Ladies and gentlemen, good day, and welcome to the Yatsen first quarter 2022 earnings conference call. Today's conference call 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 US 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 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 team are Mr. Jinfeng Huang, our Founder, Chairman, and CEO, and also 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 a webcast replay will be available on Yatsen's investor relations website at ir.yatsenglobal.com. I'll now turn the call over to Mr. Jinfeng Huang. Please go ahead, David.
Thank you, Irene, and thank you everyone for participating in Yatsen's conference call for the first quarter of 2022. The first quarter of 2022 was a challenging one for Yatsen and the entire beauty industry. According to the National Bureau of Statistics of China, beauty retail spending grew by 1.8% in the first quarter, one of its lowest growth rates since the pandemic recovery from the second quarter of 2020, due to weak consumer spending and economic uncertainties in China. The resurgence of COVID-19 in March led to widespread restrictions in major Chinese cities such as Shanghai. With the restrictions continuing well into the second quarter, it is clear that we are facing one of the toughest business environments in recent years.
Against this market backdrop, our total net revenues in the first quarter declined by 38.3% year-over-year to CNY 891 million, in line with our previous guidance. Market turbulence, notwithstanding, we remain committed to our strategy evolution plan, a process that began in 2021. Fundamentally, we believe strong brands are highly resilient across market cycles. Strong brands also deliver higher margins, which in turn can be reinvested into branding and R&D, perpetuating a virtuous cycle. Therefore, our evolution strategy is simple. Positioning a portfolio of strong brands with highly differentiated effective products to drive sustainable growth. We are allocating the talent and the resources needed to achieve these goals, and our team executed with passion, tenacity, and resilience during the first quarter. Thanks to the team's efforts, we are already seeing some signs of progress.
One such sign is the improvement in our gross margin, which reached 59% in the first quarter, an increase of 0.4 percentage points respectively on a year-over-year and quarter-over-quarter basis. We achieved this gross margin gains by relentlessly focusing on building brand equities and reducing unprofitable discounts and promotions. Encouragingly, our Perfect Diary loose powder won WWD's Makeup of the Year award and was included on the National Business Daily's 2022 China Generation Z brand list. These awards not only underscore the ongoing appeal of Perfect Diary's brand and product, but also are powerful validations of our brand building approach. We have advanced our brands and launched new products for the new year. Starting with skincare in March, Dr.
Wu released its new Triple Action Repair Serum, along with a campaign highlighting the product's efficacy in repairing acne scars and enhancing Dr. Wu's dermatology brand credentials. In April, Eve Lom launched a new branding campaign with breathtaking visuals centered around an aesthetical British botanical garden, awakening customers' sense of sight, smell, and touch while reinterpreting a vision of radiant skin beauty for a new generation. Not to be outdone, in May, Galénic introduced its new Snow Algae Serum, an anti-aging serum featuring snow algae as the core ingredient, combining the breathtaking scenery of the French Alps with an insistence on French precision and science to reinforce Galénic's reputation for elegant yet effective skincare products.
The energy and excitement of these campaigns are matched by robust financial results for our skincare brands, with net revenues growing by 58.5% year-over-year to CNY 183 million in the first quarter, representing 20.5% of total net revenues, up from 7.5% in the prior year period. While our transformation is rooted in brand building, we are laser focused on doing it in the right way. Under the current economic conditions, marketing efficiency is key. For our color cosmetic brands, the tough market environment and our relentless efforts to optimize marketing ROI led to a large decline in revenues in the first quarter. However, our color cosmetic brands are now operating with a much improved profitability profile for online business compared with the last year.
