December 2, 2021

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Yatsen Holding Limited (YSG) Q3 2021 Earnings Call Transcript

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Yatsen Holding Limited (NYSE:YSG)
Q3 2021 Earnings Call
Nov 18, 2021, 7:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, good day, and welcome to the Yatsen third quarter 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 investments and capital markets. Please go ahead.

Irene LyuHead of Strategic Investments and Capital Markets

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 the 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 the reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. Joining us today on the conference 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 is being recorded. In addition, a webcast replay of this conference call 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. 

Jinfeng HuangFounder, Chairman, and Chief Executive Officer

Thank you, Irene, and thank you, everyone, for joining today’s conference call. So our net revenue grew by 6% year over year to RMB 1.3 billion in the third quarter, in line with our guidance. We made significant progress with our skincare brands in the quarter, which increased to approximately 15% of total gross sales compared to around 14% during the prior quarter and around 5% during the same period last year. Since the premiumization of the Perfect Diary brand and an increase in skincare sales, our gross margin increased by 2.2 percentage points year over year to almost 58%.

So we saw a significant deceleration in general consumer and color cosmetics spending in China this quarter. According to the China National Bureau of Statistics, general consumer retail spending and beauty retail spending each recorded year-over-year growth of approximately 5% in the third quarter, with even slower sales growth in Tmall’s color cosmetics category. The industrywide slowdown extended into the singles’ day promotion period between November 1 and November 11, 2021, during which color cosmetics sales on Tmall fell by low single digits compared to the prior year. So this industry trend is cyclical in nature, driven by macro economies’ uncertainties and the unusual seasonality pattern caused by the COVID-19 pandemic last year.

Our business is likewise undergoing significant changes. Gross sales from our color cosmetics brands, which make up approximately 84% of total gross sales, decreased by mid-single digits year over year in the third quarter. These results were mainly due to our continued realignment of Little Ondine, partially offset by the steady performance of Perfect Diary and Pink Bear. Gross sales from our skincare brands, which include Abby’s Choice, DR.WU, Galénic, and Eve Lom grew by around 257% on a year-over-year basis.

And the majority of this quarter’s sales come from color cosmetics. These factors inevitably slowed the group’s overall growth. Despite these changes, we remain one of the largest publicly listed pure-play beauty companies in China by revenue size during the third quarter. Perfect Diary was once again the largest color cosmetics brand on Tmall channels in terms of sales.

And Tmall ranked Pink Bear as No. 1 new domestic brand — domestic color cosmetic brand during November singles’ day event. Eve Lom and DR.WU sales on Tmall grew by 100% and 1,400%, respectively, while Galénic’s [Inaudible] product was the top-selling imported facial serum during the singles’ day period. The overall gross sales from our skincare brand grew by around 477% compared to the prior-year singles’ day period, underscoring the strength of our skincare business this year.

As we look to the near future, we are committed to sharpen our growth model, which is underpinned by three pillars: continued investments in our brand equities, commitment to developing world-class R&D capabilities, and focus on sustainable growth. We expect the implementation of these growth initiatives to take multiple quarters to produce results, but we believe we are on the right path to future success. We have already seen positive results from our efforts to upgrade and refine the Perfect Diary brand. At the China cosmetic conference, known as the diverse forum of the beauty industry, the 2021 [Inaudible] awards named Perfect Diary as the most influential brand for the second consecutive year, a strong endorsement of our continued innovation.

We introduced several effective new products in the third quarter, such as the [Inaudible] lipstick with [Inaudible] color and unique microsphere wrapping technology. And the [Inaudible] lip stain with the ever-staying technology. So bolstering our leading position in the color cosmetic arena. We also unveiled a series of new products through IP crossovers and collaboration with well-known brands in other fields, such as owner of King’s eyeshadow pallet and [Inaudible] gift box.

