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 Investments 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 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 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 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.
Thank you, Irene, and thank you everyone for participating in Yatsen's conference call for the fourth quarter and the full year of 2021. Last year, we celebrated our first year as a public company as well as our fifth 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 strategic 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 five years of development, the Chinese color cosmetics market, especially the online portion, experienced rapid growth.
As a result, we focused on increasing market share, achieving high revenue growth, and establishing Perfect Diary as the leading upstart color cosmetics brand in China in this first phase of our development. We have largely achieved this goal by late 2020. More importantly, in the process, we have built a highly capable team with full spectrum of capabilities necessary to run a highly digitalized business model, covering R&D, supply chain, brand management, technology, and online/offline operations. However, as the color cosmetics market started to decelerated 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 categories, upgrading our R&D capabilities, and promoting iconic durable brands with reduced discounts and promotions. While 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 improvements in a linear fashion from quarter to quarter. With this context in mind, let me go over our financial highlights for 2021. Total net revenues for full year 2021 grew by 11.6% to CNY 5.8 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. Flagging consumer demand, the high prior year base for comparison, and our conscious decision to limit discount and promotions contributed to this performance.
One of 2021's bright spots was the robust performance of our skincare brand, which in aggregate quadrupled 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 give ground on gross margins. Our full year gross margins increased by 2.5 percentage points to 66.8% compared with 54.3% in the prior year.
In the fourth quarter, we achieved gross margin of 55% compared with 56% in the prior year period due to RMB 47.7 million of inventory provision booked at the year-end. Without inventory provisions, we would have achieved a gross margin of 68.1% and 68.3% for the fourth quarter and full year 2021 respectively. 4.8 and 3.6 percentage points higher than prior year periods on a comparable basis. We ended the year with a cash balance of approximately RMB 3.1 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 areas. First, on brand building.
For our color cosmetic brands, we plan to build brand equity with compelling high impact marketing while limiting discounts and promotions. 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 demographics, reinforcing our product's broad appeal while establishing our company as the face and future of modern Chinese feminine beauty. On the other hand, our skincare brands will build on last year's momentum, capitalizing on their brand strengths and pre-existing hero products. In 2021, we significantly boost the revenue from Galénic, Eve Lom, and DR.WU by employing our Yatsen Flow playbook for rapid scaling brands via e-commerce channels. In 2022, we intend to bring these brands to the next level.
To achieve their next growth phase, we will continue to elevate our skincare brands, develop the new compelling products, and win the trust of 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 growth margins and brand level profitability throughout 2022. Second, we will continue to strengthen our R&D capabilities, while we believe will be a major differentiator as we upgrade our product offerings. We increased R&D spending by 113.6% in 2021, representing 2.4% of net revenues compared with 1.3% in the prior year. In terms of outputs, we increased the number of total patents by 71% to 118 patents, including 39 invention patents.
We also developed several proprietary formulations, including Smart LOCK technology, key components of our newly launched Perfect Diary Pearl Loose Powder foundation, and a nano-targeting delivery system used in DR.WU's new Mandelik Multiple Acid Renewal Mask, as well as our patent anti-skin darkening technology in our Little Ondine long-wear foundation product. We significantly expanded our capabilities in the fundamental research, applied research, and efficacy testing by recruiting top talents from our global peers and renowned research institutions, as well as through R&D collaborations under our Open Lab collaboration framework with leading institutions such as the Renji 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 innovations from both local and global universities and research institutions for the China beauty market.
