Pop Mart: Concerns Emerge Amid Strong Q1 Growth, Profit Margins Under Pressure

Overview

Bernstein has analyzed Pop Mart’s (9992.HK) first-quarter management conference call, maintaining an “Underperform” rating with a target price of HK$181. The report notes that, despite Q1 revenue exceeding expectations across the board—with China segment growth in the 100%–105% range—the management has positioned 2026 as a “refueling year,” signaling a shift from breakneck expansion to operational consolidation. Key challenges include: weak overseas infrastructure leading to difficulties in retaining user traffic; overlapping headwinds putting pressure on profit margins; and short-term execution risks stemming from large-scale organizational restructuring. The firm believes that, pending the release of actual Q1 margin figures in August, the company’s long-term sustainability risks—namely, the trajectory of profitability, the timeline for achieving overseas profitability, and the deceleration in growth—remain tilted to the downside.

Core views

Profit margins are under multiple pressures, and the guidance may be overly optimistic. Management expects full-year gross margins to decline by 1–2 percentage points in 2026, primarily due to a 3–5% increase in raw material costs (PVC, fabrics, packaging), a rising share of low-margin overseas operations, import tariffs, and logistics fuel surcharges. Additionally, online channel growth in China (150%–155%) far outpaces offline growth (75%–80%), diluting the proportion of high-margin offline sales, while online expansion may entail higher promotional spending. A modest rise in fixed costs—such as rent and labor—could further erode net margins. The research report notes that, given the unfavorable shift in channel mix and management’s acknowledgment of “transitory impacts,” actual margin pressures may prove more severe than indicated in the guidance. Overseas expansion is facing a “reality check,” with infrastructure lagging behind pace. Management acknowledges that, compared with China, overseas markets have less established teams, fan bases, and retail infrastructure. Following the surge in traffic driven by Labubu in 2025, some markets have experienced a sharper “normalization” of demand—i.e., a pullback in popularity. Early overseas store openings involved compromises; for instance, a high‑performing outlet in Jakarta was deemed inconsistent with the brand’s image. Attempting to compress China’s decade‑long retail learning curve into a shorter overseas timeline faces structural headwinds, including geographic dispersion, divergent consumer behaviors, and an immature logistics network. The current priority is to strengthen foundational capabilities—enhancing store quality, building membership programs, and bolstering organizational capacity—rather than simply opening more locations. A major organizational overhaul has been launched, centralizing authority to address consistency challenges. This marks the most significant restructuring since the company’s international expansion began. Headquarters will reclaim decision‑making power over artist scouting, store design, and visual merchandising standards—previously delegated to regional teams—suggesting that headquarters believes local teams lack the capacity to maintain brand consistency. While this direction is sound, it introduces short‑term execution risks: store relocations and closures could disrupt sales, standardization might stifle valuable local adaptations, and the shift from “quantity” to “quality” requires capital allocation discipline that has yet to be rigorously tested at scale. IP diversification is beginning to yield results, though reliance on flagship IPs remains a work in progress. Labubu continues to be a global super‑IP, but Hirono’s meteoric rise in China and across Asia represents a critical turning point, providing a buffer against fluctuations in Labubu’s traffic. Skullpanda has delivered strong performance in Western markets through collaborations with My Little Pony. Meanwhile, Dimoo’s partnership with Pixar and Molly’s anniversary exhibition underscore the company’s efforts to refresh its legacy IPs. Nevertheless, management acknowledges that even globally recognized IPs face inherent volatility, reflecting the company’s ongoing effort to manage market expectations regarding Labubu’s long-term sustainability. New ventures—such as theme parks (with the April 30 opening of a new area exceeding expectations), film and TV projects (currently in the script stage), and home appliances (with limited‑edition refrigerators contributing only about RMB 6 million)—are largely extensions of the IP lifestyle, aimed at deepening IP relevance rather than driving short‑term scale.

Analysis framework

The research report employs an analytical framework that combines “expectation gaps” with a fundamental‑driven decomposition approach. First, by contrasting the management team’s remarks during earnings calls—such as terms like “a year of refueling at the station” and “insufficient accumulation”—with the market’s widespread focus on robust revenue growth, the report uncovers underlying structural vulnerabilities. Second, it conducts a granular decomposition of margin drivers, examining not only raw material costs but also shifts in channel dynamics (online vs. offline) and the rigidity of fixed costs, concluding that net margins may face greater downward pressure than what is implied by gross margin guidance. Finally, by assessing the implementation challenges of organizational restructuring and the localization hurdles in overseas markets, the report gauges the duration of the transitional pains associated with the company’s shift from “rapid, unstructured expansion” to “refined, disciplined operations,” thereby arriving at a cautious investment outlook.

