Ladies and gentlemen, good day and welcome to the Yatsen's second quarter 2022 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Irene Lyu, Head of Strategic Investment and Capital Markets. Please go ahead.
Thank you, operator. Please note that discussions 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.
Please see the earnings release issued earlier today for a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results. Joining us today on the call from Yatsen's senior management team are Mr. Jinfeng Huang (David Huang) , our founder, chairman, and CEO, and Mr.Donghao Yang , our CFO and director. 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'll now turn the call over to Mr. Jinfeng Huang (David Huang) . Please go ahead, David.
Well, thank you, Irene, and thank you everyone for participating in Yatsen's second quarter 2022 earnings conference call today. At the start of the year, we embark our next five years development journey with a simple focus on building strong brands and world-class R&D capabilities while achieving sustainable growth. In the second quarter, we entered into a turbulent stretch of this journey where a confluence of challenges has put our strategies and execution to the test. The main challenge was widespread COVID-19 recurrences which shut down numerous cities in China between April and June. According to the latest data from the National Bureau of Statistics of China, beauty retail spending was down by 22.3% and 11% in April and May respectively. It was slightly recovering in June. This disproportionately impacted offline retail spending nationwide, including our offline stores.
In the online arena, competition intensified as our competitors engaged in aggressive promotions to drive sales amidst sluggish market demand for color cosmetics. The premium skincare category, on the other hand, proved to be highly resilient and in fact grew during the second quarter. Against this backdrop, our total net revenue decreased by 37.6% year-over-year to CNY 951.8 million, making the high end of our revenue guidance. The year-over-year decline in revenues was mainly due to soft performance of our color cosmetics brand, partially offset by stellar growth across our skincare brands. Our non-GAAP net loss margin reached 20.8% in the second quarter, an increase of nine percentage points compared with the prior year period.
Attributable to the higher operating cost ratios of our offline stores due to weak offline store sales as well as inventory loss and provisions for store closures. Encouragingly, our quarterly net cash generated from operating activities turned positive for the first time since Yatsen's IPO at CNY 111.9 million, compared to an outflow of CNY 79 million for the prior year period due to our disciplined working capital management practices. While our overall strategy goals remain unchanged, these results demonstrated our ability to accelerate the optimization of our revenue mix and cut costs in response to the evolving market environment in the second quarter. Let's look at our revenue mix in greater detail.
Net revenues from our skincare brands grew by 49.2% year-over-year, representing 33.4% of total net revenues for the second quarter, compared with 14% for the prior year period. Total net revenues from Dr. Wu, Eve Lom, and Galénic collectively achieved year-over-year growth of 112%, supported by growing brand recognition, strong new products, and a successful ramp up across multiple e-commerce channels. Our skincare brands also exhibited superior gross margin and the net profitability levels compared to our color cosmetic brand and proved highly resilient during this period of economic uncertainty in China. Notably, Dr. Wu became the largest and the most profitable skincare brand in our portfolio, driven by stellar performance of the classic Mandelic Acid series, which topped the anti-acne serum chart on Tmall during the 618 shopping festival. Furthermore, Dr.
Wu sales through Douyin live streaming grew by more than 8 times compared to the prior year period, and the new Triple Action Repair Serum became the top-selling skin repair serum on Douyin during the June eighteenth shopping festival. Eve Lom ranked number one on Tmall during the June eighteenth shopping festival in the premium makeup removal category. On the branding side, following a well-received brand relaunch media campaign in late April, Eve Lom hosted a number of live events in London's Covent Garden and in New York's Soho district to provide an immersive offline experiential touch point for our customers. In May, Eve Lom launched a new Foaming Cream Cleanser, which improves upon traditional cleansers with an enzyme-infused surface active formula, representing our latest efforts to expand Eve Lom into mainstream skincare categories beyond its roots in makeup removal.
Last but not least, Galénic continued to demonstrate robust growth on the strength of its core vitamin C serum successes. During the second quarter, Galénic launched the Secret d'Excellence Snow Algae Anti-Aging Serum and a summer limited edition gift set for the vitamin C serums, accompanied by branding campaigns featuring the Chinese women's short track speedskating gold medalist, Qu Chunyu, award-winning female surfer Monica Guo, and a female free-diving champion, Vicky Li Jiaoyi. As you can see, our skincare business is growing from strength to strength, a testament to our ability to translate our accumulated experience and the know-how from color cosmetics into success in the field of luxury and premium skincare. We have fostered a truly global team to organically develop and grow our skincare brands.
