Cosmetics
The author is an analyst for Shinhan Securities. She can be reached at hpark@shinhan.com -- Ed.
2Q23 review: Booking of mostly one-off costs already known
Amorepacific posted 2Q23 consolidated sales of KRW945.4bn (flat YoY) and operating profit of KRW5.9bn (positive swing YoY). Sales came in line with expectations, while operating profit fell short of our estimate and the consensus by a wide margin. The numbers can hardly be viewed as an earnings shock as weak performance had been anticipated. Operating losses from Asia amounted to KRW25.6bn, with those from China estimated to have exceeded KRW30bn due to inventory clearing of Sulwhasoo products on e-commerce channels ahead of the brand renewal and increased marketing spend.
In ASEAN countries excluding China, sales are seen to have increased by more than 10% YoY. Non-China operating margin fell to a single digit due to incentives paid out to employees for strong sales growth, but will likely recover in 3Q23. Sales from North America and Europe soared by more than 100% YoY, with their margin contribution rising steadily when excluding incentive payments. Domestic duty-free operations performed better than feared, with sales up KRW20bn QoQ to KRW111bn on an upturn in inbound free independent travelers.
Sulwhasoo rebranding pays off, Innisfree and Laneige to turn around
We need to focus on the company’s rebranding efforts for Sulwhasoo and cost reduction in 2H23, rather than past earnings results. Marketing campaigns carried out since April to promote functional products, such as the First Care Activating Serum and Concentrated Ginseng Renewing Serum, have helped to attract new young consumers through online and offline channels. Sulwhasoo emerged as the best-selling cosmetics brand on some shopping malls during its pop-up store events in China, and saw more than a 40% increase in new membership on Tmall and other platforms. Excluding effects of inventory adjustments of Sulwhasoo, sales from cosmetics brands expanded by a single digit in 2Q23.
A turnaround in earnings from Innisfree and Laneige brands is underway. Innisfree has increased the percentage of e-commerce sales in China to 80% levels. The growth of the Chinese e-commerce market remains solid in the high-20% range. In North American and ASEAN countries, Laneige and Innisfree are increasing their margin contribution through Amazon and health & beauty stores. In our view, growth in non-China sales to levels on par with China sales in 2023-2024 is a major investment point for Amorepacific in the mid/long-term.
Passing the trough, slow but clear turnaround
Our profit forecast revision is limited, given declines in marketing spend and inventory clearing costs in 2H23. We see a clear turnaround in earnings from individual brands, albeit at a slower pace. We recommend accumulating Amorepacific shares at current bottom levels.