Shiseido Earnings: Domestic Rebound and Cost Savings Offset China and Travel Retail Headwinds

Narrow-moat Shiseido is off to a good start thanks to healthy growth achieved in Japan and Western markets as well as cost savings extracted from restructuring. A 20% sales growth achieved in Japan was particularly impressive. While core operating profits are well ahead of its internal target, Chinese consumers remain the key swing factor to its profit outlook. Given nearly 1,500 job cuts on the way, we are confident that Shiseido’s attempts to rebuild domestic margins will bear fruit. Yet, we anticipate little change in Chinese consumers’ cautious spending behavior and retailers’ tight inventory control, capping China and travel retail’s growth in 2024. We have fine-tuned our Japan and China assumptions, which leave an immaterial impact on our fair value estimate of JPY 5,600. We continue to view shares, trading at a 20% discount to its intrinsic value, as undervalued.