Our next step is to redouble 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 uphold high ROI requirements for traffic expenses on our traditional e-commerce channels. 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 proficiency and put product mix offerings on this critical sales channel in 2021-2022. For our offline stores, we intend to take a multi-pronged approach in order to boost output and improve profitability. We plan to prune certain outlets, experiment with and fine-tune the different store formats and ensure greater support for offline channels from a product and a 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 operation, operating expenses, in identifying ways to improve efficiency and adjusting our variable and fixed cost base in line with our readjusted revenue scale. As I mentioned previously, we plan to optimize our sales and marketing expenses by raising the ROI requirement of our traffic expenses, as well as refine our general administrative expenses and adjust asset footprint. 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 the 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 use of sustainable palm oil in our supply chain. We conducted a cradle-to-grave carbon footprint assessment for our core products, Slim Hue Lipstick. Furthermore, our Eve Lom brand has incorporated biodegradable materials into its products and participates in the European Green Dot 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 helps lower income female entrepreneurs master professional beauty skills, empowering them to create and build their own business in the beauty industry. We also offer jobs to outstanding program graduates, and provide financial support for potential products. With this program, we are embracing our social responsibilities, facilitating positive social development, and proudly introducing 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 ECSI. I hope by now I have presented a clear picture of the vision and strategy focus for Yatsen this year. I cannot 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 the 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 RMB 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 CNY 1.53 billion from CNY 1.96 billion in the prior period. The decrease was due to the decrease in sales from our color cosmetics brand, partially offset by the increase in sales from our skincare brand. Gross profit for the fourth quarter of 2021 decreased by 23.7% to CNY 993 million from CNY 1.3 billion in the prior period. Gross margin decreased to 65% from 66.3% in the prior 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 products. Two, more disciplined pricing and discount policy. Total operating expenses for the fourth quarter of 2021 decreased by 47.3% to CNY 1.49 billion from CNY 2.83 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 CNY 123.1 million compared with CNY 144.7 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 CNY 1.08 billion as compared with CNY 1.38 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, partly offset by a decrease in online traffic expenses.
General and administrative expenses for the fourth quarter of 2021 were CNY 248.7 million compared with CNY 1.29 billion in the prior year period. As a percentage of total net revenues, 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 year period, when a large share-based compensation expense triggered by the IPO was recognized for U.S. GAAP reporting purposes. Research and development expenses for the fourth quarter of 2021 were CNY 43.3 million compared with CNY 25.6 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 capabilities. Loss from operations for the fourth quarter of 2021 decreased by 67.3% to CNY 501.8 million from CNY 1.53 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 CNY 360.9 million from CNY 288 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 CNY 475.1 million from CNY 1.53 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 CNY 336.3 million from CNY 285.4 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 CNY 0.75 from CNY 4.04 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 CNY 0.53 from CNY 0.72 in the prior year period. As of December 31st, 2021, the company had cash and cash equivalents and restricted cash of CNY 3.14 billion compared with CNY 5.73 billion as of December 31st, 2020. For the quarter ended December 31st, 2021, net cash used in operating activities was CNY 250 million.
Looking at our business outlook for the first quarter of 2022, we expect our total net revenues to be between CNY 866.7 million and CNY 938.9 million, representing a year-over-year decline of approximately 35%-40%. Primarily attributable to our continued focus on operating margins improvement and limit 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 review of the market and operational conditions, which is subject to change. With that, I would now like to open the call to Q&A.
We will now begin the Q&A session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. 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'll pause momentarily to assemble our roster. 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. What's the assumptions behind this slide, you know, on negative 35%-40% guide for the first quarter? Like, is there any color, like, by brand or by channel? You know, we know that management wouldn't comment on the full year kind of guidance for 2022, but should we extrapolate the first quarter 2022 guidance to the full year? That's the first questions on guidance. The second question is on the OpEx optimization. Could you provide a little more details about, you know, what kind of the spending that being saved? Maybe you can, you know, provide us with some of the examples and, you know, how many more efforts that we are going to see for 2022.
Also, with this kind of, you know, ROI being gradually improving, do we have sort of the evidence or operating metrics to show actually for the main brand, like Perfect Diary? You know, they are still able to sort of gain the new quality customer. You know why? I think on the one hand, the Perfect Diary brand is, sort of, reducing some of those, you know, not quality bargain hunter from the customer, by reducing the promotion. But are they able to gain the new customer? The third sort of set of the question is that, is there any, like, target sort of by the key channel and by the, key brands?
For example, like the Tmall or Douyin or, you know, the target for the color cosmetics and the skincare in 2022. Thank you very much.
Hey, Dustin. I'm not sure if I can catch up all of 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%-40% decline was actually based on our estimate, you know, for this quarter's performance. You know, a couple of reasons why we're gonna have this - 35% to 40% decline.
You know, first off, last year Q1, you know, we still had some pent-up demand, you know, from our customers, which, you know, came from actually the COVID-19 situation, you know, started in the first half of 2020, you know, when, you know, a lot of our customers were actually, you know, staying at home. You know, they were not able to go to school or factory, so they didn't have nearly as much, you know, need for, you know, color makeup. That's one reason. One other reason is, you know, our current focus is primarily on brand building. A number of things, you know, we're dramatically cut our, you know, promotions and, you know, discount activity.
As a result of that, you know, our short-term sales, you know, will be, you know, affected significantly. As to the full year guidance, you know, actually it's the company's policy not to provide any sales guidance beyond, you know, the next quarter. Dustin, I'm sorry. You've asked too many questions. Can you please remind me of some of your other questions?
