Weak Chinese economy takes its toll on Shiseido’s finances

Two weeks ago, Standard & Poor's Ratings Services revised the outlook on its long-term rating on Shiseido to negative from stable.

This has also seen analysts at Reuters say that due to poor performance in China, it has reduced the likelihood the company will improve its credit metrics within a timeframe that Reuters had previously expected.

“We expect Shiseido's operating performance to deteriorate because the economy in China, where it had built a strong presence and achieved a higher margin, has slowed,”​ says Reuters.

China takes the hit​

Shiseido maintains high brand recognition worldwide and still holds a leading position in Japan's cosmetics market, with strong capabilities in product development and market research.

Reuters reiterates that its assessment of Shiseido's business risk profile remains "strong," although its core, mid-priced cosmetics continue to suffer because domestic demand for cosmetics is polarized between high- and low-priced products.

The cosmetic company’s sales for the first half of fiscal 2012 (April to Sept. 30, 2012) slipped 0.8 percent year-on-year to JPY333.6 billion ($4.04bn).

Operating income fell 61.2 percent to JPY8.3 billion, reflecting a lower gross profit due to a decline in domestic sales, increased investments in sales counters and overseas advertisements, especially in China, and marketing outlays for a new business model in Japan.

As a result, Shiseido's consolidated EBTIDA margin fell to 8percent from 12 percent in the same period of the previous fiscal year., prompting analysts to reassess the firm’s current status.

Negative outlook​

Reuters states that Shiseido's financial risk profile is "modest," as it features strong liquidity and good access to diversified sources of funding.

Standard & Poor's continues to view Shiseido's liquidity as strong, with a ratio of cash sources to uses of above 1.5x over the next few years; and the maturity dates of its total debt, as well as its financing sources, are diversified.

“The outlook on the long-term rating is negative,”​ continues Reuters. “Any increase in earnings from Shiseido's business in Asia will be capped by expected weakness in China's economy, which had long supported companywide profit growth.”​

“We expect Shiseido's financial position to improve only gradually given its weak operating performance overseas, although the company has kept a policy of reducing debt.”​