Specifically, we significantly improved Perfect Diary profitability profile by streamlining operations and concentrating on its hero product categories, namely the eyeliner, where it enjoys strong brand recognition among a core group of loyal customers. For Pink Bear, on the other hand, we developed a strategy combining its good bang-for-the-buck product with a breakthrough reason to buy and IP crossovers appealing to school-age target customers to attract new customers and keep performance marketing expense at a reasonable level. We are also exploring several operating levers for both Perfect Diary and Pink Bear, from increasing third-party online and offline distribution to tailoring our maximizing strategies on Tmall and Douyin as we seek incremental uplift opportunities for revenue and profitability amid this difficult market environment. These marketing efficiency enhancements across the brand portfolio help us significantly reduce our selling and marketing expenses in the first quarter.
Our total non-GAAP selling and marketing expenses declined by 44.4% year-over-year to CNY 517 million. As a percentage of total net revenues, our non-GAAP selling and marketing expenses reached 54%, a decrease of 7 percentage points year-over-year. While we continue to pursue further improvements in marketing efficiency, there's also much we can do operationally to build on this progress. At the moment, we are focusing on mitigating the adverse impact of pandemic related disruptions on our offline stores. During the first quarter, many of our offline stores were shut down due to pandemic restrictions. While those stores that remain open witnessed reduced traffic and in-store spending. We expect this situation to persist and possibly worsen in the second quarter.
Accordingly, we proactively initiated a number of store optimizations in the first quarter and accrued and recorded certain store-closure-related expenses as a result. We may continue to optimize the size of our offline stores network throughout the year. We believe this plan will put our offline business on a more sustainable footing given the dynamic retail environment in China this year. COVID-19's adverse impact also extends to our logistics and supply chain. To ensure that we are able to obtain critical orders ahead of the crucial May twentieth and June eighteenth promotional holidays in the second quarter, our team has worked tirelessly with our logistics and supply chain partners to find creative solutions.
Additionally, given the weakening consumer demand outlook for the rest of 2022, we made certain optimization adjustments to the size of our logistics footprint and reduced the scope of our supply chain expansions during the first quarter. Looking elsewhere within our cost base, we also overhauled our organization structure to align with our new sustainable growth objectives. During the first quarter, we comprehensively updated our management structure, revamped our compensation structure, and optimized our talent pool. As a result, our total headcount stands at approximately 3,000 as of the end of March 2022, compared with 4,200 employees a year ago. Our non-GAAP general and administrative expenses totaled CNY 113 million, approximately CNY 32 million lower than the fourth quarter of 2021.
The cumulative effect of our various cost optimization initiatives is we achieved a non-GAAP net loss of CNY 156 million in the first quarter, a 38.3% reduction compared to the net loss of CNY 234.3 million in the prior year period. We expect the operating environment to become even more challenging in the second quarter of 2022 due to the effect of prolonged COVID-19 impact on the economy. We will remain focused on those aspects of our business and environment that we can control, optimizing costs, upgrading our capabilities, and investing for the future while continuing to adapt to a dynamically evolving market. As the lifeblood of our product differentiating efforts, R&D continues to be a key area of investment.
We recorded CNY 36 million in R&D expenses in the first quarter, representing 4% of total net revenues. We are working on a number of exciting initiatives to strengthening our R&D capabilities in 2022, and we look forward to sharing updates on our new partnerships and milestones as they become available. We are also working to upgrade our Douyin live streaming operations. Building on the previous quarter's momentum, total net revenue from our Douyin channel grew by over 150% year over year in the first quarter of 2022, making it our third largest channel by revenues behind Tmall and our offline stores. After more than a year of extensive testing and optimization, we have developed and honed various techniques to maximize ROI on Douyin across our various brands.
In particular, Perfect Diary ranked third in color cosmetic sales on Douyin during the first quarter, demonstrating the progress we have made since last year. As pleased as we are with this result, we won't be standing still. Given the fast-moving nature of the Douyin platform, we will continually adapt and innovate to stay ahead of the curve. Last but not least, integral to our sustainable success is our continued effort to act as socially responsible corporate citizens. Yatsen is passionate about promoting women's public welfare and empowerment. On International Women's Day, Yatsen and New Weekly jointly launched the Women Without Limits campaign. We invited women from different industries and diverse identities to share their life experiences, encouraging more women to explore their own possibilities and pursue their dreams.