Our Open Lab system and our R&D teams are also building the capability to develop a strong pipeline of new products to support the growth of our clinical and skincare brands. Notable R&D breakthroughs during the quarter included the successful launch of the Triple Action Serum for Dr. Wu and the Anti-Aging Snow Algae Serum for Galénic, which featured active ingredients and formulations developed with significant contribution from our R&D lab. The Triple Action Serum, for example, was developed in partnership with the Huazhong University of Science and Technology, and boasts a nano-targeting technology enabling the precise release of active ingredients directed to acne-inflamed spots deep under the skin layers for an increase in efficacy compared with prior product versions.
The Anti-Aging Snow Algae Serum features our work with botanicals, combining a high concentration of exclusive snow algae originating from Swedish permafrost regions with Yatsen's blend of hexapeptide to achieve higher efficacy in anti-wrinkle and anti-aging applications. The successful launch and commercialization of these products shows that our R&D teams can develop new products that suit the needs of our growing brand portfolio in an expeditious and effective manner. Our color cosmetic brands, on the other hand, saw a 50.5% decline in total net revenues, led by a slowdown in our Perfect Diary and Little Ondine brands.
Perfect Diary launched several new products in the second quarter, such as the Raw Gemstone Eyeshadow, lipstick and the Blush series, as well as the new ReadMe Lips Crush collection and the Love Confession lipstick gift set collection for the May 20 Chinese Valentine's Day campaign. This new product launch was impacted by the cyclical downturn in consumer color cosmetic spending, as well as intense market competition among the mass segment. The resurgence of COVID-19 also adversely impacted Perfect Diary offline store sales and profitability, necessitating an acceleration of our store optimization plans. As of June 30, 2022, we operated a total of 228 Perfect Diary stores, a net reduction of 58 stores since the beginning of this year. Given the worsening retail environment in China, we plan to close additional underperforming stores in the second half of 2022.
We will continue to monitor the offline retail environment on an ongoing basis to determine if further store closures are needed. We are also exploring other ways to serve our offline stores' customers profitably. Both Pink Bear and the Little Ondine, for example, expanded their distribution with KK Group to more than 300 KKV and THE COLORIST stores across the nation in the second quarter, which generated additional incremental revenue and profits for the two brands. Going forward, we will look to replicate this success and further expand collaboration with other distribution partners. Due largely to the elevated levels of promotion during the June 18 period, particularly for the color cosmetics, our overall gross margin declined to 62.9%, a decrease of 2.9 percentage points compared with the prior year period.
Our gross margin was also impacted by an inventory loss of 43.9 million, representing 4.6% of total net revenue. Let's have a look at our cost. By far, the largest piece of our operating expenses was our selling and marketing expenses, totaling CNY 602.5 million for the second quarter on a non-GAAP basis, which decreased by 35.7% year-over-year. The same rate as our revenue reduction. However, as a percentage of total net revenue, our non-GAAP selling and marketing expenses remain elevated at 63.3% for the second quarter, compared with 61.4% for the prior year period.
Attributable to higher operating cost ratios of our offline stores, certain store closure related expenses and the provision of CNY 28.7 million for further store closures in the second half of 2022. This store closure provision represented 3% of our total net revenues. Our elevated store related expenses offset the effect from the reduction of our performance-based marketing expenses, which declined substantially as a percentage of total net revenue in the second quarter. Our non-GAAP general and administrative expenses recorded a net reduction of CNY 18.7 million compared with the prior year period. Though as a percentage of total net revenue, they increased by 3.5 percentage points to 12.6% due to the deleveraging effect from the reduction in our revenues.
In addition to optimizing our fixed expenses, we have further trimmed our total headcount in the second quarter. Our fulfillment expenses remained flat as the percentage of total net revenues, despite operational disruptions stemming from COVID-19. Overall, our non-GAAP net loss margin of 21.8% reflects the exceptionally challenging external environment in the second quarter, as well as the numerous initiatives we took to adjust our business with inventory loss and the store closure provisions totaling 7.66% of total net revenues. As we look back at our second quarter, we see it as an arduous chapter in our five-year development journey. The crucible from which a stronger and more resilient Yatsen will emerge.
