MINISO Doubles Its Share Repurchase Program – Buyback Wednesdays

 

MINISO, a ten-year-old Chinese retailer offers products that are heavily influenced by Japanese design. It was listed on a U.S. exchange in 2020. Since its listing, the company managed to expand its intellectual property (IP) licenses from 17 to 80 including Barbie products. In its recent call transcript, the company mentioned that half of the store’s Stock Keeping Units (SKUs) related to the recent blockbuster “Barbie” series were sold out within the first 5 days of launch!

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The company operates on a franchise model, and its retail partners open and operate their own stores under its brand name. They share part of in-store sales proceeds with the company and are responsible for the stores’ capital expenditure and operating expenses. This model carries both the potential for profitability and associated risks as individual franchisees might suffer if the company expands too rapidly. In its Q4 FY2023 report, the company stated that its per store sales increased by about 25%, excluding the impact of store closures last year. This figure looks promising and it is likely that the franchise model is working well for them thus far.

Almost a year back, in October 2022, we wrote about MINISO (MNSO) in our Buyback Wednesdays post titled MINISO Announces a $100 Million Buyback, when the company announced a repurchase program that represented around 6.25% of its market cap at announcement. The stock’s price was $6.03 at the time of announcement. Since then, MINISO’s stock price has more than quadrupled reaching as high as $25.65 on the day of this writing. This remarkable increase within a year has taken me by surprise, and I find myself regretting the missed opportunity. I was concerned by the company’s high short interest and a short report by Blue Orca as discussed later in this article. This has very much been a risk on year and we have seen companies like Carvana which were widely expected to go bankrupt last year, run up 926% this year.

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Key Insights

• MINISO has seen its stock rally sharply by 380% over the last year.
• MINISO announced a new dividend policy promising a 50% payout of earnings.
• Robust financial performance and expanding margins in FY2023 indicate the future might be bright for the company.
• Despite buyback announcements, we have yet to see an actual decline in shares outstanding.
• The company’s short interest of over 60% is a cause of concern.
• MINISO’s ambitious new sub-brand, TOP TOY’s revenue increased by 81% year-over-year with an increase of 46% year-over-year in per store sales.
• The company expects to have about 5,000 stores in China by 2027 compared to 3,226 stores at the end of 2022.

 

Share Repurchase

This is the third consecutive year that MINISO has announced a buyback. This time the amount of buyback is twice as much as last year.

On September 15, 2023, MINISO announced that, following the expiration of the September 2022 share repurchase program, the company’s Board approved a new share repurchase program under which the company may repurchase up to $200 million over a period of 12 months. This represents around 2.25% of its market capitalization at announcement. The company expects to fund repurchases from surplus cash on its balance sheet.

MINISO had repurchased a total of 6.12 million shares, and 3.23 million shares under its 2021 and 2022 share repurchase programs respectively.

Over the course of two years, the number of shares outstanding has actually expanded by 36.5 million, which presents a contrasting narrative. It is possible that the shares repurchased by the company through these buyback initiatives were primarily intended to offset the dilution resulting from stock-based compensations.

Dividends 

On July 27, 2023, MINISO’s Board adopted a dividend policy for the company. The aggregate amount of cash dividend to be paid is approximately $128.8 million, which is approximately 50% of the company’s adjusted net profit for fiscal year 2023.

Chairman Ye and his wife Yang Yunyun, will be big beneficiaries of the new dividends, since they collectively own 62% of MINISO’s shares. After three consecutive years of losses from 2019 to 2021, MINISO has been reporting profits for several quarters in a row, which could account for its recent announcement of a dividend policy. The company also paid a special dividend of $0.17 in 2022.

Valuation

MINISO is valued a bit on the expensive side with an EV/EBITDA of 17.94 for the trailing twelve months. The P/E ratio is 34.18 which is again high compared to the sector median.

Strong Financials 

MINISO’s revenue and profits have increased, after some difficult years due to the pandemic. Revenue steadily increased from $1.37 billion in June 2019 to $1.58 billion in June 2023. Net income has seen a gradual increase since June 2021, rising from $17.8 million in the quarter to $74.3 million in June 2023.

Global Store Expansion

According to the company’s annual report, MINISO has opened 592 new stores in the past year, out of which 378 stores are opened locally and the rest are in the overseas market. This number was higher than prior years when the company managed to open over 500 stores from 2020 to 2021 and 450 stores from 2021 to 2022.

Within the local market, MINISO has successfully started penetrating into various lower-tier cities in China despite its prior experience of operating in mostly high-tier Chinese cities. This fiscal year the company opened only 8 stores in first tier cities whereas the number of stores opened in third tier cities was 251.

The Chinese markets are not as robust as they were in the pre-covid period. The best way to achieve top-line growth is to keep expanding its footprint globally and this is exactly what the company is doing at present. Regularly monitoring the same store sales metric is crucial to mitigate the risk of individual stores underperforming, as previously mentioned.