In addition, our efforts to ensure the safe and efficient delivery of goods have continued in the recent COVID-19 outbreaks, with Perfect Diary cooperating with logistics companies to develop a green goods code. This code improves the transparency of the transported goods and helps ensure on-time delivery to customers. For detailed information on how we are addressing the environmental and social impact of our business and putting in place corporate governance best practices, please refer to our inaugural ESG report, which was released on May fifteenth. This first annual report provides a comprehensive review of our ESG activities. In a world full of uncertainties, we believe Yatsen serves a vital social mission: To discover, protect, and elevate beauty, which creates happiness and inspires our minds. To that end, 2022 will be an important year for Yatsen as we set off on our new five-year plan.
Although the current and foreseeable market conditions remain challenging, we plan to evolve, narrow our operating routes, and continue to delight customers in China and around the world with our pioneering high-quality beauty products. 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 RMB amounts, and all percentage changes refer to year-over-year changes, unless otherwise noted. Total net revenues for the first quarter of 2022 decreased by 38.3% to CNY 891 million from CNY 1.44 billion in the prior year period. The decrease was primarily attributable to the 45.6% decrease in net revenues from our color cosmetics brand, partially offset by the 68.5% increase in net revenues from our skincare brand. Gross profit for the first quarter of 2022 decreased by 38% to CNY 614.5 million from CNY 991.6 million in the prior year period.
Gross margin for the first quarter of 2022 increased to 69% from 68.6% in the prior year period. The increase was primarily attributable to our continuous efforts to improve our gross margin, including through increasing sales from our higher gross margin products, as well as through optimization of pricing, discounts, and promotions. Total operating expenses for the first quarter of 2022 decreased by 30.9% to CNY 922.5 million from CNY 1.33 billion in the prior year period. As a percentage of total net revenues, total operating expenses for the first quarter of 2022 were 103.5% as compared with 92.4% in the prior year period.
Fulfillment expenses for the first quarter of 2022 were CNY 73.9 million as compared with CNY 92.7 million in the prior year period. As a percentage of total net revenues, fulfillment expenses for the first quarter of 2022 increased to 8.3% from 6.4% in the prior year period. The increase was primarily attributable to a decrease in the economies of scale of our fixed fulfillment expenses, partially offset by certain cost saving initiatives related to fulfillment assets instituted during the first quarter of 2022. Selling and marketing expenses for the first quarter of 2022 were CNY 604.7 million as compared with CNY 1.04 billion in the prior year period.
As a percentage of total net revenues, selling and marketing expenses for the first quarter of 2022 decreased to 67.9% from 72.1% in the prior year period. The decrease was primarily attributable to our continuous efforts to optimize the efficiency of our marketing spending, partially offset by the expenses related to the closure of certain offline experience stores. General and administrative expenses for the first quarter of 2022 were CNY 208.1 million as compared with CNY 172.3 million in the prior year period. As a percentage of total net revenues, general and administrative expenses for the first quarter of 2022 increased to 23.4% from 11.9% in the prior year period.
The increase was primarily attributable to the increases in salaries and share-based compensation expenses. Research and development expenses for the first quarter of 2022 were CNY 35.8 million as compared with CNY 27.7 million in the prior year period. As a percentage of total net revenues, research and development expenses for the first quarter of 2022 increased to 4% from 1.9% in the prior year period. The increase was primarily attributable to the increases in personnel costs, raw materials, equipment, and share-based compensation expenses, reflecting our commitment to enhancing our research and development capabilities. Loss from operations for the first quarter of 2022 decreased by 10.3% to CNY 308 million from CNY 343.3 million in the prior year period.
Operating loss margin was 34.6% as compared with 23.8% in the prior year period. Non-GAAP loss from operations for the first quarter of 2022 decreased by 34.1% to CNY 170.1 million from CNY 258.3 million in the prior year period. Non-GAAP operating loss margin was 19.1% as compared with 17.9% in the prior year period. Net loss for the first quarter of 2022 decreased by 8.7% to CNY 291.4 million from CNY 319 million in the prior year period. Net loss margin was 32.7% as compared with 22.1% in the prior year period.
