Yatsen: The Color Cosmetics Engine Is Broken

Yatsen entered this quarter telling investors to expect 10% to 20% revenue growth. The company delivered 5.1%. Then it guided for the next quarter to be flat or declining.

That is the headline from the China beauty group's second-quarter results released Tuesday. The more telling story is buried in the segment breakdown: the color cosmetics business that built Yatsen — and gave it the Perfect Diary brand — is no longer just struggling. It is collapsing. Revenue from color cosmetics fell 35.8% year-over-year. A year ago, that same segment was growing 8.8%.

For a company founded around digital-era color cosmetics and influencer-driven growth, this is not a soft quarter. It is a structural reversal.

What happened in the quarter

Total revenue came in at RMB 1.14 billion ($168 million), a modest increase from RMB 1.09 billion in the same quarter of 2025. The top line stayed barely positive because skincare is growing fast. Skincare revenue surged 40.4% to RMB 816 million and now represents 71.5% of the total, up from 53.5% a year ago. Clinical and premium brands — Galénic, DR.WU, and Eve Lom — are the engine.

But color cosmetics, which make up the remaining 28.5%, fell hard. Perfect Diary, Little Ondine, and Pink Bear are all included in that segment. Management used the phrase "structural headwinds" and said it is taking "decisive actions to streamline" the portfolio. Translation: the business is shrinking and the company is retreating.

The margins tell the same story. Gross profit actually declined, despite higher total revenue, because of higher inventory provisions in color cosmetics tied to SKU rationalization. Gross margin fell to 73.9% from 78.3% a year earlier. The company is writing down color cosmetics inventory it can no longer sell profitably.

Profitability flipped from profit to loss. Last year's Q2, Yatsen posted a non-GAAP net income of RMB 11.5 million. This quarter's non-GAAP net loss was RMB 99.4 million — roughly seven times the revenue of the prior-year profit. The operating loss nearly tripled to RMB 131.9 million from RMB 55.5 million. Selling and marketing expenses consumed 70.8% of revenue, up from 66.5% a year ago, driven by brand-building spend on skincare and higher traffic acquisition costs on Douyin, China's short-video platform.

What the guidance says

The forward outlook is what matters most. Management expects Q3 revenue between RMB 898 million and RMB 1.01 billion — a year-over-year decline of 0% to 10%. Compare that to the 15% to 30% growth guidance it gave for Q3 in the prior year.

That is a complete reversal of trajectory. The company went from guiding for strong double-digit growth to projecting decline in what would normally be a peak holiday quarter around China's National Day and Singles' Day shopping events. If the low end plays out, revenue would fall for the first time in quarters.

Two businesses, one identity crisis

There is a way to read this quarter that isn't apocalyptic: Yatsen is in the middle of a portfolio shift. The company started as a color cosmetics disruptor but acquired Galénic, DR.WU, and Eve Lom to build a premium skincare platform. That strategy was working through last year — skincare grew 78.7% in Q2 2025 — and the shift is now structurally complete with skincare at over 70% of revenue.

But you don't get to discard one half of your business while replacing it. The problem is timing and scale. Color cosmetics was nearly half the revenue base a year ago. It is shrinking by nearly 36% in a single quarter. Skincare is growing at 40%, but that growth is applied to a smaller base. The math does not add up to a smooth transition.

And the transition comes at a cost. Yatsen is burning through cash. Net cash used in operating activities was RMB 78.5 million this quarter versus RMB 77.7 million generated a year ago. Total cash, restricted cash, and short-term investments stood at RMB 1.056 billion ($155 million) as of June 30 — enough runway for now, but declining steadily. The company raised additional capital through a convertible note private placement with Hillhouse in May.

There is also a new variable: a July partnership with Sephora China to bring Perfect Diary into roughly 300 stores across Beijing, Shanghai, Guangzhou, and Shenzhen. This is a prestige validation play — moving the brand from pure e-commerce to physical retail where customers can touch and test products. But it will take time to show results, and the revenue impact in Q2 was zero since it launched in July.

The valuation question

The stock is down roughly 72% from its 52-week high of $10.70, currently trading near $2.66 with a market capitalization of about $250 million. On a trailing revenue basis, that works out to an EV-to-sales multiple of roughly 0.19. The company trades below book value at a price-to-book ratio of 0.59.

These are distressed multiples. The question is whether they are distressed because the market has overreacted, or because the business deterioration justifies the repricing.

Here is the case that the sell-off is justified: color cosmetics, once the growth story, is in freefall. The company missed its own guidance and is now guiding for decline. Operating losses nearly tripled. Cash burn accelerated. Management is essentially admitting the business it was founded to build is no longer viable in its current form. None of this is temporary fear — it is operating reality.

Here is the case that the multiple may have moved faster than the business: skincare at 71.5% of revenue and growing at 40% is a different business than the one the market priced a year ago. The Galénic-DR.WU-Eve Lom portfolio has real premium positioning in China. If color cosmetics stabilizes at a lower level rather than continuing to spiral, the revenue base could level off rather than collapse. At a $122 million enterprise value (enterprise value net of cash), the market is pricing this as a small, losing skincare company with a legacy color cosmetics problem. If the skincare platform holds and the color bleeding stops, that price could be too low.

But the evidence does not support optimism yet. The Q3 guidance for flat-to-declining revenue suggests the worst may not be behind the company. Color cosmetics inventory provisions signal further write-downs are likely. Marketing spend is still rising as a share of revenue. There is no visible inflection point on the horizon where expenses come down, color cosmetics stabilizes, and the operating loss narrows.

What changes the story

The next few quarters will tell whether Yatsen is becoming a skincare company or simply a smaller version of what it was. Watch three things:

First, color cosmetics revenue. A 36% single-quarter decline can reverse if the SKU rationalization and Sephora rollout actually work. But it can also accelerate if Perfect Diary loses more relevance in a crowded market. The company needs to show that decline is decelerating, not deepening.

Second, operating leverage. If skincare continues to grow at 40% while the color cosmetics base shrinks, total revenue will still be smaller. For profitability to improve, marketing spend as a percentage of revenue needs to come down. Right now it is going up.

Third, the Q3 result. Guidance is for 0% to 10% decline. If the company reports revenue at the top end of that range — near flat — it would be a sign the skincare engine is holding up. If it reports at the bottom end, the revenue base is contracting and the business case becomes harder to defend at any price.

The market has done its work already. A stock that traded above $10 now trades below $3, and the financial results explain why. The operating deterioration is real. The question for anyone watching is whether the multiple has fully absorbed the damage or whether there is still pain coming when the guidance resets further. Based on the evidence in this quarter, the latter looks more likely.