So, looking forward, we think there is still potential for the China’s color cosmetic market. So, we think the penetration will continue to grow. And then with the COVID goes out, the lip category will resume as well. So right now, we see the growth of the foundation part is driving the market growth. So, we think there is also some upgrade trend for the make-up market as well. So, all of those contributors will make this market to grow at a more sustainable growth rate. That’s our perspective about the make-up market.
Thank you. And on the second question, regarding any major product pipeline that you would like to highlight in the next few quarters?
Sure. I think for Galenic, so last year, we launched a very successful beauty serum products. And then we are looking for a new very high-end skincare product line launch in the coming months. And also for Eve Lom, we are expanding category into serums. And then we are very excited about the brand upgrades of Eve Lom in the coming two months as well. For our DR.WU, right now, we are launching a very good SKU, which is the color correcting serum. And then – so we launched that product with just a few days and then the product has gained a very good feedback from consumers and KOLs as well. And for our make-up brands, for sure, Pink Bear is growing really fast. And then more and more lip gloss, new SKUs and the brand is expanding into eyeshadow pallets and also foundations as well. And also for Perfect Diary, you see a very few successful new product launch once the butterfly eyeshadow pallets and also the new lip gloss. And then in May, in August and then there will be another two very big launch product line for various malls. So, we think – so right now, our new product for this year has pretty robust pipeline and then it’s not only in makeup, but also in skincare and then in different price tiers, in different categories. So, we think our – the product offerings is more diversified category focus right now.
Great. Thank you.
Our next question comes from Kian Lin from CICC. Please go ahead.
Thanks for the management. I have got two quick questions. The first question regarding financials, you mentioned the increase in sales and marketing expenses was primarily attributable to the expenses related to offline stores optimization and an increase in brand expenses, partially offset by a decrease in online traffic expenses. So, could the management help break down quantitatively the impact of the three factors? The second question is the operation of skincare is quite different from color cosmetics on product offerings and marketing strategy. So, the company has already proven itself as a leading color cosmetic player. And to what extent has the company upgraded the capabilities to run the skincare business? That’s my questions.
Well, again, sorry about that. We are not providing breakdown across different channels regarding our sales and marketing expenses. So, I am sorry about that. And your second question…
Other capabilities, yes. I think first of all, I think our – the growth model we have built up in the past few years can be re-priced into three categories. So, we see the – so the growth for our skincare brand to lead up. And then what is different is the skincare brand has higher loyalty and higher gross margins. Second is, in the past few years, the company has been very dedicated in strengthening brand building capability of the company. So, we have more talent joining with very good experience in traditional beauty and fashion company. So, we think that what they bring into the company is the brand building framework and also the experience they have mattered in the period working experience. And the third part is about – so right now, based on our experience, what we see is – so our target domain is still contributing for our brands launched from zero to one page. So, we have seen – we typically have seen the evidence from that for our product domains. So, all of those capabilities has been helping us to building more brands.
Got it. Thanks so much. That’s all the questions I have.
The next question comes from Louise Li from Bank of America. Please go ahead.
Hi there. Thank you to taking my question. So, my first question is about our guidance on Q1. So, based on the current expectations, so maybe do you expect like operating deleverage in Q1, i.e., we might see expanding net loss on a non-GAAP level on a Q-o-Q basis or on a Y-o-Y basis? This is my first question. Second question is, do you have a timetable for the breakeven strategy plan? And third question is about the industry. So, I remember that in Q4 last year, actually from the second half of last year, the overall beauty market has rolled down a lot. So, do we see any trend revision or any – so how can we compare the past two months year-to-date versus Q4 in last year from the industry level, maybe for color or both and skincare as well? So, you also mentioned that in the last earnings call that the international brands they were doing very aggressive promotion. So, do we see this promotion level has been eased in the past Women’s Day promotion? Thank you.
Well, obviously, there will be some deleveraging impact because – according to our guidance, our sales are going to decline 35% to 40% year-over-year. But we are trying very hard to offset the deleveraging impact by cutting some of our costs and improving our operational efficiencies and ROI on our traffic expenses. So, we are expecting to breakeven on a yearly basis next year. So, that is our current goal. Third question?
Third question about the price discount for global brands. So, we see that it’s getting worse in the first quarter this year. So in the first – in the just past March 8th promotion, because right now, we have only one KOL and the price cut is getting even like deeper. So, we see the effect on price cuts is getting smaller and smaller. So, at this stage, the company’s strategy process is to lower the percentage of promotional discounts and then raise the gross margin, spend more on brand building and then lower the cap expense, improve the ROI and also increase the percentage of the skincare, especially on the highest skincare brand, which we believe will become an iconic brand in the future. So, that is our response at this stage.
Thank you, David. Thank you, Donghao. So, just a quick follow-up. So, you mentioned that the competition actually got worst year-to-date. So, the reason is, is that because – I mean the whole industry is still very weak. So, is this the reason?
I think there are a couple of reasons. One, the competition is getting stronger. And also, yes, the market demand is getting soft. And also because of there is – especially for the large streaming, the competition to gain this slot is getting like more intensified. But for the global brand, the only way they can to keep their sales level is to lower the price and then have a more aggressive promotion plan in order to get a slot so that they can remain at a certain sales level. So, that’s what we see.
Got it. Thank you very much. I have no questions.
This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Thank you once again for joining the Yatsen’s conference call today. If you have any further questions, please feel free to contact us at Yatsen directly or TPG Investor Relations. You can find our contact information for IR in both China and the U.S. in today’s press release. Thank you and have a great day.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.