Furthermore, well-known Chinese celebrities [Inaudible] joined with international-acclaimed Chinese actress Zhou Xun to serve as the joint spokesperson for Perfect Diary, further strengthening our brand recognition. Now let’s look at the other brands. Little Ondine is continually gaining traction among young consumers, specifically powered by a new product launch, such as our Disney villains crossover and the opening of our first off-line physical stores in Shanghai [Inaudible] Mall in September. So building on our momentum from last quarter, we also continued to invest in our Pink Bear brand.

In the third quarter, we developed a new lip gloss using [Inaudible] technology, as well as the new eye shadow collection, which resonated strongly with Pink Bear’s diverse young community. Pink Bear also engaged a Chinese singer and actress [Inaudible] as its spokeswoman, reinforcing Pink Bear’s positioning as the brand of choice for young girls. Now turning to our skincare category. We completed several integration initiative for Galénic and Eve Lom during the first half of the year and have began to ramp up both brands’ marketing and branding activities in the third quarter.

So in early September, we appointed Chinese supermodel [Inaudible] and the famous Chinese actor [Inaudible] as Galénic and Eve Lom’s brand ambassadors, respectively, accompanied by high-profile publicity and media events. And given that prestige brand building takes patience and effort, we expect to continue investing in branding and marketing for these two brands while steadily adding new hero SKUs and product categories over time. On the R&D front, we increased R&D expenses to 2.7% of total net revenues in the third quarter, compared with 1.1% in the period — in the prior period. We also established an innovative skincare laboratory with Ruijin Hospital’s dermatological department, as well as R&D collaboration platform with Sun Yat-sen University during the quarter.

Ruijin Hospital, part of Shanghai Jiao Tong University School of Medicine is a Grade III level general hospital with an enormous history. Its dermatology group department has a nationally renowned national-grade clinic specializing in the diagnosis and achievement of refractory skin disease. Our three-year joint R&D program with Sun Yat-sen University will focus on efficacious new ingredients and formulas to address specific skin issues. Our collaborations with these two preeminent academic research institutions will significantly bolster our open lab R&D capabilities.

So additionally, during the third quarter, we completed our investment in [Inaudible], an innovative company focusing on R&D of microecological skincare products. So founded in 2018, [Inaudible] owns [Inaudible], a microecological skincare brand endorsed by dermatologists. By leveraging our online and off-line resources, as well as open-lab R&D capabilities, we will further promote the development of [Inaudible]. The quarter also included an investment in [Inaudible] Biotechnology, a cutting-edge company focusing on the development of industry-leading pharmaceutical products, with product pipeline covering medical aesthetics, innovative beauty drugs, cell therapy, and small molecule immunology — immuno-oncology.

With this investment, we intended to stand at the forefront of developing cutting-edge biomedical technology for future potential applications in the field of beauty. So lastly, the final key of our evolutionary strategy is our framework for sustainable growth, which encompass both sales growth and cost optimization elements. In the near term, we plan to focus on increasing sales contribution from our masstige and premium skincare brands, such as DR.WU, Galénic, and Eve Lom, which provides excellent gross margins and higher-quality growth. Meanwhile, we will seek opportunities to increase sales contribution from nontraditional channels, where we see room for sustainable growth and incremental sales penetration.

In terms of cost optimization, we aim to continue to improve our performance-based marketing ROI and shift more resources to branding investments. While we may sacrifice certain low-quality growth in the short term, we believe this optimization strategy will enable us to build brand equities across our portfolio and sustainably reduce sales and marketing spend over time. We also plan to optimize our fulfillment and G&A expenses in the near future should be aligned with our new growth strategy. We expect that these initiatives will enable us to achieve sustainable growth with a near path to profitability in the medium to long run.

So in closing, before I hand it over to Donghao, I would like to reflect on the journey that has brought us here. Yatsen celebrated its fifth birthday in September. So while I’m proud of our team’s achievements since Yatsen’s founding, I remain as determined as on one day — on day one to ensure Yatsen’s continued success in the next stage of its development. Our focus on sustainable growth will entail some short-term adjustments and may take time to produce results, but we are confident that this is the right moment in Yatsen’s development for this essential shift.

