Yatsen (YSG) Q1 2026 earnings review
Strong Skincare Growth Erased by Escalating Customer Acquisition Costs
Yatsen delivered 22.5% YoY revenue growth in Q1, hitting its guidance targets. The strategic pivot toward a skincare-first portfolio continues to yield top-line results, pushing gross margins to an impressive 80.2%. However, the quality of this growth is highly questionable. To maintain momentum, the company had to aggressively outspend on Douyin traffic acquisition, which caused Selling and Marketing expenses to spike to 72.2% of revenue. As a result, bottom-line profitability collapsed, reversing from an income last year to a non-GAAP net loss of RMB 57.3 million. Adding to the concerns, the legacy Color Cosmetics segment resumed its decline, acting as a structural anchor on the business.
🐂 Bull Case
The premiumization strategy is working. Skincare now represents over 56% of total revenue, growing at a rapid 58.5% YoY. Clinical brands like Galénic and DR.WU are showing excellent traction, up 61.4% combined.
Gross margin breached 80% for the first time, up from 79.1% a year ago. If traffic acquisition costs ever normalize, the underlying unit economics of the portfolio have fundamentally improved.
🐻 Bear Case
S&M expenses surged to 72.2% of total sales, driven primarily by intense competition and traffic costs on Douyin. The company is essentially buying top-line growth at the expense of its bottom line.
After a brief recovery, the Color Cosmetics segment has posted two consecutive quarters of YoY decline, falling another 5.0% this quarter. The turnaround narrative here has stalled.
⚖️ Verdict: 🔴
Bearish. While gross margin expansion and skincare adoption are strong positives, the business model currently requires ruinous levels of marketing spend just to maintain growth. Operating leverage is moving in the wrong direction.
Key Themes
Traffic Acquisition Costs Crushing Profitability
Reversing. Despite a record gross margin, Yatsen's non-GAAP operating margin violently reversed from -1.8% in 25Q1 to -8.3% in 26Q1. The sole culprit is Selling and Marketing. Expenses surged 33.1% YoY to RMB 737.2 million, consuming 72.2% of total revenue (up from 66.4% last year). Management explicitly cited higher traffic acquisition costs on the Douyin platform, exposing a dangerous reliance on expensive social media channels to fuel the skincare growth narrative.
Skincare Now the Undisputed Core
Stable. The transition is firmly in place: Skincare now accounts for 56.2% of total revenues, up from 43.5% a year ago. Driven by clinical and premium labels (Galénic, DR.WU, Eve Lom), the segment is masking the weaknesses of the legacy business. This mix shift directly enables the company's 80.2% gross margin ceiling.
Color Cosmetics Strategy Sputters
Decelerating. The legacy Color Cosmetics portfolio (Perfect Diary, Little Ondine) is deteriorating further. Following a brief period of growth in mid-2025, the segment declined 9.1% in Q4 and another 5.0% this quarter. The previous management narrative regarding 'makeup skinification' reviving the brand has failed to deliver sustained momentum.
Capital Raise Signals Liquidity Needs
Yatsen recently closed a $120 million private placement of convertible notes and warrants involving Trustar Capital, Hillhouse, and the CEO. While PR frames this as a vote of long-term confidence, it coincides with operating cash flow flipping back to a negative RMB 90.0 million and a sequential decline in cash balances. Raising capital suggests a need to bolster the balance sheet against ongoing cash burn.
Other KPIs
Accelerating efficiency. In a quarter dominated by cost overruns in marketing, fulfillment expenses were a bright spot. Costs decreased to 6.0% of revenues from 6.2% in the prior year, marking consistent operational leverage in logistics and supply chain execution.
Accelerating. R&D spending jumped 74.2% YoY and now accounts for 3.9% of total revenue (up from 2.7%). This validates management's commitment to 'R&D-led innovation' through higher headcount and payroll, though it adds heavily to the short-term margin compression.
Guidance
Decelerating. The implied YoY growth rate of 10% to 20% (15% at the midpoint) marks a step down from the 22.5% achieved in Q1 and a sharp deceleration from the ~37% growth posted in Q2 2025. This indicates that either the rapid skincare expansion is hitting tougher comparables, or the drag from Color Cosmetics is expected to intensify.
Key Questions
Douyin Strategy and Marketing ROI
With S&M expenses spiking to 72% of revenue due to Douyin traffic costs, what is the specific strategy to decouple top-line growth from proportional marketing spend? At what scale do we see operating leverage kick in?
Color Cosmetics Turnaround
The Color Cosmetics segment has now declined for two consecutive quarters, lagging significantly behind the company average. Are you managing this segment for cash extraction, or is there a genuine plan to return it to durable growth?
Use of Proceeds for Capital Raise
Regarding the $120 million private placement, can you clarify the planned use of proceeds? Is this primarily a defensive liquidity buffer to cover expected operating burn, or are there specific acquisitions or product investments on the horizon?