YSG (YSG) Q2 2025: Skincare Revenue Surges 79%, Fueling Margin Recovery and R&D-Driven Edge
YSG’s skincare portfolio delivered a breakout quarter with nearly 79% revenue growth, sharply improving profitability and validating its R&D-centric model. The company’s pivot toward premium skincare, anchored by innovation and operational discipline, is compressing losses and raising brand equity. Forward guidance signals continued double-digit expansion, but competitive intensity and the need for sustained marketing investment will test operating leverage in coming quarters.
Summary
- Skincare Outperformance: Premium brands Galenix, Dr. Wu, and Yves Long drove robust top-line momentum.
- Margin Turnaround: Higher-margin product mix and cost leverage narrowed losses and returned YSG to non-GAAP profitability.
- Competitive Pressure Rising: International brands and higher promo spend will challenge sustained margin gains.
Performance Analysis
YSG’s second quarter marked a decisive inflection in both growth and margin trajectory, powered by its pivot into high-end skincare. Total net revenues advanced 36.8% year-over-year, with skincare contributing the lion’s share of incremental growth. The trio of Galenix, Dr. Wu, and Yves Long collectively posted an 88.1% revenue jump, underscoring the effectiveness of YSG’s R&D-driven product pipeline and brand-building efforts. Color cosmetics, led by the revived Perfect Diary brand, also returned to growth, though at a slower 8.8% pace and with lower margin contribution.
Gross margin expanded 160 basis points to 78.3%, reflecting a richer mix of hero products and premiumization, a strategy where brands shift toward higher-priced, higher-margin offerings. Operating expenses rose in absolute terms but fell sharply as a percentage of revenue, illustrating the company’s improved scale efficiency. Notably, selling and marketing costs, while still elevated, declined as a share of sales, and general and administrative expenses were reduced via headcount rationalization. The result: non-GAAP net profit margin of 1.1%, a swing from a 9.4% loss a year ago, and positive operating cash flow of $77.7 million versus outflows last year.
- Skincare Scale Effect: Skincare now dominates growth, with segment expansion far outpacing the company average.
- Cost Discipline Gains: Fulfillment and administrative costs fell as a percent of revenue, supporting margin recovery.
- Cash Generation Reversal: Operating cash flow turned positive, reflecting improved working capital and profitability dynamics.
While the quarter’s numbers validate YSG’s strategic bets, the sustainability of margin gains will depend on maintaining innovation velocity and channel efficiency as competitive pressures mount.
Executive Commentary
"Despite the uncertain environment, we stayed focused on executing our R&D journey strategy. Anchored in our vision of becoming a world-class pioneer in beauty innovation, we have continued expanding our international innovation network, attracting top global R&D talent, and deepening collaborations across industry, academia, and research institutions."
Junfeng Huang, Founder, Chairman and Chief Executive Officer
"We will continue to optimize our product mix by driving premiumization and hero products with stronger margins. We are improving marketing efficiency through data-driven CRM and better ROI discipline, shifting spending towards higher return channels. As top line growth continues, we expect to gain operating leverage across expenses. Altogether, these initiatives give us confidence in steadily expanding profitability while maintaining growth."
Donghao Yang, Chief Financial Officer and Director
Strategic Positioning
1. Skincare-Led Brand Portfolio Transformation
YSG’s strategic shift to skincare as a core growth engine is now delivering tangible results. Galenix, Dr. Wu, and Yves Long have become the company’s growth anchors, fueled by continuous R&D investment and a robust new product pipeline. This transition not only drives higher revenue growth but also lifts gross margin, as skincare typically commands premium pricing and customer loyalty compared to color cosmetics.
2. R&D as a Competitive Moat
Management is doubling down on R&D to differentiate in a crowded and increasingly competitive market. With a best-in-class Shanghai R&D center and ongoing collaboration with global research institutions, YSG is positioning itself as an innovation leader. Product launches like the upgraded Brightening Micro Mask and BioPhase Essence Foundation exemplify this approach, supporting both brand equity and pricing power.