Methodology notes

• Industry/ Sector Analysis FrameworkSupply-and-Demand Framework

  “Accumulation” and Retention of User Traffic in Overseas Markets

  The research report points out that overseas growth cannot be judged solely by short-term demand surges—such as the Labubu craze—but must also consider whether the supply-side infrastructure—including teams, logistics, and membership systems—can keep pace. If the supply side remains underdeveloped, demand-driven traffic will struggle to translate into sustained repurchase and retention, which helps explain why overseas markets often experience a rapid normalization of traffic levels.

• Company Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  Rising fixed costs and slowing revenue growth are squeezing profits.

  When revenue growth slows—shifting from hyper‑speed to moderate—and fixed costs (rent, labor) continue to rise, operating leverage reverses its effect, leading to a sharp contraction in profit margins. The research report cautions investors to be mindful of this “scissors gap” risk: revenue growth may fail to offset the rigid increase in costs.

• Competition and Strategic FrameworkMoat / competitive advantage

  Balancing Brand Consistency with Local Adaptability

  Pop Mart is strengthening global brand consistency—part of its competitive moat—by centralizing regional decision-making authority, though this may come at the expense of local market agility. The research report analyzes the double-edged nature of this strategic shift: in the long term, it should help build and reinforce brand equity, but in the short term, it could lead to sales declines due to misalignment with local conditions or overly rigid execution.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Pop Mart (9992.HK)

  Core targets are grappling with the growing pains of transitioning from rapid expansion to high-quality operations.

  Strengths

  The IP matrix diversification is beginning to yield results (with Hirono’s rise), while the company’s domestic core business remains robust, and strong cash flow underpins its exploration of new ventures.

  Weaknesses

  Overseas infrastructure remains underdeveloped, and profit margins are under pressure from multiple factors; meanwhile, organizational restructuring introduces short-term execution uncertainties.

  Comparison

  Compared with pure-content companies, its retail-oriented business model makes it more susceptible to supply-chain and channel-cost pressures; meanwhile, compared with traditional retailers, it exhibits a stronger reliance on intellectual property.

  Risks

  Overseas restructuring has failed, the popularity of key IPs has plummeted, and profit margins continue to deteriorate.

Key data

• Overall revenue growth in Q1 202675%-80%All segments have exceeded expectations, with the China region achieving 100%–105%.
• Growth rate of online channels in China150%-155%It is significantly higher than the 75%–80% level for offline channels, causing the channel mix to shift toward lower-margin segments.
• Full-Year Gross Margin Guidance for 2026Decreased by 1 to 2 percentage pointsAffected by multiple factors, including raw material costs, the overseas revenue share, and tariffs.
• Increase in raw material costs3%-5%Inflation in PVC, fabrics, packaging, and other inputs has driven up product costs.
• Next Twelve Months Price-to-Earnings Ratio (NTM P/E)12.3xBased on the projected earnings per share of RMB 11.68 for 2026,

Impact & implications

For Pop Mart, this means that 2026 will be a challenging year of structural adjustment. The company must demonstrate its ability to catch up in overseas markets and reshape its organizational structure without unduly sacrificing profit margins. For investors, the near-term catalysts for the stock price are no longer simply the number of new stores or revenue growth rates, but rather the actual margin levels disclosed in the August earnings report, as well as management’s ability to articulate a sustainable path to earnings expansion. Should the restructuring prove more disruptive than anticipated, or if Labubu’s popularity fades faster than the pipeline of new IPs can sustain it, valuation could come under further pressure.

Risks

• The restructuring of overseas organizations has proven more disruptive than anticipated, resulting in sales disruptions.
• Labubu’s traffic normalization is accelerating, but its new IP has failed to promptly fill the gap.
• Rising raw material costs and fixed expenses have exceeded expectations, severely eroding profitability.
• The overseas flagship store’s return on investment fell short of expectations, weighing down overall capital efficiency.

What to watch

• The Q1 actual profit margin data from the full-year financial report released in August.
• Same-store sales growth (SSSG) and member repurchase rate metrics for overseas stores
• The acceptance and sales contribution of new IPs such as Hirono in overseas markets
• Employee turnover rates and the progress of store closures/relocations during organizational restructuring