Morningstar | Shiseido Reports Another Strong Quarter as Trends Remain Unchanged in 2Q; Stock Looks Rich
Shiseido appears well on track to meet our full-year EBIT estimate of JPY 125 billion. At the halfway point of 2018, it is tracking slightly behind our 14% revenue growth assumption and comfortably ahead of our 11% EBIT margin forecast. We are maintaining our estimates in light of the recent strength of the Japanese yen, particularly against the Chinese renminbi, as this could slow inbound tourist volumes in the later part of the year. We remain skeptical about whether Shiseido's current growth rate is sustainable, and we expect growth to fade to the mid-single digits by 2020. We think the stock is overvalued at its current level.Both the prestige and cosmetics segments posted midteen sales growth in the first half of the year, implying a slight slowdown from the first quarter, but still a strong performance. Asia remains the growth engine, with just under 15% growth. We are impressed with the 10% increase in sales to domestic customers in Japan, as this implies significant share of wallet gains. Growth in sales to inbound tourists in Japan held steady from the first quarter at just under 40%, although we suspect this could fade during the second half of the year if the renminbi remains weak against the Japanese yen. Sales to Chinese tourists were supported in the first half of the year by the relative strength of the renminbi against the yen.
Shiseido's profitability improvement remains impressive. While it is likely that mix is providing a tailwind with the growth of high-margin brands, including Elixir and Nars, contributing to margin expansion, the 7 percentage point increase in the reported EBIT margin points to operating leverage and strong execution. Selling, general and administrative expenses grew at a much slower clip of 7%, although we note that this is higher than the first quarter, implying increased investments behind the brands in the second quarter of the year.
Shiseido is mainly engaged in the manufacture and sale of cosmetics, toiletries, beauty products, health foods, beauty foods and pharmaceuticals. Along with its affiliates, Co. operates in seven business segments: Japan, China, Asia Pacific, Americas, EMEA, travel retail, and professional. Co. markets a wide range of skin care products, hair care products, body care products, perfumes, toiletries, health foods, pharmaceuticals, medical cosmetics, analyzers and other products through cosmetics specialty stores, drugstores, department stores, airport duty free stores and online. Co.'s principal brand names include "SHISEIDO," "cle de peau BEAUTE," "ELIXIR," "MAQuillAGE," "NARS" and "IPSA."
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