We generated a net cash inflow from operations of CNY 111.9 million, the first positive quarterly net cash flow recorded since our IPO, and ended the second quarter with CNY 3.06 billion of cash and short-term investments. While we expect the external environment to remain challenging in the near term, we have ample financial flexibility to meet our strategic objectives and continue our journey of evolution. With that, I will now turn the call over to our CFO, Donghao Yang , to discuss our financial performance. Thank you, everyone.
Thank you, David, and hello, everyone. Before I get started, I would like to clarify that all financial numbers presented today are in renminbi amount, and all percentage changes refer to year-over-year changes unless otherwise noted. Total net revenues for the second quarter of 2022 decreased by 37.6% to CNY 961.8 million, from CNY 1.53 billion in the prior year period. The decrease was primarily attributable to a 50.5% decline in net revenues from our color cosmetic brands, partially offset by a 49.2% increase in net revenues from our skincare brand. Gross profit for the second quarter of 2022 decreased by 40.3% to 598.3 million, from 1 billion in the prior year period.
Gross margin for the second quarter of 2022 decreased to 62.9% from 65.7% in the prior year period. The decrease was primarily attributable to elevated levels of promotions during the 618 shopping festival and an inventory loss of CNY 43.9 million. Total operating expenses for the second quarter of 2022 decreased by 38% to 875.3 million, from 1.41 billion in the prior year period. As a percentage of total net revenues, total operating expenses for the second quarter of 2022 were 92% as compared with 92.6% in the prior year period. Fulfillment expenses for the second quarter of 2022 were 69.7 million, as compared with 118.1 million in the prior year period.
As a percentage of total net revenue, fulfillment expenses for the second quarter of 2022 decreased to 7.3% from 7.7% in the prior year period. The decrease was primarily attributable to a reduction in share-based compensation corresponding to a decrease in fulfillment headcount. Selling and marketing expenses for the second quarter of 2022 were 625.7 million, as compared with 972.5 million in the prior year period. As a percentage of total net revenue, selling and marketing expenses for the second quarter of 2022 increased to 65.7% from 63.8% in the prior year period.
The increase was primarily attributable to higher operating cost issues of our offline stores corresponding to our depressed offline store sales, as well as store closure related expenses and the provision of CNY 28.7 million for further store closure in the second half of 2022. Partially offset by a reduction of our performance-based and brand marketing spending. General and administrative expenses for the second quarter of 2022 were CNY 147.8 million, as compared with 286.4 million in the prior year period. As a percentage of total net revenue, general and administrative expenses for the second quarter of 2022 decreased to 15.5% from 18.8% in the prior year period.
The decrease was primarily attributable to a reduction in share-based compensation corresponding to a decrease in general and administrative headcount. Research and development expenses for the second quarter of 2022 were 32 million, as compared with 35.2 million in the prior year period. As a percentage of total net revenues, research and development expenses for the second quarter of 2022 increased to 3.4% from 2.3% in the prior year period. The increase was primarily attributable to the deleveraging effect of lower total net revenues. Loss from operations for the second quarter of 2022 decreased by 32.4% to CNY 277 million from CNY 409.9 million in the prior year period.
Operating loss margin was 29.1% as compared with 26.9% in the prior year period. Non-GAAP loss from operations for the second quarter of 2022 increased by 3.2% to CNY 218.2 million from CNY 211.4 million in the prior year period. Non-GAAP operating loss margin was 22.9% as compared with 13.9% in the prior year period. Net loss for the second quarter of 2022 decreased by 32.4% to 264.3 million from 391.2 million in the prior year period. Net loss margin was 27.8% as compared with 25.7% in the prior year period.
Net loss attributable to Yatsen's ordinary shareholders for diluted ADS for the second quarter of 2022 was CNY 0.43 as compared with CNY 0.62 in the prior year period. Non-GAAP net loss for the second quarter of 2022 increased by 6.5% to CNY 207.5 million from CNY 194.9 million in the prior year period. Non-GAAP net loss margin was 21.8% as compared to 12.8% in the prior year period. Non-GAAP net loss attributable to Yatsen's ordinary shareholders for diluted ADS for the second quarter of 2022 was CNY 0.34 as compared with CNY 0.31 in the prior year period.
As of June 30, 2022, the company had cash, restricted cash and the short-term investments of CNY 3.06 billion as compared with CNY 3.14 billion as of December 31, 2021. Net cash generated from operating activities for the second quarter of 2022 increased by 241.6% to CNY 111.9 million from net cash use in operating activities of CNY 79 million in the prior year period.