As we navigate this period of unprecedented challenges, we are optimistic about Yatsen’s future. To further demonstrate our confidence in the company’s prospects, our board of directors have authorized a USD 100 million share repurchase program to be completed over the next 24 months. So thank you, everyone. With that, I will now turn the call over to our CFO, Donghao Yang, to discuss our financial performance. 

Donghao YangChief Financial Officer and Director

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 third quarter of 2021 grew by 6% to RMB 1.34 billion from RMB 1.27 billion in the prior-year period. The growth was primarily attributable to increased sales from our newly launched and acquired brands.

Gross profit for the third quarter of 2021 increased by 9.6% to approximately RMB 911.8 million from RMB 831.6 million in the prior-year period. Gross margin improved by 2.2 percentage points to 67.9% in the third quarter of 2021 as compared with 65.7% in the prior-year period, mainly due to increased sales from higher-margin brands and products. We have also seen an increase in sales from our skincare brands this quarter, enabling us to achieve higher average order value and better margin. Total operating expenses for the third quarter of 2021 decreased by 13.2% to RMB 1.28 billion from RMB 1.48 billion in the prior-year period.

As a percentage of total net revenues, total operating expenses decreased to 95.4% from 116.6% in the prior-year period. Fulfillment expenses for the third quarter of 2021 were RMB 100.2 million as compared with RMB 91.5 million in the prior-year period. As a percentage of net revenues, fulfillment expenses increased to 7.5% from 7.2% in the prior-year period, primarily due to an increase in customer service expenses and share-based compensation expenses compared to the third quarter of 2020, partially offset by a slight decrease in fulfillment logistics expense. Selling and marketing expenses for the third quarter of 2021 were RMB 911.3 million as compared with RMB 854.3 million in the prior-year period.

As a percentage of total net revenues, selling and marketing expenses were 67.9%, compared with 67.5% in the prior-year period. However, on a non-GAAP basis, which excludes expenses related to share-based compensation and amortization of intangible assets, selling and marketing expenses were 64.9% of total net revenue, compared to 67.5% in the prior-year period. This was a result of our focus on improving our selling and marketing expenses ROI. General and administrative expenses for the third quarter of 2021 were RMB 233.9 million as compared with RMB 515.9 million in the prior-year period.

As a percentage of total net revenues, general and administrative expenses for the third quarter of 2021 decreased to 17.4% from 40.7% in the prior-year period. The decrease in percentage was primarily due to lower SBC expenses compared to the same period last year, partially offset by an increase in salaries. Research and development expenses for the third quarter of 2021 were RMB 35.8 million, compared with RMB 14.4 million in the prior-year period. As a percentage of total net revenues, research and development expenses for the third quarter of 2021 increased to 2.7% from 1.1% in the prior-year period.

The increase was primarily due to higher personnel costs and share-based compensation expenses, reflecting our commitment to enhancing our R&D capabilities. Loss from operations for the third quarter of 2021 decreased by 42.7% to RMB 369.3 million from RMB 644.6 million in the prior-year period. Operating loss margin was 27.5% as compared with 50.9% in the prior-year period. Non-GAAP loss from operations for the third quarter of 2021 increased by 11.9% to RMB 221.7 million from RMB 198.1 million in the prior-year period.

Non-GAAP operating loss margin was 16.5% as compared with 15.6% in the prior-year period. Net loss for the third quarter of 2021 decreased 43.8% to RMB 361.8 million from RMB 643.8 million in the prior-year period. Net loss margin was 26.9% as compared with 50.8% in the prior-year period. Non-GAAP net loss for the third quarter of 2021 increased by 9.6% to RMB 216.3 million from RMB 197.4 million.

