Good morning, ladies and gentlemen, and thank you for standing by for Baozun's Second Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I will now turn the meeting over to your host for today's call, Ms. Wendy Sun, Senior Director of Corporate Development and Investor Relations of Baozun. Please proceed, Wendy.

Thank you, operator. Hello, everyone, and thank you for joining us today. Our second quarter 2023 earnings release was distributed earlier before the call and is available on our IR website at ir.baozun.com as well as on GlobeNewswire services. We have also posted a PowerPoint presentation that accompanies our comments to the same on our website where they're available for download. On the call today from Baozun, we have Mr. Vincent Qiu, Chairman and Chief Executive Officer; Mr. Arthur Yu, Chief Financial Officer and President of Baozun E-Commerce; and Ms. Sandrine Zerbib, President of Baozun Brand Management. Mr. Qiu will review the business strategy and company highlights, followed by Mr. Yu, who will discuss the business development of Baozun E-Commerce and above our financial and outlook, and then by Ms. Zerbib to share more about Baozun Brand Management. They will all be available to answer your questions during the Q&A session that follows. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of the U.S. Security Act of 1933 as amended, the U.S. Security Exchange Act of 1934 as amended, and the U.S. Private Security Litigation Reform Act of 1995. These forward-looking statements are based upon management current expectations and current market and operating conditions and relates to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the U.S. Exchange Commission and its announcement notice in the company's filings, published on the website of the Stock Exchange of Hong Kong Limited. All information provided in this call is as of the date here and is based on assumptions that the company believes to be reasonable as of today. And the company does not undertake any obligation to update any forward-looking statements except as required under applicable law. Finally, please note that, unless otherwise stated, all figures mentioned during this call are in RMB. In addition, we may elect to use adjusted in place of non-generally accepted accounting principle or non-GAAP in order to reduce overall confusion that may arise from our discussion about financials related to the Gap brand. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Vincent Qiu. Vincent, please go ahead.

Thank you, Wendy. Hello, everyone, and thank you all for your time. Last quarter, we detailed our exciting transformation roadmap where we are expanding Baozun Group into three business lines: Baozun E-Commerce, Baozun Brand Management, and Baozun International. As demonstrated on Slide number 2, these three business lines create an ecosystem in which each complements the other two, and all three concurrently promote each other. This transforms Baozun Group into a one-stop ecosystem with the most comprehensive services. Today, I'm happy to share our strategic partnership with Authentic Brands Group, or ABG, which exemplifies the advantages and benefits of Baozun Group's one-stop ecosystem. Slide number 4 is a snapshot of ABG. ABG is a global leader in brand development, boasting a large portfolio of more than 50 iconic and world-renowned sportswear and lifestyle brands. Earlier this year, ABG's executives visited us to discuss Baozun Brand Management and our potential collaboration with Hunter, a British premium outdoor brand under its portfolio. They quickly recognized that Baozun's vision and ecosystem can elevate Hunter's business in Greater China. Especially -- specifically, Baozun's advancements in marketing technology and digitalization, as well as our game-changing new retail philosophy and the broad international reach, makes us the ideal strategic partner. Accordingly, ABG has chosen Baozun Group to become its strategic partner in Greater China. We have signed a license agreement for Hunter. Beyond a typical license partnership, we are moving further and are in the process of forming up a joint venture with ABG to co-own Hunter's intellectual property in Greater China and Southeast Asia. This marks another milestone in our transformation where all three business lines will cooperate together to deliver an extraordinary suite of services to leading global brand partners. Looking forward, we anticipate the challenging macro environment in China to continue. However, we…

Okay, thank you, Vincent, and hello, everyone. Let me do a quick review of the financials of the second quarter of 2023, after which I will discuss our BEC business in more details. Please note that we have prepared segment reporting to provide higher transparency as shown on Slide number 5. At this time, we are reporting two segments: E-Commerce, which includes BEC, BZI, and Group Headquarters; and Brand Management, which includes Gap Greater China. Please turn to Slide number 6. We are pleased to report that our E-Commerce segment achieved better year-over-year profitability and operating cash flows. This positive outcome can be attributed to our ongoing efforts in business optimization and cost reduction. Additionally, our Brand Management segment contributed incremental top-line growth after the inclusion of Gap Greater China. This resulted in a 9% increase in net revenues for Baozun Group, reaching a total of RMB2.3 billion during the quarter. Notably, product sales experienced a significant increase of 34%, while service revenue declined by 3% compared to the same period last year. Within the E-Commerce segment, we witnessed improved top-line momentum as consumer sentiment has gradually recovered, particularly during the 618 promotion campaign. To further enhance our offerings, we prioritized value-added services in digital marketing and IT services, while tactically reducing low-margin product sales in the appliance and electronics categories. Notably, the apparel sector displayed a robust recovery in the second quarter, with double-digit year-over-year growth in sportswear. Please turn to Slide number 7. In this quarter, at the Group level, our total gross profit increased by 8%, to RMB1.6 billion. Our total cost of the products increased by 12% to RMB675 million, mainly due to the incremental cost of products for Gap China. For the quarter, product sales gross margin of E-Commerce expanded by 110 basis points to…