For the third quarter of 2022, the company expects its total net revenues to be between CNY 738.4 million and 872.7 million, representing a year-over-year decline of approximately 35%-45%, primarily due to the continued softness in market demand for color cosmetics. These forecasts reflect the company's current and preliminary views on the market and operational conditions, which are subject to change. With that, I'd now like to open the call to Q&A. Operator?
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, we ask that you 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. Today's first question comes from Dustin Wei at Morgan Stanley. Please go ahead.
Thanks a lot for taking my questions. The first question, I want to start with the guidance. The third quarter guidance in terms of the revenue, the decline magnitude is quite similar to the second quarter. Considering, I think, the COVID situation is probably the worst is over, and I think the base will also be lower into the second half and the third quarter. You know, understand that Dong Hao talked about the softness in color cosmetics, but just wondering if there's, you know, more information behind this guidance. And maybe, you know, management could share some of the near-term trends, third quarter to date, you know, and maybe by channel or by products or by category. You know, what kind of softness, or, you know, that we are talking about?
Second question regarding the GP margin. I think this is probably the second quarter that we have this inventory loss or the inventory provision. Not sure if we have this number to share regarding the inventory age structure. How much sort of a little bit aging inventory that we're still seeing that can potentially still be written off in the coming quarters? Also regarding GP margin, I think it's encouraging to see the revenue contribution from the skincare is increasing. I think it's probably on the direction to reach almost like half of the business coming from skincare. How should we longer term or maybe next year or so think about the GP margin for the company?
Thank you.
All right, thanks for the question. First on guidance. Well, you know, in the overall cosmetics market in China has experienced a very sharp decline starting from, like, the beginning of this year. While some of that impact was related to macroeconomic, the global, you know, situation, and some of that also, you know, was due to the COVID-19 situation, especially, you know, in Shanghai and areas around Shanghai. Even today, you may also know that, you know, in a lot of the areas, regions in China, you know, COVID-19 situation is still very serious.
For example, you know, today, I think, you know, in some of the northwest and southwest provinces in China, you know, people are still restricted from traveling due to the, you know, resurgence of the COVID-19, you know, pandemic. So that's about the the overall market softness that we've experienced this year. As we compare our Q3 guidance versus Q2, and you've mentioned, you know, our Q3 guidance is very similar to, you know, the level of Q2. Actually, to us, we view that as a very positive signal. That means, you know, the business has stabilized, you know, from the trend of a sharp decline starting from you know, the beginning of this year. That's one thing, you know, our overall business is stabilizing.
You know, the softness of our color cosmetics business is to some extent offset by our strong growth in skincare. That's why we're giving this guidance level similar to that of Q2. You talked about our GP margin and aging of inventory. You know, we're not providing that kind of details for our inventory. But what we can tell you is, you know, we made a provision of CNY 44 million for obsolete inventory in Q2, which is quite substantial number. You know, we do have a provision policy as part of our overall accounting policy. Going forward, you know, we will continue to make provisions as required by our policy.
David, Irene, do you have anything else to add?
Yeah, sure. On the guidance, basically, I think it's we're providing this based on our estimation on both the external and internal factors. Then we have to look at it by different product category, right? For example, on the color cosmetics side, Donghao has mentioned, you know, external environment with the resurgence of the COVID, which continues to impact consumer confidence. Also the unemployment rate among the young generation these days are also impacted by the COVID situation, which those people are our core customers. That continues to impact the color cosmetics market, which we could also see in the July beauty. Overall, like, China beauty retail spending is still negative growth year-over-year. That's on the external side for color.
Internally, as we're still going through our strategic evolution, we're still really focusing on high quality revenue for those color cosmetics brands. Right now, because of this refining of our business model, we could still see, you know, decline in the color cosmetic segment of our business. On the skincare side, we had a very strong growth in Q2. For skincare, because it's highly seasonal, right? Normally, Q2 and Q4 are the major season for skincare because consumers tend to stock up during large promotions. For Q3, we think we'll see growth in skincare, but given, you know, it's a kind of a quiet period for the e-commerce sales, that's why we are also providing this guidance. That's kind of just some additional point on the guidance side.
Yeah. One other thing to add. You just asked about, you know, the impact of the growth of our skincare business on the gross margin trend. Obviously, you know, our skincare business has much higher gross margin level than our color cosmetics. Even the difference could be as big as, like, 10 percentage points. As we continue to grow our skincare business, as the skincare business continues to take more shares in our total product mix, we believe that, you know, we will continue to see improvement on our gross margin.