Net loss attributable to Yatsen ordinary shareholders per diluted ADS for the first quarter of 2022 was CNY 0.46, as compared with CNY 0.5 in the prior year period. Non-GAAP net loss for the first quarter of 2022 decreased by 33.6% to CNY 165.6 million, from CNY 234.3 million in the prior period. Non-GAAP net loss margin was 17.5%, as compared with 16.2% in the prior year period. Non-GAAP net loss attributable to Yatsen ordinary shareholders per diluted ADS for the first quarter of 2022 was CNY 0.25, as compared with CNY 0.37 in the prior year period.
As of March 31, 2022, the company had cash equivalents and short-term investments of CNY 2.97 billion, as compared with CNY 3.14 billion as of December 31, 2021. For the first quarter ended March 31, 2022, net cash used in operating activities was CNY 104.1 million as compared with CNY 466.1 million in the prior year period.
For the second quarter of 2022, the company expects its total net revenues to be between CNY 808.3 million and CNY 960.8 million, representing a year-over-year decline of approximately 37%-47%, primarily due to continued industry-wide softening of color cosmetics demand and the continued negative impacts from COVID-19 on offline experience stores, online order fulfillment capabilities and supply chain. This forecast reflects 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. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. At this time, we will pause momentarily to assemble our roster. The first question comes from Dustin Wei with Morgan Stanley. Please go ahead.
Thanks a lot for taking my questions. My first question is, like, I wish management could quantify a little bit for the COVID impact from both like sales, market, consumer perspective, offline store, and also I think from the product delivery or any supply chain disruption. Do you actually see some of the easing situation like coming from like March, April to May? Second question is, you know, based on the improvement in the loss reduction and the much sort of better ROI, but also we have this bigger headwind, from COVID. Like, just want to check if management still stick to the target to, you know, maybe for 2023 to, get to turn around or making some small profits. I guess the third question is that if David could provide a little more, like, highlights, for the key brands.
I think you talk about it in the prepared remarks, but just anything that you to highlight, especially in the current competitive environment and the current, you know, macro weakness. What's your thoughts and the initiatives for the key brands as well as for the key channel? You mentioned Douyin, but just wonder if you can elaborate more, like, you know, what's, you know, some of the detail sort of initiatives that you are focused on. Thanks a lot.
David, do you wanna take the first question on the impact of the COVID-19 on our operations?
Sure. I think if you look at the numbers of the retail sales and also the beauty industries and growth in April, and then we can clearly see the total retail sales declined by 11.1% and also another 22.3% decline in the beauty industry. I think that is the very important sign about the impact of the COVID-19 for our business, including like online and offline. For our offline specifically, I think in April, we see that around like 50% of our stores has been impacted by the COVID-19. For online, because of the logistics and also the supply chain disturbance in Shanghai area.
That has very negative impact for our new product launch and also for our customer coverage. If we look ahead about what we are going to hedge the risk of the COVID-19 and also we have been very focused on our new cost model. We are shifting more and more resources in the skincare brands. I can answer the third question first, which is what kind of initiatives we are taking for strengthening our brand properties in skincare. I think for right now, Galénic and Dr. Wu are growing really fast. For Dr.
Wu, I think, the brand has a very unique and distinctive brand equity, which is focused on dermatologist brand. This year, the brand has launched a very important product, which is the Triple Action Repair Serum, which helped the product to expand into to cover more bigger group of the customer base. We see the momentum of Dr. Wu is pretty strong. For Galénic, we just launched the Snow Algae Serum, which has extended the brand from the VC Serum into a bigger category space.
Based on the initial launch results of the two new products in the, we foresee the two products will become very strong supporting here for both brands growth in the future. For Eve Lom this year, one of the most important initiatives is we actually take a brand we launched for Eve Lom. Right now the brand equity has been expanding from a cleaner brand to more like luxury skincare brand. The campaigns we just launched, which is the Eve Lom Secret Garden, has been very well received by the consumers.
