Miniso Rides Into China Covid Storm With Forecast for First-Ever Revenue Contraction

Key Takeaways:

• Miniso said it expects its revenue to decline around 9% in the current quarter as many of its China stores have been forced to shut down during recent citywide lockdowns
• Company said nearly one-tenth of its China stores were closed in March, even as its smaller international operations continued to rebound

By Doug Young

Fasten your seatbelts for rough weather ahead.

That’s the biggest theme in the latest earnings season from China, where companies are warning that a slowdown in the first quarter of the year looks set to accelerate into the current quarter amid growing restrictions to contain the spread of Covid Omicron outbreaks. The latest distress signal is coming from retailer Miniso GroupMNSO, whose small, brightly lit shops are being shut down en masse in its home China market during recent lockdowns.

“In China, the outbreaks of the Covid-19 pandemic during this quarter, including those in Shenzhen and Shanghai, led to the most stringent restrictive measures taken by local governments since 2020, including the full or partial lockdown of many cities,” Miniso said in remarks with its results for the quarter through March. “These measures reduced traffic to shopping malls where Miniso and Top Toy stores are located, and even caused the suspension of operations of some of these stores.”

Miniso is best known for its namesake stores selling everyday knickknacks like stationery and cosmetics, reminiscent of Japanese chains like Muji and Uniqlo. More recently it has also stepped up its collectible toy business with its year-old Top Toy chain.

The company actually managed to post modest growth in the first three months of the year, with overall revenue up 5% to 2.34 billion yuan ($348 million). That included 1.9% growth in its China revenue, which accounts for more than three-quarters of the total. While such single-digit growth normally doesn’t look so good, one needs to consider that nearly one-tenth of the company’s China stores were closed in March, as major cities like Shanghai and Shenzhen imposed partial or even citywide lockdowns to try to control the virus.

But things are expected to get even worse in the current quarter, which has seen Shanghai completely locked down since April and only set to gradually reopen in June. Beijing has also been closing most shops and forcing restaurants to sell only takeout orders during the time, as it tries to prevent a major outbreak like the one seen in Shanghai.

As a result, Miniso forecast its revenue would contract by about 9% year-on-year to between 2.1 billion yuan and 2.4 billion yuan in the current quarter, marking the first such decline since the company went public in October 2020.

Despite the gloomy outlook, it appears investors were expecting even worse. Miniso’s stock actually rose 4.3% in Thursday trade after the results came out, and were up another 3.1% after-hours. Then again, the stock is still trading near an all-time low, and has lost about three-quarters of its value since its IPO.

Despite all the difficulties, Miniso’s stock still trades at a surprisingly competitive trailing price-to-earnings (P/E) ratio of 15. That’s far less than the 40 for domestic rival Pop Mart (9992.HK), which is more profitable due to its focus on high-margin collectible toys. But it’s actually slightly ahead of trendy U.S. retailer Target’s TGT ratio of 13, and 12 for Muji parent Ryohin Keikaku (7453.T).

Recovering global operations

Having covered the major gloom, we’ll spend the second half of this space diving deeper into Miniso’s latest results to try and divine how the company might perform once the lockdown blues finally start to fade. Things look decidedly better for the company outside China, where it had nearly 2,000 stores at the end of March, accounting for nearly 40% of its total.

The company said that 74 of its 1,916 non-China stores remained closed as of March 31, as it gradually resumed operations for those shops that experienced large-scale closures over the last two years. Most of the company’s stores, both domestic and international, are operated by franchise partners, meaning Miniso gets a big portion of its money from fees that are less affected by store closures. But another big portion comes from sales, since Miniso provides its franchisees with most of their merchandise.

In contrast to the weak 1.9% revenue growth in China, Miniso posted much stronger 17.4% growth for its international operations during the March quarter. That shift helped to lift Miniso’s gross margin by about 2 percentage points to 30.2% for the quarter, since its international operations tend to have higher margins than domestic ones.

Despite that, the weakness in China ultimately undermined Miniso’s profit, which fell 19% during the first three months of the year to 92.7 million yuan from 115 million yuan a year earlier.

The company noted it could also face headwinds both at home and abroad from surging inflation, since people tend to cut back on discretionary spending during such times for the kinds of nonessential items that are Miniso’s main focus. To weather such potential difficulties, the company said it would pay close attention to costs – another theme emerging among Chinese companies in the latest results season.

“We have taken necessary actions such as controlling operational overheads, reducing personnel-related expenses and adjusting marketing plans, in order to ease the short-term impact from the challenges we face on our bottom line,” CFO Zhang Saiyin said in the earnings announcement.

Miniso was founded in 2013 by Ye Guofu, who came up with the concept for the brand during a family trip to Japan, after being impressed by local specialty stores selling high quality yet affordable products made in China. He even hired a Japanese designer, Miyake Junya, to lead his company’s design team.

At the end of the day, the company does seem quite well run, with its recreational shopping model that appeals to impulse buyers and strong reliance on franchising that is far cheaper and less risky than direct store operation. Its geographic diversity is also a strong point, as we’re now seeing with the problems in China. That probably explains why six out of seven analysts polled by Yahoo Finance had a “buy” rating on the company in April, with an average price target of $15.33 – nearly three times its latest close of $5.54.