Shiseido Earnings: Profit Rebound Strongly but Remain Far Below Pre-COVID-19 Level; Top Line a Focus

Narrow-moat Shiseido’s 4911 first-quarter profit rebound seemed strong, but the amount of profits remains significantly below the 2019 level, estimated at around 25%, despite the fact that the top-line has fully recovered. Sales grew 6.6% year on year (like-for-like, reported 2.6% growth) while core operating profits nearly tripled from a fairly low base, boosted by strong top-line growth in Western markets and narrowed losses in Japan and China. Given increased marketing investment from the second quarter to capture China and Japan’s reopening demand, we have maintained our forecasts and fair value estimate of JPY 6,100. As a step-up of investment will weigh on profits in 2023, we will focus on tracking its sales progress, especially in the once-lucrative China and Japan markets. We view shares as modestly overvalued, indicating 7% downside to our intrinsic value.

China and travel retail are the only two markets that saw sales decline during the first quarter. While sales in China have picked up from February after reopening, sluggish online sales during the March shopping festival in China and destocking at Korean’s travel retail channel depressed sales. As we have pointed out, Shiseido’s endeavor to channel marketing resources to strengthen its brand equity and reduce dependence on aggressive promotions during key shopping events in China will bring short-term pain but produce more sustainable growth over the long run. We reckon the rollout of the Drunk Elephant brand in China, likely in 2024, will reinvigorate its growth momentum in the market.