I think looking forward about the skincare expansion, we will devote more resources into Galénic, Dr. Wu, Eve Lom, and I believe those brands have high gross margin and also drive the profitability for the whole company.
That thing, your question number two. Well, I think we were still aiming to break even or to turn profitable for the full year next year. That depends on how the COVID-19 situation improves. Well, if it's over by the end of this year, I think you know, chances are we will be able to achieve our goal, but that will actually depend on the situation of the virus.
Thanks a lot, David and Donghao. May I just one follow up on, you know, main brand, Perfect Diary brand. This year obviously is very important for Perfect Diary brand itself to go through so many changes in terms of the way you do marketing and I guess a new product launch. Could you also share some, you know, colors on, you know, what's the current focus on Perfect Diary brand?
Sure. I think for Perfect Diary, we are looking at a number of growth drivers to really ease the sales decline. At the same time, the most important thing is to improve the brand's profitability. There are a few things we are doing right now. For one thing, we are continuing momentum in Douyin. Right now we have more and a stronger direct working relationship with the top KOLs. We are continuing to improve our own brand live streaming capabilities. The second initiative we take is going to launch new products. Right now, we just launched the Origin Stone Sea Salt series as part of the 6-18 promotion period.
I think based on our observation on social media, the product is pretty well received by our core customers. The third thing we are going to do is to expand our third-party distribution at the major offline beauty retailer chains. On the other hand, another thing we want to highlight is we really want to improve the bottom line for the brand. Which we will seek to improve by optimizing Perfect Diary's offline stores network throughout the whole year.
Thanks a lot. That's all very helpful. Thank you.
Thank you.
The next question comes from Christine Cho with Goldman Sachs. Please go ahead.
Okay. Thank you, management. I have two quick questions. I think you mentioned that I think the operating environment still remains quite challenging in the second half. How should we think about the recovery path in the second half and also next year? You know, what are some of the key drivers that we need to watch for to see industry re-acceleration as well as our own market share gains? That's the first question. Secondly, can you elaborate a little bit more on your plans for selling and marketing spend if you look at first half of this year versus the second half? Thank you.
I think for the whole industry, one of the key indicators is still the year-on-year growth rate. Right now we see a very pretty big decline in April, and how the number is gonna to be in the third quarter and the fourth quarter will become one of the key decision factors about reflecting the health conditions of the whole industry.
Having said that, I think we need to be very cautious about the impact of the supply chain. For the whole industry, because right now if you look at a lot of the manufacturers or OEM, ODM partners, which located in Shanghai, the Shanghai areas, I mean, all of those suppliers have got a very strong impact of the very strict COVID-19 policy. That would be the if all the players in this industry very big challenge for the new product innovations or existing product supply in the second half of this year. That's what we think about the COVID right now.
Yeah.
follow-up?
For the second question that Christine asked about the sales and marketing expense changes going forward. Currently if we look at this quarter, we have a 7 percentage point reduction of the sales and marketing expense compared to a year earlier. The actual number and the reduction is actually higher, but it was partially offset by some one-time expenses related to closure of some offline stores due to the resurgence of the COVID-19. Going forward, we think there are a couple of drivers will help us continue to reduce our sales and marketing expenses as a percentage of revenue. Number one is ongoing optimization of the offline store.
Secondly, the ongoing optimization of ROI, which will help reduce the traffic expenses for all our brands in the portfolio. Those will be the two main drivers going forward for sales and marketing. Okay, thank you.
Thank you.
Next question comes from Lin Zhang with CITIC Securities. Please go ahead.
Thanks to the management, Irene, for taking my questions. My first question is that what are the company's strategies on June 18 shopping festivals, such as price strategies and marketing strategies, and how much will we leverage top KOLs? How do the management see the competition this year? My second question is that we've seen Yatsen established Open Lab in 2021 and have increased investment on R&D, showing the company's growing capabilities and pursuit for a sustainable growth. Could the management give some updates on our R&D results and how will the results be applied in the product development in the future? Thanks.