Non-GAAP net loss margin was 16.1% as compared with 15.6% in the prior-year period. Net loss attributable to Yatsen’s ordinary shareholders per diluted ADS for the third quarter of 2021 decreased to RMB 0.57 from RMB 6 in the prior-year period. Non-GAAP net loss attributable to Yatsen’s ordinary shareholders per diluted ADS for the third quarter of 2021 decreased to RMB 0.34 from RMB 1.2 in the prior-year period. Looking at our business outlook.

For the fourth quarter of 2021, we expect our total net revenues to be between RMB 1.57 billion and RMB 1.67 billion, representing a year-over-year decline of approximately 15% to 20%. As David mentioned earlier in the call, we expect the high comparison base and our future emphasis on higher-quality growth to factor into this projected performance. This forecast reflects our current and preliminary view on the market and operational conditions, which is subject to change. The company’s board of directors has approved a share repurchase program, whereby the company is authorized to repurchase up to USD 100 million worth of its ordinary shares over the next 24 months.

The company’s proposed repurchase may be made from time to time through open market transactions at prevailing market prices, in privately negotiated transactions, in block trades, and/or through other legally permissible means, depending on the market conditions and in accordance with applicable rules and regulations. The company’s board of directors will review the share repurchase program periodically and may authorize adjustment of its terms and size. The company expects to fund the repurchase with its existing cash balance. As of September 30, 2021, the company had cash and cash equivalents and restricted cash of RMB 3.63 billion as compared with RMB 5.73 billion as of December 31, 2020.

With that, I would now like to open the call to Q&A. Operator? 

Questions & Answers:

Operator

Thank you. [Operator instructions] The first question comes from Dustin Wei with Morgan Stanley. Please go ahead.

Dustin WeiMorgan Stanley — Analyst

Thanks for taking my questions. First question regarding guidance for fourth quarter. So this 15% to 20% year-on-year decline, is there any one-off adjustment in terms of, for example, the store closure for proprietary brands or further sort of reduction of SKU regarding Little Ondine or Abby’s Choice? Question number two, regarding the outlook for next year. So based on the current assessment for the macro industry dynamics, I remember last call we kind of talked about like 20% to 30% year-on-year growth without considering the acquisition could be sort of the range to look at for next year.

But what’s the refreshed view for the next year? The third question regarding competition. So it seems like the global brands, especially the prestige color cosmetics are coming back in terms of the ranking and the growth rate. So what’s management’s view on that? Thanks a lot.

Donghao YangChief Financial Officer and Director

Thanks, Dustin, for your questions. Well, in our guidance, well, of course, there will be some one-off expenses regarding closure of some of our nonperforming stores, but that’s not going to be a major item in our — factored in our guidance. So I mean, our guidance, as we said in our statement, reflects our current view on our business performance for the next quarter. So I don’t think there is any particularly large one-off items included in the guidance.

Your second question about next year’s projections. Well, actually we do not give guidance for the full year next year. So the only guidance we give is for the following quarter. But again, as we said earlier in the call, the market environment is changing rapidly, including the competition, as we mentioned in question three, from overseas brands is intensifying and also there has been dramatic change in the retail sales channels that we have to deal with.

So I don’t think we’re in a position to give any specific guidance for the full year next year. Competition. Well, I think the competition from those overseas brands is intensifying, especially during the 11/11 shopping festival. Well, what we’ve seen is a lot of the prestige foreign color cosmetics brands have offered deep discounts, really deep discounts for their products.

Part of the reason is probably a lot of them are global companies and their sales are declining anywhere else outside of China. So China is probably the only place where they can generate some meaningful sales. So for example, there was one brand, I’m not giving you the name here, but that one brand used to be in the masstige segment. But during the 11/11 shopping festival, they offered deep discounts like buy one, get one free type of deals.

So they’re trying to generate more meaningful sales through deep discounts. So David, do you want to add to that answer? 

Jinfeng HuangFounder, Chairman, and Chief Executive Officer

Sure. Thank you. The first thing is about the product competition. So in the singles’ day, we saw this year a very aggressive promotion and discount tactics adopted by global brands.