Sure. No. Thanks a lot. Just follow on with the guidance. Would you provide a little more color behind this, like 35%-40% decline, like by channel or like by brand? You know, any more color behind, you know, beyond this number?
Dustin, sorry about that. You know, we are not providing
Sure.
Any color or more detailed color behind this guidance. This is a guidance policy only for the sales for the next quarter.
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 I'm understanding for the second half of last year, the base isn't that high already. Sort of should we still extrapolate this like sort of decline level in the first quarter to the full year or it would be, you know, a little too much?
Well, I think the only thing I can tell you here is, you know, we're gonna work really hard, you know, for this, for the remaining quarters of this year. Of course, you know, lower base, you know, from last year will definitely help with our year-over-year performance comparison. Again, so far, you know, we're not in a position to provide any further guidance for the full year sales numbers.
Okay. Thank you. My sort of second question is, if I may, in terms of the OpEx optimization. Just wanna know, is there any operational examples? Like, what kind of the costs are being saved? Can they be done more effectively in 2022? Also, I kinda understand that we are reducing the discount, so we also kind of, you know, cut the sales. I think those sales being cut is more on the sort of lower quality side. Like, we stop doing excessive, like, discounting. Is there any evidence suggesting, like, because our new products, you know, better R&D, so we can still gain the new customer in a more quality way with the, you know, even higher gross margin.
I guess, like, what I'm trying to get is that, after this kind of high base being washed out, can the brands that we have, the company has, can still have that kind of sustainable organic growth?
Yeah, exactly. We believe so. The costs we're cutting the most are actually number one, traffic. You know, we're aiming at a much higher ROI than the previous quarters. Secondly, you know, we're trying to optimize our head count. That will help us save some costs. Again, you know, since the sales numbers are declining year-over-year, you know, to some extent that will offset some of our efforts from a percentage point standpoint.
From the customer's perspective, I think the diversity of our brand portfolio is really differentiating from one year ago. Because right now the percentage of the skincare brands is getting higher. We have some high-end brands including Galénic and Eve Lom, which are appealing to high-end consumers with higher affordability and also higher age. Right now we see the diversity of our customer base is differentiating from the majority part coming from Perfect Diary. That's one of the operational evidence we see for our customer base.
Now on the other hand, the incremental 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 switch to a profitable growth model. That's what we see about the customer base change.
Thanks a lot, David. May I just ask the last question about 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 gonna be some differences in terms of the product launch or marketing? Give some examples that would be really helpful. Thank you.
Sure. In the first month and second month of this year, the color cosmetic sales in Tmall declined by 2.4%. With skincare, it's almost the same percentage decline, like 2.8%. If you look at the traditional e-commerce channels, we see, looking forward, we think it will not be the main growth drivers for our brand portfolio. Right now our company has devoting more and more talents and resources into Douyin, and we see a quite remarkable growth in the last quarter in the fourth quarter last year.
Recently, we also see a very remarkable and also complement coming from the operations in Douyin as well. Looking forward, we think the percentage of Douyin of our total revenue will continue to grow. We 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.
Thank you.
Our next question comes from Christine Cho from Goldman Sachs. Please go ahead.
Thank you. Thank you, David and Donghao. Two quick questions. One, just at a high level, I was wondering what do we need to see for really color makeup to rebound as the industry. And if there's any kind of surprises year to date, when thinking about the color makeup market that has surprised you, compared to, for example, six months ago. That'd be great to hear your thoughts there. Secondly, if there's any major product pipeline that is upcoming in the next few quarters, it'd 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 half of your question?
Yes. Yeah, just at a high level, what are some of the things that we need to see for the color makeup category or the overall industry to re-accelerate? Is it really just the base to go away? It feels like the product registrations have been slowing this year, generally across the industry. Does that have to accelerate? Does it have to be around the offline recovering, for example from the COVID restrictions? What are some of the building blocks should we need to see for the whole category to re-accelerate in your view?
Okay. 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 still the COVID impact still lasts right now. With like the consumers wearing a mask, we see the lip like category is not growing as fast as before. Second, I think for the makeup 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.
What we see is, 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. This will also have some negative influence on driving the consumer's demand on buying the makeup product. Looking forward, we think there are still potentials for China's color cosmetics market. We think the penetration will continue to grow. With the COVID goes out, the lip category will resume as well. Right now we see the growth of the foundation part is still driving the market growth.
