Shiseido Earnings: US Sales Decline a Surprise; More Strategic Measures to Address China Weakness

Narrow-moat Shiseido’s second-quarter results fell short of its internal targets due to an unexpected sales decline in the United States and persistent weakness in travel retail and China business. Given normalized US production and more measures to tackle soft China demand, we expect Shiseido will make up for the JPY 3 billion core-operating-profit shortfall in the second half. We have finetuned our foreign exchange assumptions, which leaves an immaterial impact on our fair value estimate of JPY 5,600. The pain incurred during the business normalization process in China and travel retail is inevitable but necessary for building a resilient and profitable business model in the largest beauty market. We anticipate the hardship will accelerate organization transformation and cost-cutting, enabling profits to leap once sales return to the growth trajectory. We view shares as undervalued, trading at a 20% discount to our intrinsic value. Our net profit forecast for 2024 is largely in line with the company's guidance.