And also those global brands has booked a lot of the slots with the top KOLs like Austin Li and Viya, who dominated the remaining traffic and GMV at Tmall. So the combination of both factors significantly impacted our sales during singles’ day. So if you look at the top 10 tier beauty brands in the Tmall’s Single’s Day promotion, so there is no color cosmetics brands in their top 20 brands. Last year, Perfect Diary was the 11th, was ranked 11.

And so I think that’s a very important factor, reflecting the very deep promotion on skincare brands and also the traffic mainly gained by Austin Li and Viya. So looking forward about what we see about the competition, I think this is not going to be a sustainable tactic by the global brands because it will significantly improve — significantly hurt their premium brand image. So after Q4, we — so during the past one or two weeks, we see the global brand sales is kind of like remaining to normal. And also, we, right now for our brands, we are trying to gain more shares after the singles’ day promotion.

So looking forward about next year’s growth guidance. For sure, we are not going to be able to provide an exact number here. The one thing I want to call is that right now the whole company is taking a transition strategy, which means we are improving our sales in skincare brands. And then right now, skincare brands taking almost 14% of the revenue in Q3.

And then total number will be almost increased to 20% in Q4. So looking forward, we believe the percentage of the sales of skincare brands will continue to increase next year. And the growth — the high growth rate of the skincare brands will also help to bring the company’s growth to normalized stage. However, I think this might take a few quarters to reach that.

So I think the investors need to be patient about what we are doing right now because we believe that’s the right path to go. 

Dustin WeiMorgan Stanley — Analyst

OK. Thanks a lot for sharing. Indeed, that’s a quite challenging environment, so best of luck. Thank you very much.

Jinfeng HuangFounder, Chairman, and Chief Executive Officer

Thank you so much.

Operator

The next question comes from Stephen Yang with Goldman Sachs. Please go ahead.

Stephen YangGoldman Sachs — Analyst

Thanks for the sharing of that, management. So I have two questions. One is on buyback. So would you mind sharing more color regarding the rationale behind the buybacks and the timing? And also, what does the management think about, from a forward-looking basis, the cash usage, whether it’s going to be used more on buybacks or more M&As, etc.? And the second question is regarding the efficacy regulation.

So has management seen an impact from the new asset efficacy regulation to, for example, product launch or any change in your competitive dynamics? 

Irene LyuHead of Strategic Investments and Capital Markets

Yes. For the first question regarding buybacks, so currently, the management will be — our market cap is undervalued. And given what we’re seeing with our transition, though it may take several quarters to show the results, we’re very confident of the company’s long-term prospects. So we think it’s a great time to start a buyback growth program with the existing cash balance given that we still have ample cash reserves.

Timing-wise, as mentioned earlier, we — the board has authorized a buyback of up to USD 100 million for the next two years. So far, we’ll do that as time come and when we see fit. And then for the second question on regulation, I think, David, do you want to take that question on the part of the regulation? Thank you.

Jinfeng HuangFounder, Chairman, and Chief Executive Officer

Sure. Yes, sure. So overall, we have been discussing with the regulators and the related government — the department and the leaders in the past few months. I think, overall, if you’re looking at the regulation trend, there will be more and more regulation coming out in the coming quarters.

So again, the key reason behind is the government is trying to regulate the industry and also to guide the development for the future product launch and brand development. So the new efficacy regulation you just mentioned about, so right now, I guess, because of our very close relationship with the government officials and also the — our OEM/ODMs, so right now, we are satisfying the new regulation development. However, in order to lead in this part, we are taking a few new initiatives to change our product efficacy test. So as I mentioned before, so right now, we are devoting more and more resources to R&D.

And one of the — a few initiatives we are going to take is we are going to strengthen the clinical test for our product test before we launch to market. So — and also the collaboration with the region hospital, we were very — will strongly help us to establish the R&D capability and also the product design capability in the dermatologist skincare area. So for those products, we believe we’ll be very strongly relying on the efficacy test and also the relationship we set up with the top dermatology hospital in China. So right now, we think that this trend is going to give more impact on the industry.

