Yatsen (YSG) Q2 2026 earnings review
Skincare Mix Reaches 71%, But Transition Costs Bleed the Bottom Line
Yatsen's strategic pivot toward skincare is accelerating in revenue mix but destroying near-term profitability. While Skincare Brands (Galénic, DR.WU, Eve Lom) delivered a robust 40.4% YoY growth, the legacy Color Cosmetics segment collapsed by 35.8%. The costs to manage this transition were steep: an active SKU rationalization drove gross margins down to 73.9%, and soaring Douyin traffic acquisition costs pushed Selling & Marketing expenses to an unsustainable 70.7% of revenue. Consequently, Non-GAAP Net Loss widened to RMB 99.4M. With Q3 guidance calling for a revenue contraction, the company is sacrificing significant near-term cash flow to reposition its brand identity.
🐂 Bull Case
The long-term thesis is intact: Skincare now accounts for 71.5% of total revenue (up from 53.5% a year ago). Brands like DR.WU and Galénic are successfully outgrowing the broader China beauty market.
Despite margin pressures elsewhere, logistics improvements drove Fulfillment expenses down to 4.9% of revenue (from 5.8% a year prior), providing a silver lining in operational execution.
🐻 Bear Case
Spending 70.7% of revenue on Selling & Marketing—driven explicitly by expensive Douyin traffic acquisition—signals that Yatsen is buying growth at a severe loss. This casts doubt on the ultimate steady-state profitability of the new brand portfolio.
A 35.8% revenue decline in Color Cosmetics is an aggressive deceleration. The proactive portfolio optimization and SKU rationalization required painful inventory provisions, dragging overall gross margins down 440 basis points.
⚖️ Verdict: 🔴
Bearish. While the strategic shift to higher-margin skincare is fundamentally sound, the transition execution is hemorrhaging cash. Guidance implies the growth engine is stalling, making the 70%+ S&M expense burden incredibly difficult to justify.
Key Themes
Color Cosmetics Collapses, Dragging Down Gross Margins
The legacy Color Cosmetics segment transitioned from a lagging segment to a full collapse, decelerating sharply from -5.0% in Q1 to -35.8% in Q2. Management's 'decisive actions to streamline' the portfolio triggered inventory provisions (write-downs), which directly caused total Gross Margin to reverse course, falling from 78.3% a year ago to 73.9%. This essentially erased the structural margin benefits usually provided by the growing skincare mix.
Traffic Acquisition Costs Crippling Operating Leverage
Selling and marketing expenses accelerated to RMB807.6 million, eating up 70.7% of total revenue (up from 66.5% YoY). Management explicitly cited higher traffic acquisition costs on the Douyin platform. This reliance on high-cost social commerce channels completely negates the company's gross profit, leading to an operating loss margin of 11.5%. Until this channel reliance shifts, profitability remains elusive.
Skincare Now Dominates the Business Model
Despite the total company deceleration, Skincare brands (Galénic, DR.WU, Eve Lom) grew an impressive 40.4% to RMB816.1 million. Skincare now represents 71.5% of total sales, a massive structural shift from 53.5% a year ago. If management can complete the Color Cosmetics restructuring, this segment provides a healthy foundation for long-term growth.
Intensifying Competition in China Beauty Market
Management highlighted that the broader Chinese beauty market is remaining 'challenged as competition across the industry intensified.' This macroeconomic headwind provides critical context for why Yatsen is forced to spend aggressively on marketing and endure margin-crushing promotions to defend its market share.
R&D Investments Building Product Pipeline
The company maintained R&D spending at 3.3% of revenue (RMB37.3M). Management continues to leverage clinical and premium formulas for brands like Galénic and DR.WU (building on previous quarters' successes like the DR.WU PDRN series and Galénic's Cellulary Reviving Cream) to create an 'innovation pipeline' designed to bypass pure price-based competition.
Logistics and Fulfillment Optimization
A rare bright spot in the cost structure: Fulfillment expenses decreased in absolute terms (RMB56.1M vs RMB63.3M YoY) and as a percentage of net revenues, improving to 4.9% from 5.8%. Management attributed this directly to targeted improvements in logistics efficiency.
Other KPIs
Reversing trend. Cash flow swung violently from a positive generation of RMB 77.7 million in 25Q2 to a burn of RMB 78.0 million this quarter. The severe net loss and aggressive marketing spend have halted the company's ability to self-fund its operations.
Accelerating relative to sales. Total OpEx now consumes 85.4% of total net revenues, up from 83.4% a year prior. With gross margin compressing to 73.9%, the business model is currently generating structurally negative unit economics.
Guidance
Reversing. The guidance implies a YoY decrease of approximately 0% to 10% (midpoint -5.0%). This is a stark break in trajectory from the 5.1% growth achieved in Q2 and the 22.5% growth in Q1, indicating that the Color Cosmetics collapse is now overpowering the Skincare growth engine.
Key Questions
Color Cosmetics Restructuring Timeline
With the 35.8% drop in Color Cosmetics and related inventory provisions hitting gross margin, when do you expect the SKU rationalization process to be fully complete, and what is the target steady-state margin for this segment?
Cap on Customer Acquisition Costs
Selling and Marketing expenses surpassed 70% of revenue, driven by Douyin traffic costs. Is there an internal ceiling for this expense ratio, or are we structurally locked into a higher-cost acquisition environment?
Confidence in Future Top-Line Growth
Given the Q3 guidance pointing to a potential 10% YoY revenue contraction, what specific catalysts give management confidence that the company can return to consolidated top-line growth in Q4 and into FY27?