Bare Escentuals Drives Up Shiseido Sales, But Takes Toll On Profits

Shiseido Co.’s Bare Escentuals acquisition has helped to increase the firm’s sales in the Americas, but charges associated with the deal have dramatically impacted its bottom line.

The Japan-based cosmetics firm posted a 62% drop in net income to ¥9 bil. for the first three quarters of its fiscal year through Dec. 31, much of it attributed to charges incurred from the deal for Bare Escentuals.

While the mineral makeup brand gave the firm a ¥29.8 bil. bump in net sales, its integration into Shiseido had a ¥5 bil. negative impact on operating income, according to financial documents released Jan. 31.

Shiseido’s overall sales rose 4.8% to ¥487 bil. for the nine-month period.

Bare Escentuals helped lift sales in the Americas to ¥61.7 bil., representing a 91.4% increase in local currency from the prior-year period. Total sales in the Americas made up 12.7% of the firm’s overall sales, compared with 7% over the same period last year.

The prospect of stronger business in the Americas was one incentive behind Shiseido's acquisition of Bare Escentuals in January 2010, which positioned the firm as a more prominent player in the global cosmetics market (Also see "Shiseido Looks To U.S. For Growth With $1.7 Bil. Offer For Bare Escentuals" - HBW Insight, 18 Jan, 2010.).

The firm expected 42% of its business to come from outside Japan following the deal, and eventually looks for the rest of the world to account for 50% of revenue.

Through the first three quarters, sales in Japan made up 59% of the firm's net take despite dropping nearly 5% to ¥287.1 bil.

Shiseido’s financial documents note that while Japan’s economy demonstrated “modest” recovery for certain segments of personal-care spending over the first three quarters, cosmetics were not among them.

The firm tried to strengthen sales in the country through “meticulous rearrangement of targeted stores,” but a “polarized market” and low consumer confidence did not help it raise sales figures in the “difficult market conditions.”

In order to recapture domestic sales, Shiseido believes "it is important to communicate the superiority of our products to consumers." The firm plans to do that by communicating the technologies in its products online and at beauty counters, according to an online presentation by Yasuhiko Harada, director and corporate senior executive officer.

Research analyst Ritsuko Tsunoda of Bank of America/Merrill Lynch Japan wrote in a Jan. 31 note to investors that the “stage is set” for increased competition in Japan, “and it’s hard to imagine that Shiseido can restore its market share” in the short term.

Shiseido aims to continue its growth momentum in Europe and the Americas through the end of the fiscal year and beyond as cosmetics markets in those regions continue to recover, and to forge ahead in the burgeoning Chinese market.

The firm’s Shiseido and NARS brands have both performed well in the Americas, with NARS sales up nearly 40% in the third quarter. Russia has also been a bright spot due to Shiseido's increased store presence, from 300 doors at the end of 2009 to 900 at the end of 2010.

Sales of Shiseido brands in China have grown in the double-digits, driven by solid performances in the country's specialty and department store channels.

Shiseido plans to give a refresh to skin-care line Cle De Peau Beauty – “our most prestigious brand” – this month and is targeting the U.S. and China as strategic markets for the initiative (“Shiseido To Expand Luxury Brand,” “The Rose Sheet” Nov. 1, 2010).

For the year, Shiseido expects revenue to increase while earnings continue on their downward trajectory. The firm's full-year guidance puts net sales at ¥680 bil., down from a previous forecast of ¥688 bil., and income at ¥45 bil., down from a projected ¥50.5 bil.

By Lauren Nardella