The author is an analyst for Shinhan Securities. She can be reached at hpark@shinhan.com -- Ed.
4Q23 OP falls short due to inventory adjustments at distributors
Amorepacific posted consolidated operating profit of KRW20.7bn (-64% YoY) on sales of KRW926bn (-15% YoY) for 4Q23, missing our estimate (KRW39.4bn) and the market consensus (KRW34.3bn). Sales from the duty-free channel and reverse overseas direct purchases were as weak as expected. Operating loss of the Chinese subsidiary appears to have been higher than foreseen at about KRW49.5bn. Marketing spend increased by 12% YoY, but we find it positive that fixed costs, such as commission fees paid to distributors and depreciation expenses, were down by more than 10% YoY.
By distribution channel, duty-free sales declined 29% YoY to KRW134.5bn, coming in line with expectations. Online sales fell by a single digit YoY overall, as growth in domestic online sales was offset by a drop in reverse overseas direct purchases by Chinese consumers. The road to recovery in China earnings is still tough. The company has continued to make efforts to reduce inventory levels in key distribution channels for stronger financial health. The Laneige brand likely saw sales rise by about 20% as a result. Sales from North America expanded by 37% YoY, driven mainly by Laneige and Innisfree. In Japan, we believe the company is slowly benefitting from the upturn in demand for Korean cosmetics brands as a whole. Although some negatives remain for Amorepacific (weakness in duty-free and China sales), no new negatives were seen in 4Q23 results.
Inventory adjustment underway, M&A effects to kick in from 2024
We urge investors to pay attention to rebranding efforts made by Sulwhasoo, Laneige, and Innisfree, as well as COSRX’s contribution to consolidated earnings. Innisfree and Laneige continue to enjoy an uptrend in earnings, driven by brisk e-commerce sales in China and solid demand in North America and Southeast Asia. Innisfree now accounts for over 80% of e-commerce sales in China with solid growth continuing in the 20% range. COSRX, which will likely be added to consolidated financial statements from May this year, aims to deliver sales of KRW600bn (up from KRW204.4bn in 2022 and over KRW467bn in 2023F) and operating profit of KRW200bn in 2024. As COSRX generates 90% of sales from overseas markets and half of it from North America, its inclusion into consolidated statements should drive a sharp increase in North America’s portion in company-wide profits.
Large-cap top pick in the cosmetics sector
We will need to focus on the absence of new negatives rather than weak 4Q23 earnings. Our annual forecasts for 2024 and 2025 are kept unchanged in view of the strong performance of COSRX and a turnaround in Laneige earnings. Amorepacific remains our large-cap top pick in the cosmetics sector.