And Yatsen is taking enough initiative to be leading this share in the future. 

Stephen YangGoldman Sachs — Analyst

Yes. Thanks, management. So if I may have a follow-up question maybe on the ROI regarding — so we see quite an improvement Y-o-Y on the selling expenses. I just wanted to get a sense of what do you think about the color cosmetics industrywide ROI trend going forward? Is it going upwards or downwards? Thank you.

Jinfeng HuangFounder, Chairman, and Chief Executive Officer

The ROI of skincare overall is higher than the color cosmetics. So if we look at the non-GAAP sales and marketing expenses in the Q3, we can see a decline over there. One of the key reasons is that we keep optimizing the ROI for our existing brands. So looking forward, with our continuous investment in the skincare brands and also we are optimizing the sales channel for our brand portfolios, we will see an improvement of the price as well. 

Operator

The next question comes from Louise Li with Bank of America. Please go ahead.

Louise LiBank of America Merrill Lynch — Analyst

Hi, management. Thank you for taking my questions. So my first question is, do we have a breakdown for Q3 or for Q4 today about the — I mean, channel? So you mentioned that we might invest into more on the unconventional channels. So just would like to get a sense about the latest breakdown.

So my second question is, you just mentioned that we may take several quarters’ time to see some transition results. So how do we understand the transition results? Will it be like — so in terms of the earnings side, so would it be like sales return to positive growth? Or what kind of level of sales growth? Or we’re looking for bottom-line breakeven? So which one is our priority? So what is the timetable? So is it in the next year or even longer time? So my third question is also about the SG&A ratio or particularly the selling and marketing expense. So what is the fixed cost part? Thank you.

Jinfeng HuangFounder, Chairman, and Chief Executive Officer

The first question about the sales channel fleet. So right now, I think Tmall is taking around like 40% of the sales for the total company. We see the percentage is declining. And our percentage in the livestreaming especially in Douyin is increasing.

So looking forward, we think this trend will continue as well. But the things like in the past three months, I guess the company has been taking some initiatives to optimize our sales in Douyin. Douyin, right now, is becoming a very important factor for brand growth. We see the first stage of the Douyin sales is mainly coming from the discount.

So if you look at some of the skincare brands, the benefit from the first stage of the Douyin’s livestreaming development is very deep discount for their skincare products. However, if you look at some of the recent development of Perfect Diary’s ranking in Douyin, Perfect Diary’s ranking is going — is increasing really fast. So right now, if I remember correctly, Perfect Diary is ranking around No.3 or No.4 in Douyin color cosmetics, but could be high growth rate than other brands. So I think we saw a commitment to continuous like investing in that channel.

The percentage of the Douyin will increase in the future as well. So going back to your second question about the brand focus. I think — so we share with the public that we are going to take some change for our strategy, which is devoting more resources into the skincare development. So looking at the past singles’ day, our skincare growth is very robust and then we saw almost 500 percentage growth versus last year.

Looking forward, we believe the skincare brands will take a higher percentage of the total company’s revenue. So right now, what we are focusing on is on the premium brands, including Galénic, Eve Lom, and also the masstige brand, DR.WU. So the three brands is on trend and then — and also for each of the brand proposition is — we believe there’s good potential to monetize the brands’ positioning. For example, like DR.WU, right now, the brand has grown really fast, mainly because of two hero products.

And we plan to launch another two or three hero products in the coming year. So with the product and the category expansion of DR.WU, the brands will grow, we believe. We’re confident about the brand’s growth in the next year. For Galénic, there is some impact because of the supply chain.

So right now, the brand has been — the hero product of the [Inaudible] has been sold out in the past few months. In the coming one or two months, we think the supply chain challenge will remain. However, we took an initiative to solve the supply chain problem. And then with the supply chain running up, I guess the — so we believe the sales of Galénic will significantly improve in the coming quarters as well.

