Channel Restructuring to Proceed in Earnest
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
AmorePacific’s 1Q20 OP proved to be in line with recently lowered consensus. Uncertainties towards both the firm’s DFS channel and its North America and Europe operations remain prominent, but we positively view rising consumption in both China and Korea, the beefing up of the firm’s digital marketing, and a reduced number of poorly performing offline stores.
Channel restructuring to proceed in earnest
We maintain a Buy rating and a TP of W240,000 on AmorePacific. The operating environment for its DFS channel remains unfavorable. Also worrisome, the Covid-19 crisis has been hard hitting ASEAN, North American, and European countries since late March. Accordingly, uncertainties towards the firm’s domestic and overseas earnings have been carrying into 2Q20. But, we positively view the fact that Chinese and domestic market sales (excluding the DFS channel) have been gradually improving this quarter after enduring the worst point in 1Q20. While the firm was expected to postpone its restructuring drive amidst deteriorating operations due to the Covid-19 crisis, it has already in 1Q20 closed down some of loss-making stores and beefed up its digital-centric operations. From 2Q20, channel restructuring is expected to begin in earnest. Based on such, we believe that the firm’s earnings will improve rapidly upon the easing of the Covid-19 pandemic, leading to stronger EV.
1Q20 review: OP arrives in line with lowered consensus; positively view high online sales growth
AmorePacific posted 1Q20 consolidated sales of W1,130.9bn (-22.1% y-y) and OP of W60.9bn (+67.3% y-y), with OP proving in line with both recently lowered consensus and our estimate.
Influenced by the Covid-19 crisis, 1Q20 cosmetics sales slipped 29.5% y-y at the firm’s DFS channel, over 20% y-y at its door-to-door channel, 20% y-y at its department store channel, and 50% y-y at its Aritaum stores. We estimate that local sales in China dropped around 30% y-y due to offline store closures, shorter business hours, and reduced customer traffic. As fixed cost burdens at AmorePacific’s China and Hong Kong operations were exacerbated by the fall in sales, we believe that its overseas businesses turned to the red. On the other hand, its domestic e-commerce sales upped more than 80% y-y, and its Chinese market e-commerce sales climbed 15% y-y even despite logistics disruptions in February. In addition to the company’s strengthened focus upon e-commerce channels, we also favorably view its closings of loss-making offline stores (5 directly operated Aritaum stores in Korea and 18 Innisfree stores in China).