EUR 850.00 For Business Accounts Only

Morningstar | Shiseido Slows in 3Q as Inbound Tourism Demand Weakens; Shares Slightly Rich

After nine months of the year, Shiseido is performing in line with our forecasts and we are reiterating our narrow moat rating and JPY 6,900 fair value estimate. Management’s full-year guidance is below our estimates, but it looks conservative and we are not making major changes to our estimates. We continue to think that management’s 2020 targets are achievable but we believe this is priced into the market price, which we regard as being slightly overvalued.

As we had expected, growth in the prestige segment slowed in the third quarter, but the 9% growth rate during the first nine months of the year is still very impressive and implies significant share gains. Asia remains the growth engine, with 15% growth, although Japan slowed to around 3% from around 10% in the first half. As expected because of the weak renminbi, growth in sales to inbound tourists in Japan slowed to 28% in the nine-month period, implying that growth faded to a mid-single-digit rate in the third quarter. On a shipment basis, domestic sales slowed sequentially to just 1%, from 17% in the second quarter, in part likely because of disruption caused by the flood in southwest Japan.

Our valuation, as well as management’s medium-term targets, depend upon margin expansion. We model over 5 percentage points of margin expansion during our five-year forecast period, but in the third quarter, Shiseido’s EBIT slipped by almost 6 billion yen, or 280 basis points at the margin, due to significantly higher marketing spending of almost JPY 13 billion. We expect this brand spending to support sustained above-industry average sales growth in the medium term, however.