Shiseido’s stock plummets as beauty giant faces most significant decline in 16 years due to weak China demand

13 Nov 2023 --- Shiseido has been hit with its most significant decline in 16 years as the Japanese cosmetics company revised its full-year profit outlook due to weakened demand from Chinese consumers. This downturn follows concerns stemming from the discharge of treated radioactive wastewater at Fukushima in August.

Japanese businesses reliant on consumer demand in China have been grappling with challenges, particularly after Chinese online netizens boycotted Japanese cosmetics brands in response to the treated water release from the damaged Fukushima nuclear plant. 

On Monday, the company’s stock plummeted by as much as 14% in Tokyo by noon, hitting its daily limit and marking the most substantial intraday drop since October 2008. Shiseido revised its forecast for core operating profit for the year ending December 31, reducing it by 42% to ¥35 billion (US$231 million) on Friday.

Shiseido shares have declined by approximately a third, and Pola Orbis Holdingsand Kose have also seen decreases in their stock values.

Travel retail fails to take off
Shiseido’s sales in the first nine months of fiscal year 2023 declined 5.3% year on year to ¥722.4 billion (US$4.7 billion), down 8.9% year on year on a FX-neutral basis, or up 5% year on year on a like-for-like basis, excluding the impacts from foreign exchange and business transfers.

Core operating profit increased by ¥0.6 billion (US$3.9 million) year-on-year to ¥36.8 billion (US$242.3 million), while the company’s EBITDA margin was listed at 10.4%.

Net sales on a like-for-like basis declined year on year in the company’s Travel Retail Business segment, which continues to be affected by “retailer inventory adjustments in light of the tighter regulations.”

Other big beauty players, including Beiersdorf and L’Oréal, have reported similar losses in travel retail sales this year, attributing the emergent “daigou” surrogate shopping culture in China.

In contrast to “solid” performance seen in the first half of the year, Shiseido’s net sales in the China Business declined year on year on a like-for-like basis in the third quarter, due primarily to the unfavorable impact of the weakening sentiment towards China’s economy and the Fukushima plant issue.

“While the ongoing challenges by retail inventory adjustments in the Travel Retail Business continued to weigh on our business, we managed to achieve a year-on-year growth in net sales on a like-for-like basis through strategic marketing investments aligned with trends in markets. We also accelerated our agile cost management which contributed to profits,” highlights Shiseido.

“Profit attributable to owners of parent declined ¥8.5 billion (US$56 million) year-on-year to ¥20.5 billion (US$135 million), reflecting the impact of non-recurring items such as an impairment loss, costs on structural reforms and losses on business transfers incurred by the transfer of manufacturing operations of personal care products as well as an impairment loss on the integration of two factories in Osaka Prefecture, which outweighed an increase in core operating profit.”

Domestic sales sustain growth
Nevertheless, Shiseido’s net sales in the Japan Business delivered steady growth year-on-year on a like-for-like basis through strategic new product launches and marketing activity enhancements aimed at capturing the post-pandemic market recovery and rising demand from foreign tourists.

In Japan, Shiseido saw a steady increase of users for its Clé de Peau Beauté and its brands, as well as strong sales growth. Elixir also continued to show strong growth driven by its renewed products, as did Anessa.

“Many of our brands also benefited from the rising number of foreign visitors entering Japan which drove a gradual recovery in inbound tourism consumption,” notes Shiseido. “As a result, net sales were ¥191.6 billion (US$1.3 billion), up 7.3% year on year, or up 7.8% on a like-for-like basis excluding business transfer impacts.”

“Core operating loss was ¥0.2 billion [US$1.3 million], returning to profitability in the third quarter with an improvement of ¥5.7 billion [US$37.5 million] year-on-year, thanks to the higher gross profit driven by an increase in sales as well as our cost management efforts.”

Asia-Pacific business
In the countries and regions of Shiseido’s Asia-Pacific Business, Taiwan returned to growth, while ongoing strength was observed in South Korea and Southeast Asia.

Overall, NARS and Shiseido continued to drive growth in the region. As a result, net sales increased 0.1% year on year to ¥48.8 billion (US$321.2 million) on a reported basis, down 5.1% year on year on a FX-neutral basis, or up 14.2% year on year on a like-for-like basis excluding foreign exchange and business transfer impacts. 

Core operating profit decreased year on year by ¥2.4 billion (US$16 million) to ¥1.7 billion (US$11 million), as gains on gross profit by an increase in net sales was more than offset by rising costs incurred by marketing investments and personnel and other expenses. 

Americas business
In Shiseido’s Americas Business, Drunk Elephant, which was promoted by social media marketing, continued to see significant growth. Meanwhile, NARS and Shiseido also grew steadily. 

As a result, net sales were ¥81.7 billion (US$538 million), down 16.6% year on year on a reported basis, down 22.3% year on year, or up 17.9% year-ar on a like-for-like basis excluding foreign exchange and business transfer impacts. 

Core operating profit decreased by ¥0.3 billion (US$2 million) year-on-year to ¥6.5 billion (US$43 million), primarily due to higher personnel costs and impacts from business transfers, offsetting the gains on gross profit by an increase in net sales on a like-for-like basis. 

EMEA business
In the EMEA business, NARS continued to drive overall growth in sales as Shiseido reinforced its digital marketing strategy and accelerated the rollouts of new products. 

“We also enjoyed strong growth delivered by Narciso Rodriguez, which benefited from the success of the newly launched All of Me,” highlights Shiseido.

Sales of Drunk Elephant and Clé de Peau Beauté steadily increased as well, with a growing brick-and-mortar footprint. 

As a result, net sales were ¥82.5 billion (US$543 million), down 8% year on year on a reported basis, down 16.4% year on year on an FX-neutral basis, or up 16% year on year on a like-for-like basis excluding foreign exchange and business transfer impacts. 

Core operating profit decreased by ¥4.2 billion (US$28 million) year-on-year to ¥4.4 billion (US$29 million), owing primarily to the impact of business transfers. 

By Benjamin Ferrer