Thank you. Thank you, Vincent and Arthur, and thank you all for joining us today. It is my great pleasure to speak with you. Please follow us to Slide number 12. Let me first reemphasize that BBM is a holistic omnichannel partner for global brands. We focus on growing a portfolio of premium consumer lifestyle brands that we manage with a data and technology-driven China-for-China approach. We began our journey earlier in 2023 with Gap, and we are currently underway of transforming Gap China from a discount-driven approach to one that focuses on building consumer love for our brand and products. In the second quarter of 2023, although the macro recovery was not as strong as everyone had hoped, we implemented our transition plan and successfully improved AUR, average unit retail, and gross margin. Our store-level operating profit after royalty fees turned positive, and we exceeded our initial forecast on the bottom line. Please turn to Slide number 13. As you may recall, we took a series of quick actions to improve store efficiency, including strictly controlling discounts, updating existing store visuals with a focus on mix-and-match storytelling, and enhancing sales advisors training. Thanks to these actions, our blended gross margin reached 52%, a healthy level, even post-royalty fee. I want to highlight that this gross margin achievement is key to Gap China's success. Overall, we generated a total revenue of RMB324 million, a decrease of 26% year-over-year, largely explained by the closure of 86 stores before we took over, which is equivalent to a decline of 40% year-over-year on store counts. Our same store growth reached 11% in the second quarter of 2023. As you can see, despite the disappointing macro recovery, we still managed to implement our transition plan, improve gross margin, and reduce loss. We believe the…

Okay, thank you, Sandrine. In summary, we have achieved another milestone in our transformation, where all three business lines will cooperate together to deliver an extraordinary suite of services to our brand partners. BEC continues to benefit from business and cost optimization and is transitioning itself into a second wave of growth. BBM has put in place a new foundation for Gap China and accelerating its China-for-China strategy. Baozun International is on track to build infrastructure and expand its mission. That concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

Yes, thank you. At this time, we will begin the question-and-answer session. [Operator Instructions] And the first question today comes from Alicia Yap with Citi. Please go ahead.

Hi, thank you. Good evening, management. Thanks for taking my questions. I have two questions. First, can management share with us on the latest consumption sentiment you have seen for July and August so far? What are the spending sentiment by brand, if you can give some color? And any major difference in terms of the international brands versus the domestic brands in terms of the ad budget spend willingness? And then second question is, can management help us to update on the store traffic for Gap China? With more offline activity post reopening, have you seen meaningful traffic improvement since taking over the business? Thank you.

Okay. Hello, Alicia, it's Arthur here. So I will take the first question, and then I will hand over to Sandrine for the second one. So, for the first one, as we all know, in the quarter two, with the 618 promotion, the overall consumption is in a pretty positive recovery trend. But unfortunately, in July, what we witnessed is the trend has stopped with both Tmall and JD into a negatory -- into a negative territory in terms of the growth. But the good thing is, in August, we have seen some recovery, even though it's still slightly below our expectation, but it's on the trend to recover. So hopefully, with some holiday ended, we will see that continue. People will start to spend. In terms of the category, so far, we have seen some good momentum in the third quarter to date on luxury, on jewelry, and also travel-related products. So for example, the outdoor and also the suitcase, so those we have seen experiencing a double-digit growth. In your final question about the domestic and the international brands, we actually see both the international brands and domestic brands have the willingness to spend if the ROI is good, so which leads to the quality of operations for both Tmall and JD. So that's where we see the customer either international or domestic are looking for the good quality and stable team. They're looking for data analytics. They're looking for technology to help them, which gave Baozun a strength to stand out from our peers. So that's why I mentioned in the second half of the year, we have a stronger pipeline than the past year. So after the COVID, the brand, both international and domestic are starting to spend their money wisely. Therefore, the capability of Baozun can play a big part in this area. So, I will hand over to Sandrine for the second question on Gap.

Okay. So Alicia, to answer your second question, let me stress the fact that our same-store growth for the Q2 is 11%. And now if I look at August, it has picked up to more than 30%. And if I look at year-to-date as of today, we are close to 30%. So all in all, this is very positive, and it's actually the combination of increased traffic to answer more directly your question and increased conversion in spite of stopping or at least drastically reducing the discounts in store, and therefore, actually increasing our margin quite significantly. So, all in all, yes, we see traffic, and I insist, and conversion picking up very significantly and momentum continuing to go up until today in August. And we expect that the last four months will be continuing on this trend and potentially even accelerating, because this is when we're going to really start accelerating not only store opening, but also marketing investments with the I am Gap, a new Gap campaign, as well as launching the new products that are designed China-for-China. I'm done with my reply.

