Cosmetics
The author is an analyst for Shinhan Securities. She can be reached at hpark@shinhan.com -- Ed.
1Q review: Demand still weak in China but stronger elsewhere
Amorepacific posted consolidated operating profit of KRW64.4bn (-59% YoY) on sales of KRW913.7bn (-22% YoY) for 1Q23, falling short of the market consensus of KRW86.5bn and our estimate of KRW87.8bn. Duty-free sales plunged 53% YoY to KRW82.8bn, underperforming the market average. Sales from the China unit declined more than 40% YoY and missed market expectations. Duty-free channels reported an operating loss due to changes in the allocation of common costs, but we believe earnings were slightly above the breakeven point based on the previous accounting method.
On a positive note, sales increased through offline channels excluding duty- free stores (department stores, multi-brand shops, etc.), and earnings continued on a visible uptrend from cosmetics brands such as Innisfree after turning profitable in 2022. Sluggish earnings from the Sulwhasoo brand should be limited to 1Q23, due to efforts made to exhaust pre-renewal products through sales discounts and inventory depletion in certain domestic distribution channels, with strong growth noted from the start of 2Q23 from sales of renewed products. By region, sales from North America and Europe surged 81% YoY and 107% YoY, respectively. Margins notably improved despite increases in labor costs and marketing spend.
2Q outlook: China demand recovery, brand renewal effect to kick in
Expectations are growing for confirmation of visible earnings improvement at Sulwhasoo following rebranding efforts. Marketing efforts concentrated on the recently-released First Care Activating Serum VI product seem to be leading to actual improvement in earnings, with sales growth of the Sulwhasoo brand through offline distribution channels estimated at triple-digit levels at the start of 2Q23. Positively affected by the dramatic renewal of the Sulwhasoo brand, earnings from Innisfree and Laneige are also continuing on a recovery track. In North American and ASEAN countries, Laneige and Innisfree brands are enjoying stronger-than-expected growth and increasing their margin contribution through the expansion of customer reach. The Innisfree brand will likely focus on increasing e-commerce sales in China beyond current 80% levels with most of its stores in the country set to be closed down by 1H23.
Longer-term uptrend to hinge on turnaround in earnings
Despite weaker-than-anticipated earnings in 1Q23, our earnings projections for 2Q23 onwards remain largely unchanged with effects of the restructuring of brands and distribution channels set to kick in amid improvement in market conditions. We expect to see a mid/long-term uptrend in share price with the return of China demand and positive effect of brand restructuring efforts starting to drive actual improvement in overall earnings.