I think for the first one about our preparation for the June 18 big promotion, one of the key initiatives we take is to launch new product and also for some brand upgrade before the big promotion event. In May, we launched a few very important new SKUs for the Perfect Diary, Little Ondine, Pink Bear, basically all of our brands. We are looking forward to those new initiatives performance for the promotion event.
On the other hand, we're also strengthening our brand equity, 'cause right now if you look at the promotion event of the June eighteenth, and we clearly see that the discount rate and also price competition has become really strong. The only way we can to adjust that concern or mitigate that risk is to strengthening the brand equity so that we can maintain a healthy growth margin for sustainable growth. That's what we are doing for the June eighteenth promotion. Having said that, right now we think that there are a very big uncertainty about what is going to happen for the new year promotion.
That's why we are giving a relatively wider range of the guidance this year. For the second question about the R&D, if you're looking at the numbers, yes, we are improving the R&D expenses. On the other hand, if you're looking at some of the new initiatives or products we just launched, and then you can see that there are patterns, there are technologies that we developed based on the Open Lab strategy. For example, the Dr. Wu Triple Action Repair Serum is a product we co-developed with Huazhong University of Science and Technology. The patent inside is something that we uniquely own, and we create some entry barriers for the competition.
If you look at the Snow Algae Serum, it is a product we co-developed with Pierre Fabre in the past years and also the ingredients and also the technology within the Snow Algae Serum actually ensure very high performance of the product efficacy. Now we can see that looking forward, there will be more and more patents on the technology we developed through R&D putting to our newly launched product. In the coming half a year, there will be more and more new items, especially focused on the skincare areas.
We can see that the R&D efforts has been helping our products to improve the competitiveness in the market and also reflecting in the growth margin and a healthier repurchase rate. Thank you.
Thanks. It's super insightful. Yeah. That's all the questions I have. Thanks.
The next question comes from Olivia Tong with Raymond James. Please go ahead.
Hi, this is Devin Weinstein on for Olivia. I appreciate you taking our questions. First I wanted to ask a little bit more about the guidance. Presumably the impact of COVID will be a bit more substantial in Q2 than Q1. Your guidance for the next quarter implies only at the midpoint, just a slight increase in the slowdown rate and on a two-year stack, a sequential improvement. I was hoping to get a little bit more color on the environment, the category and your positioning, to get some more context. If you could also comment on the second half. I appreciate some of the earlier comments that you gave, but more specifically around some of the pent-up demand you're expecting to see, with lockdowns ending and the easier comps going into the second half.
My second question is around the cost environment. It sounds like you've done quite a bit of work in terms of reducing headcount and right sizing, you know, your personnel. I'm curious where you think you stand in terms of your long-term goal, where the headcount needs to be, what kind of other actions you plan taking as well in terms of optimizing your COGS or other operating expenses. Just any other areas where you think you can lean out the expenses and bring greater productivity. Thank you.
For the first question, you can look at the decline of the beauty industry in April. If we separate like color cosmetics and skincare. Color cosmetics has a higher decline rate versus skincare. The reasons we are giving this guidance is a reflection of our estimation of our skincare brands growth for the Q2. 'Cause we believe right now the skincare sector of the beauty industry will be gradually resuming and also mitigating the impact of the COVID from Q2 into this year and looking forward.
That's why we are devoting more resources growing the skincare brands, which we believe will be fundamentally helping the business to become a profitable business. Having said that, for makeup, right now we are for sure,
Thank you for your comment.
That concludes the question and answer session. I would like to turn the conference back over to management for any additional or closing comments.
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, its investor relations firm. You can find our contact information for IR in both China and the US in today's press release. Thank you, and have a great day.
The conference has concluded. You may now disconnect. Thank you.
Thank you.