Okay. Thank you so much.

Thank you. And the next question comes from Thomas Chong with Jefferies.

Hi, good evening. Thanks, management, for taking my questions. My first question is regarding the growth outlook for on non-Tmall channels. Can management comment about how it is trending and its contribution to GMV in the future? And my second question is about our international strategy. Can management comment about any strategic update and our thoughts in second half and next year? Thank you.

Okay. Thank you, Thomas. I will take the first one, then I will hand over to Vincent for the international expansion. In terms of the non-Tmall channels, as I mentioned in the earlier prepared remarks, we actually have seen an increased trend that the clients are looking for omnichannel. Therefore, our Tmall contributes has actually come down in terms of the total GMV. And non-Tmall is representing 34% of the overall GMV for quarter two. And that trend has continued with the clients looking for the omnichannel strategy. And in terms of in Baozun, we have 47% of our entire portfolio the clients are using more than one channel, so that number has increased by about 5% over the last few quarters. So, we are seeing that trend to continue. Okay. Let me hand over to Vincent for the second question, yes.

Okay. Thank you, Thomas, for your questions. I'm [indiscernible] here for the second question about the Baozun International overseas strategies. Of course, Baozun International is, of course, a key element of our strategy. And I think in the past one-and-a-half years, we have finished construction the infrastructure, including the team building capability and also territory coverage. So, we have several offices in different countries with the ground team to help us to combat not only in brand e-commerce business, but also brand management business. So with that addition, just now, as Sandrine mentioned, we have a new member, a very capable guy joined us for the BBM expansion in the region. So for the strategies, I think one thing about the localization, we want the local team can do the BD service provisioning and also all the other elements of the e-commerce business themselves in the region. So that is localization. And we also have another keyword called lending means that the Baozun International team will help our global e-commerce clients or brand management clients to lend in that area. So, there's two key elements. Right now, I think we are doing a quite good job. And also this year, we will start to conduct the Hunter business in the region after the joint venture and license agreement. And also next year, we have some other brands, strong brands in our pipeline. So, early next year, we will roll out more on management business in the region. So, I think it's quite promising. Thank you, Thomas.

Thank you.

Thank you. And the next question comes from Sophie Huang with CMB Bank International.

Okay. Thank you for taking my question. I have two questions here. The first one is regarding livestream e-commerce update. Last time you stated plan to enhance livestreaming e-commerce capacity. So, do you mind share us more color on the recent update? And what is the feedback and the performance of brands engaged? The second question is about the Hunter acquisition. What is the rationale behind this deal? And how do we look at from [indiscernible] and financial impact from Hunter acquisition going forward? Thank you.

Yes. Hi, Sophie. I will take the first one on the livestreaming, and then I will pass to Sandrine for the second one. In terms of the livestreaming, I think our idea is to combine the best of Baozun capability, which is, for a long time, we have been strong in terms of the content creation and also operations, with the world-class facility and operations, which we are starting to build. Those two things can combine together to achieve a very good kind of model for our brand partner to find the new growth area in terms of the e-commerce. So, this is a new area that Baozun can get into, but our strength in terms of the connection with the brand and also the content creation will help us to stand out. So far this year in the first half of the year, we have seen some good progress in terms of some luxury brands, we started to perform the Douyin, which has achieved very good results. And also, very recently, only this month, we launched a new Douyin GQ show on Douyin, which has achieved a very good result. So, if you look at Douyin, you can find in terms of the details on that one. I'm not going through the detail. But what that prove is Baozun's capability plus our investment into the livestreaming can create a good result for our clients. Okay. Now I will hand over to Sandrine. Yes.

Okay. So Hunter, what's the rationale to add Hunter to the portfolio? So, second brand in the portfolio. The first reason is that it really fits the philosophy of how we want to build this portfolio, because Hunter is a premium lifestyle brands by essence, I would say, or in essence. It has a strong DNA. It has very iconic products, that's a second reason. On top of this, it's in a category which is like urban outdoor, which has a lot of momentum, and especially after COVID, we have seen a lot of growth. Then to add to this, we know the brand. We know the brand, because we've been its e-commerce partner for a couple of years. We therefore saw it growing very fast in the last two years, and also being in China, at least a profitable brand. And all these are actually positive reasons to go this direction. On top of this, also among the criteria which are important for us, it's a brand that sells strongly online, actually, for the time being in China, it's only online. So online potential is very strong. And it's a brand that we believe that we can do China-for-China to expand the product portfolio in an efficient way. So, all this combined together made us think that it's actually a good brand for our portfolio. And in addition to this, this time, we can have some ownership over the brand, which makes a big difference versus a pure license. And then in terms of financial impact, at the beginning, it's relatively marginal. We plan to grow this brand significantly in Greater China, but also in Southeast Asia, because we have the IP in Southeast Asia as well. And the good thing is that, as we said, it's a brand which is operationally positive from the very beginning. So of course, at the beginning, we will have to add some royalties. But overall, it's the brand which is operationally positive from day one, which is not a turnaround like we have experienced previously.