All right. Got it. Thanks a lot.
Thank you.
Ladies and gentlemen, our next question comes from Maggie Huang with CICC. Please go ahead.
Thanks for taking my questions. I have two questions. The first one regarding selling and marketing expenses. As industry competition intensifying and some international brands also lower their price, which exerts great pressure to the domestic brands. Could the management give some color on your plan for marketing and promotion in the second half of 2022? And how do you see the trend of Yatsen's selling and marketing expenses as a percentage of total revenue in the second half of the year? The second question regarding organizational structure. As the growth of Yatsen's brand portfolio, could you give some color on how you allocate resources and talents among different brands?
Thank you very much for your question. First, on the selling and marketing, you know, we compete, of course, with other, you know, overseas brands and as well as our domestic, those domestic brands, not only on selling and marketing, but also, you know, we are making very big investment in our R&D capabilities. You know, we, you know, we want to improve the efficacy, of our products, and to make it, one of our biggest competitive advantages going forward. For the second half of this year, I believe the selling and marketing expenses as a % of revenue will most likely stay at a relatively stable level.
Meaning you won't be seeing a sharp increase in our selling and marketing expenses to drive sales growth, because you know for the long term you know we do believe that product efficacy and our investment in R&D will be you know the most important drivers of our future business growth. Organization structure, you know, how do we allocate our talent? Well, it depends. You know, for our skincare brand, I think you know we will allocate or we will assign you know our talents in marketing and branding most likely to those brands. And R&D, you know, we're going to allocate more you know R&D dollars or talents for you know our skincare brands. And for color cosmetics, maybe more operational, and also branding is also very important.
It really depends on the specific brand and market segment and product categories and et cetera.
Got it. Thank you very much. I have no other questions.
Thank you.
Ladies and gentlemen, as a reminder, please press star then one to ask a question. Today's 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, just wanted to ask a little bit more about the competition that you're experiencing. One, how would you compare it to prior quarters and perhaps how are you looking at it going ahead? I wanted to specifically ask about the level of promotional activity that you experienced during the 618 event and how you're expecting it to evolve for 11.11 and any preparations that you're making for that.
Yeah, sure. Most of the competitors, you know, public listed companies have reported their Q2 as well. We're seeing, you know, so a soft season for most of the competitors. Which is kind of demonstrating our thesis on the overall demand for the beauty industry in China has been impacted by the ongoing COVID and also consumer confidence issue. The competition is still quite intense. Ever since last year we were actually at the beginning of the COVID, where there's more pressure for the international players in their to meet their targets. Their sales and promotions have been strong, which is still the case.
Going forward, we think as COVID, if you know after this year could become more of we'll pass COVID, then such level of promotions we think could ease in future. That's angle number one. Secondly, nowadays it's not only competition based on promotions, right? Also not only on branding, but more, as Donghao Yang mentioned, on efficacy of the product. We're seeing, for example, recently some of international companies reported their financial, some strong, some less strong.
You can see because of the difference of efficacy of the products, right, especially for skincare, if the brand portfolio has brands which more focusing on efficacy-based products, then the performance tends to be stronger in the Chinese market because these days consumers and KOLs are more sophisticated in terms of formulation ingredients. We think, as we mentioned, the three of the recently acquired skincare brands, right, in the efficacious and also premium category, the Eve Lom, Galénic and Dr. Wu are the growth is over 100% for Q2, which we think because of the positioning are very in trend in China, we'll continue to see a strong growth of those brands.
Thank you. I appreciate that. If I could just sneak in one more. I just wanted to ask, I realize the shutdowns and the lockdowns from COVID impacted you. Was there any material impact from Hainan on your business?
From what? From Hainan.
Just wanted to clarify, you mean the duty-free of the Hainan sales, right? Given the recent-
Yes, that's correct.
Lockdown of Hainan Province.
Correct. I was curious what impact that is having on your business, that area specifically.
It's relatively small for us because, you know, only premium and luxury skincare only have large distribution in Hainan. We do have distribution of Eve Lom in Hainan right now, but still relatively small contribution to the overall revenue as most of our business are still in the mass market segment.
Okay, very helpful. Thank you so much for the answers.
Thank you.
Ladies and gentlemen, as a final reminder, if you would like to ask a question, please press star then one at this time. Everyone, this concludes our question and answer session. I'd like to turn the conference back over to management for any additional or closing remarks.
Great. 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 in today's press release. Thank you. Have a great day.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.