We think there is also some upgrade chance for the makeup market as well. All of those contributors will make this market to grow at a more sustainable growth rate. That's our perspective about the makeup market.
Thank you. Yeah. On the second question regarding any major product pipeline that you'd like to highlight in the next few quarters.
Sure. I think for Galénic, last year we launched a very successful VC serum product. We're looking for a new very high-end skincare line launch in the coming months. For Eve Lom , we are expanding categories into serum. 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 a color correcting serum. We launched that product, which is just a few days, and then the product has gained a very good feedback from consumers and KOL as well.
For our makeup brands, for sure, Pink Bear is growing really fast. Then, more and more lip gloss, new SKUs. The brand is expanding into eyeshadow palettes and also foundations as well. Also for Perfect Diary, we see a very successful new product launch. One is the butterfly eyeshadow palettes and also the new lip gloss. Then in May, in August, there will be another two very big launch for the line for Perfect Diary as well.
We think so right now our new products for this year has to be a robust pipeline and then it's not only in makeup but also in skincare and then in different price tier, in different categories. We think the product offerings has more diversified category focus right now.
Okay, thank you.
Thank you.
Our next question comes from Qianye Lin from CICC. Please go ahead.
Thanks for the management sharing. I've 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 store optimization and an increase in branding expenses, partially offset by a decrease in online shopping expenses. 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. The company has already proven itself as a leading color cosmetics player. To what extent has the company upgraded the capabilities to run the skincare business? That's my questions.
Well, again, sorry about that. You know, we're not providing breakdown across, you know, different channels regarding our, you know, our sales and marketing expenses. I'm sorry about that. Your second question
Oh, about the capabilities. Yes. I think first of all, the growth model we built up in the past few years can be applied in the skincare category. We see the growth for our skincare brand is still really fast. What is different is the skincare brand has higher loyalty and higher gross margin. Second is, in the past few years, the company has been very dedicated in strengthening the brand building capability of the company. We have more talent joining with very good experience in traditional beauty and fashion company.
We think what they bring into the company is the brand building framework and also the experience they have mastered in their previous working experience. The third part is about right now, based on our experience, what we see is our private domain is still contributing for our brands launched from zero to one stage. We have been repeatedly seeing the evidence from our private domain. All of those capabilities has been helping us to building more brands. Got it. Thanks a lot. That's all the questions I have.
The next question comes from.
Thank you.
Louise Li from Bank of America. Please go ahead.
Hi. Hi, David. Hi, Donghao. Thank you for taking my question. My first question is about your guidance on Q1. Based on the current expectations, maybe do you expect like operating leverage in Q1, i.e., we might see an expanding net loss, non-GAAP, on a non-GAAP level on a Q-on-Q basis or on a Y-on-Y basis? This is my first question. Second question is, do you have a timetable for the breakeven strategy plan? Third question is about the industry. I remember that in Q4 last year, which is actually from the second half of last year, the overall beauty market has slowed down a lot.
How can we compare the past two months in year-to-date versus the Q4 in last year from the industry level, maybe for color or both or and skincare as well? You also mentioned that in last earnings call that in the international brands they were doing very aggressive promotion. 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, you know, according to our guidance, you know, our sales are gonna decline 35%-40% year-over-year. You know, we're trying very hard to offset this deleveraging impact by, you know, cutting some of our costs and improving our operational efficiencies, and, you know, ROI on our traffic expenses. We are expecting to break even on a yearly basis next year. That is our current goal. Third question?
Some question about the price discount for global brands. We see that it's getting worse in the first quarter this year. In the just past March 8 promotion, because right now we have only one super KOL and the price cut is getting even, like, deeper. We see the effect on price cut is getting smaller and smaller.
At this stage, the company's strategy choices is to lower the percentage of promotion and discounts and then raise the gross margin, spend more on brand building, and then lower the traffic spend, improve the ROI, and also increase the percentage of the skincare, especially on the high-end skincare brands, which we believe will become iconic brands in the future. That is our response at this stage.
Thank you, David. Thank you, Donghao. Just a follow-up. You mentioned that the competition actually got worse year-to-date. The reason is it because, I mean, the whole industry is still very weak? Is this the reason?
I think there are a couple reasons. One is the competition is getting stronger. Also, the market demand is getting soft. Also, because there's especially for the live streaming, the competition to gain the slot is getting like more intensified. For the global brands, 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. That's what we see.
Got it. Thank you very much. I have no questions.
Thank you.
This concludes our Q&A 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.