And also we — after the first stage success of [Inaudible] of Galénic, we are going to launch other skincare products and also serums in Q1 and Q2. So with the product lines expanding, we think the growth for Galénic will also benefit from that. So talking about Eve Lom, so the cleanser has been remaining very strong in the singles’ day promotion, it’s the most premium cleanser in Tmall’s singles’ day promotion and also the sales is ranking top for the cleanser category — for the premium cleanser category. And we didn’t see any other competitors in the premium price tier launching or competing with Eve Lom for the cleanser.

I think the key next step for Eve Lom is to expand product category on top of the cleanser. So in the past quarter, we launched a rescue mask and we had initial success. So in the coming quarters, we have sufficient product launch high-level Eve Lom as well. So with that, we think the three skincare brands will benefit from what we designed for the growth strategy. 

Operator

The next question comes from [Inaudible] with CICC. Please go ahead.

Unknown speaker

Thanks for taking my questions. The first regarding the profitability. It seems that the promotion of Perfect Diary increased during the singles’ day. I wonder if there is any pressure on the company’s fourth quarter gross margin and operating margin.

The second, regarding the industry outlook. As we’ve seen the soft industry environment for color cosmetics, how do the management see the color cosmetics market in the next three years and the future of the domestic color cosmetics brands? Thank you. Thanks a lot.

Donghao YangChief Financial Officer and Director

Thanks for the question. Go ahead, David. Go ahead.

Jinfeng HuangFounder, Chairman, and Chief Executive Officer

I heard the first one. What is the second question? Sorry about that. OK. I will go with the first one.

So for the Q4, if you look at the percentage of the — just in these livestreaming, the percentage of Perfect Diary is low for the total revenue. So if you look at the AOV of Perfect Diary, it’s actually increased in the past singles’ day. So we didn’t see a challenge coming from the gross margin. So that’s the first question — my answer to your first question.

So I missed your second one. Sorry about that. 

Donghao YangChief Financial Officer and Director

Well, I think the second question is about the outlook of color cosmetics business or market in China for the next 30 years. I mean it’s a really long-term perspective. So David, do you have anything to say on that, prime color cosmetics Chinese market for the next 30 years? If I got that one correctly.

Jinfeng HuangFounder, Chairman, and Chief Executive Officer

I cannot hear very clear about that part. But talking about the color cosmetics industry, if you look at the — in the past singles’ day promotion, as I mentioned before, there’s no color cosmetics brands ranking in the top 20 brands. So I guess looking forward, so we still are confident about the color cosmetics growth, mainly driven by two things. One thing is the penetration increase.

The second one is about premiumization. So I guess the challenge for our existing brand portfolios is that the — because of the — in the singles’ day, the global brands has very deep price cut for their color cosmetics products. And then — so we see a very clear premiumization for the makeup industry. But I don’t think that that is going to sustain in the coming quarters.

So looking forward, there is no — there’s only a few domestic brands playing in the makeup industry. So I guess right now, there are only three main companies still trying to gain shares in the color cosmetic area. So I guess there will be a consolidation trend in the coming year less than because we take a multi-brand strategy. So we have a masstige brand, we have mass brand and also we have a new brand to get more of the new entrants into the category.

So I guess with the multi-brand strategy, we are in a very good position if we can take the consolidation period in the coming quarters in the color cosmetics area. 

Operator

The next question comes from Helen Shu with CITIC Securities. Please go ahead.

Unknown speaker

Good evening. Helen Shu from CITIC. The first one…

Operator

[Operator instructions]

Unknown speaker

Can you hear me? Hello? Can you hear me?

Donghao YangChief Financial Officer and Director

Sorry, we can’t hear you. We cannot. Can you repeat your question?

Unknown speaker

Sorry. Can you hear me?

Donghao YangChief Financial Officer and Director

It’s much better now.

Unknown speaker

OK. Helen Shu from CITIC. I have three questions. First one, if we broaden our view outside the brands of Yatsen, that’s to say equally broaden our views toward all the DTC Internet new brands.