Okay. Thank you. Very clear.

Thank you. [Operator Instructions] And the next question comes from [Janet Young] (ph) with Bank of America.

Hi. Thank you, Vincent, Arthur, Sandrine, Wendy [indiscernible]. My question is regarding the product sales, since you have mentioned that the optimizing -- optimization of product distribution model and time portfolio has put some pressure -- downward pressure on our product sales. It has been going on for a while. Can you give us an update on the progress? And looking into the future, do you -- how long do you think you will last? And what product categories still have much room to improve? And can you give a sense of how much further impact it could potentially have on the product sales and margins? Thank you.

Okay. Thank you, Jenny. And I think, as I mentioned in the earlier call, our focus of the BEC business is on quality and on the operating cash flow. And the rationalization has made a good contribution to our portfolio and the quality of the portfolio has enhanced. Therefore, you see the results in quarter two, we have a fairly healthy positive cash inflow of RMB450 million, which is a very good result, and a lot of this come down to rationalization of product sales portfolio. As you may remember, we started this journey about a year ago and now is coming to the point that our product sales portfolio has significantly improved. So, we will continue our journey in terms of improving the quality, and we will add on new good quality product sales like the sole distributor model I talked about earlier to our product sales portfolio. We think from quarter four this year, you will see a positive trend in terms of the growth from this area.

Thank you very much.

Okay. Thank you.

Thank you. And the next question comes from Andre Chang with JPMorgan.

Thank you, management, for taking my question. I have a follow-up question on Hunter, the deal and the company's strategy on BBM going forward. So, it's a relatively short interval from us doing the deal of Gap and now the deal with Hunter. And we also talk about like potential more cooperation with the Authentic Brands Group. So, can management help us understand how we consider -- how far we can go based on our current financial resources and how do we think about the opportunity cost? Say, we are doing several deals in a short period of time, what about the potential going forward? And what's the reason for us to have the confidence to accelerate progress on the BBM front? Thank you.

Okay. Go ahead, Sandrine.

Do you want to start off -- no. Okay. Well, I'll go ahead and I'll let you complement if you feel, especially on the resource question. Actually, we started working on BBM even before the Gap deal. So, we've been looking and selecting brands very carefully and we continue to be extremely selective. So, for one, Hunter, we have looked at dozens and dozens of brands. So, we're not rushing. In any manner, we're not rushing. However, going forward, what we want is indeed to build a portfolio that brings significant revenue and profit and value to Baozun Group. So, we will continue to be extremely selective, but we will continue to look at the best opportunities, especially when they fit the portfolio philosophy so well. When they are positive operationally from the beginning, have a marginal impact financially and enable us to also create value by acquiring ownership and not only being in the license mode. So that's the way I would summarize, but I'm sure that Arthur wants to complement on this.

Yes. I think I totally agree, Sandrine. Just one more point I would like to add, Andre, is we have been operating as the [indiscernible] partner for Hunter over the last two years. And we know this brand operationally and financially. So, the same as Gap, as a result, you can see, we managed to turn the situation around only after five months. And we have confidence, given the information we know about Hunter to make a significant improvement in the short term given where we are by utilizing the resource and platform and capability of Baozun Group. So that's why we go ahead to make this deal. And also, this has opened another cooperation model with the ABG Group, who owns more than 50 different brands in China that owns IP. And through that cooperation, we may explore all different venues of cooperation with ABG Group. So that will help us to grow both the BBM and BEC business as well.

Thank you. Some more color from me -- from my side, Vincent here, is that for the positioning, we are positioning the premium fashion category. So, no matter Gap or Hunter, it's totally within this positioning. Secondly, I think it's going more upstream because Hunter represents co-ownership of IP of brands. And thirdly, I think, as always, we think financial fundamentals or the strength of our financials is very important. So, in the meantime, we will carefully evaluate capabilities. So Hunter decisions made consider all these kind of aspects. So, I think it's quite mature and solid and a careful selection. Yes, thank you.

Thank you. And this does conclude the question-and-answer session. I would like to turn the floor to management for any closing comments.

Okay. Thank you, operator. On behalf of the Baozun management team, we would like to thank you for your participation in today's call. If you require any further information, feel free to reach out to us. Thank you for joining us today. This concludes the call.

Thank you. Now, as mentioned, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.