3. Operational Leverage and Cost Optimization
YSG’s scale is enabling improved cost absorption, with operating expenses dropping nearly 10 points as a share of revenue. The company has trimmed general and administrative headcount, enhanced logistics efficiency, and is reallocating marketing spend toward higher-ROI channels. These efforts are critical to sustaining profitability as the company continues to invest in brand and channel expansion.
4. Multi-Channel Expansion and Offline Presence
While digital remains the primary sales channel, YSG is expanding its offline footprint with Galenix experience stores in major cities. This omnichannel approach deepens consumer engagement and increases brand visibility, especially for premium offerings where in-person experience can drive conversion and loyalty.
5. Social Responsibility and Brand Equity
Corporate social responsibility programs, such as the Create a Beautiful Life initiative and Dr. Wu’s campus tours, reinforce YSG’s brand narrative and support long-term customer trust. These efforts may not immediately translate to sales but are vital for sustaining premium positioning and differentiation.
Key Considerations
YSG’s quarter underscores the payoff from its multi-year R&D and premiumization strategy, but the path forward will require balancing growth with disciplined investment as market dynamics shift.
Key Considerations:
- Product Innovation Pipeline: Continued R&D output is crucial to defend share against both domestic and international brands targeting high-growth skincare.
- Margin Sustainability: Margin gains are heavily reliant on premium mix and cost leverage, but rising competition could force higher promo spend or price concessions.
- Channel Strategy Evolution: Offline expansion is in early stages; execution risk remains as YSG scales physical retail amidst digital dominance.
- Marketing Efficiency: Improved ROI discipline is evident, but maintaining top-line momentum may require renewed investment as competitors intensify digital and influencer campaigns.
- Brand Ceiling Not Yet Reached: Management believes key brands remain well below their potential, suggesting runway for growth but also the need for ongoing investment.
Risks
Competitive intensity is escalating, particularly from global premium brands and aggressive domestic players, putting pressure on pricing, marketing spend, and innovation pace. Macroeconomic uncertainty in China and evolving consumer preferences could dampen discretionary beauty spend. Margin improvement may prove fragile if top-line growth slows or if YSG is forced to escalate promotions to defend share.
Forward Outlook
For Q3 2025, YSG guided to:
- Total net revenues between RMB 778.6 million and RMB 880.1 million, representing 15% to 30% year-over-year growth.
For full-year 2025, management maintained a positive outlook, emphasizing:
- Ongoing double-digit revenue growth, led by skincare portfolio expansion.
- Gradual margin improvement as scale and product mix effects persist.
Management highlighted the need to balance investment in brand building and innovation with cost discipline, acknowledging that profitability gains will be gradual as brands are scaled toward their full potential.
- Skincare momentum expected to outpace color cosmetics.
- Competitive landscape and consumer sentiment remain key variables.
Takeaways
YSG’s Q2 results validate its R&D-centric, skincare-first strategy, but future margin gains will depend on sustaining innovation and operational efficiency amid intensifying competition.
- R&D-Driven Growth Engine: Skincare innovation is now the company’s primary growth and margin driver, supporting both top-line and gross profit expansion.
- Leverage and Efficiency: Cost controls and improved scale are compressing losses, but further gains will require ongoing discipline as the company invests in new channels and brand equity.
- Investor Focus: Watch for continued pipeline output, margin durability, and execution on offline expansion as key signals of long-term value creation.
Conclusion
YSG’s decisive shift to premium skincare, underpinned by sustained R&D investment, is delivering both revenue acceleration and margin recovery. The model is working, but the next phase will test whether YSG can defend share and profitability as the competitive landscape evolves and investment needs persist.
Industry Read-Through
The quarter’s results highlight a structural shift in China’s beauty sector toward premium skincare, with local innovators like YSG successfully challenging international incumbents through R&D and localized product development. Hero product strategies, omnichannel expansion, and operational leverage are becoming table stakes for growth and margin expansion. Other domestic brands will likely double down on innovation and marketing, while global players face mounting pressure to localize and respond to faster-moving local competitors. The playbook of premiumization and efficiency will increasingly define winners in China’s consumer beauty landscape.