What are the reasons that DTC brands are bearing through weak growth, even shrink? And the second question is how to improve customers’ loyalty toward our brands, especially makeup? And the third question is, how long can the cash support our business, considering the operating cash flow and the potential M&A? Thank you.

Jinfeng HuangFounder, Chairman, and Chief Executive Officer

I think the first one about the DTC makeup brands, the key reason is not just the DTC makeup brands, essentially the whole trend of makeup market being slowed down in the Q3 and also the singles’ day promotion. So I guess one of the — part of the reason of the slowdown was due to the seasonality caused by the COVID-19. So Q3 and Q4 last year was high base when consumers picked up spending after COVID. So this is also why we are giving a conservative guidance in Q4 as well.

So looking forward, so when we are thinking about the channel strategy of our flagship brand, Perfect Diary, we believe at this stage it’s also an initiative and necessary steps to optimize the sales channel for the brand as well. So the second one, talking about the customers’ loyalty. So I guess there are a few things we can do. The first one is R&D.

So in the past quarters, we launched the pearl loose powder supported by the Smartlock technology which is developed with the [Inaudible]. So the second — mainly because of the technology and also the product performance, right now, we see the product growth is pretty remarkable. The second thing talking about the loyalty is about the category expansion into the foundations to the base makeups. Previously for Perfect Diary, the brand mainly focused on the lip category and also the eye category.

So for those categories, mainly color, and fashion driven. So if you look at the whole — the makeup industry, the growth of the foundation, and also the base makeup is leading the growth versus lip category and also eye category. So the expansion into the base makeup for Perfect Diary is very important. So that’s why we launched the loose powder, the pearl loose powder.

And we launched a new BB cream. We launched a new cream foundation. So those are the new initiatives we launched in the past quarters. And then right now we are seeing a pickup trend for those new initiatives.

So with that, I believe it will be the right path to improve the customers’ loyalty. Talking about the cash question, I guess, how about Irene and Donghao address that? 

Irene LyuHead of Strategic Investments and Capital Markets

Sure. Yes. Regarding your third question on cash and also M&A, potential M&A, so currently, we have RMB 3.6 billion cash at the end of Q3, which I think — we think is sufficient to meet our operating needs for the near future, including the potential buyback plan, for our medium-term goal is to continue to improve our profitability and eventually break even and start profit making, and we don’t foresee the company to be moving cash for long term. And then regarding M&A, we have been continuing looking at opportunities.

And actually, as David mentioned, we have also recently acquired a very small skincare brand focusing primarily on microbiome or microecological brands endorsed by dermatologists. So given that there are a lot of uncertainties right now in the global — in the China economy and also the beauty industry, for our M&A right now, we’re primarily looking at small- to medium-sized transactions or brands that can prove to be high potential in the future rather than looking at large transactions. So given that’s our strategy right now, we feel — with our current cash level, it’s ample for us to continue to pursue new M&A opportunities in the future. 

Unknown speaker

OK. Thank you. Thank you, David and Irene.

Irene LyuHead of Strategic Investments and Capital Markets

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the call back over to management for any closing remarks.

Irene LyuHead of Strategic Investments and Capital Markets

Thank you once again for joining us today. If you have any further questions, please feel free to contact us at Yatsen directly or TPG Investor Relations. Our contact information for IR in both China and the U.S. can be found on today’s press release.

Thank you again, and have a great day.

Jinfeng HuangFounder, Chairman, and Chief Executive Officer

Thank you.

Operator

[Operator signoff]

Duration: 55 minutes

Call participants:

Irene LyuHead of Strategic Investments and Capital Markets

Jinfeng HuangFounder, Chairman, and Chief Executive Officer

Donghao YangChief Financial Officer and Director

Dustin WeiMorgan Stanley — Analyst

Stephen YangGoldman Sachs — Analyst

Louise LiBank of America Merrill Lynch — Analyst

Unknown speaker

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