Global Expansion Of High-Profitability Brands Will Strengthen Customer Loyalty

Key Takeaways

• Strategic investments and structural reforms are aimed at enhancing profitability, brand value, and customer loyalty, driving revenue growth and improving net margins.
  
• Global cost efficiencies and expanded structural reforms should boost net margins and free cash flow by reducing operational costs.
  
• Sluggish consumer spending, competition, and structural reform challenges impact revenue, profit margins, shareholder returns, and market position, raising financial and operational uncertainties.

Catalysts

Engages in the production and sale of cosmetics in Japan and internationally.

• Shiseido plans to expand its core brands globally and increase marketing investments by ¥10 billion, focusing on high-profitability and growth-potential brands. This is expected to drive revenue growth and improve net margins due to enhanced brand value and customer loyalty.
  
• Structural reforms, especially in Japan, are projected to yield significant profit growth by improving product mix, launching new products, and reducing personnel costs. These changes are likely to increase net margins significantly.
  
• In the Americas, Shiseido aims to recover and optimize costs by strengthening key brands and enhancing brand marketing. This effort is expected to drive revenue growth and improve earnings by stabilizing and expanding its market presence.
  
• The company is focusing on strategic investments in growth areas and structural reforms, aiming to secure financial flexibility and improve long-term corporate value. These initiatives are likely to enhance net margins and contribute to earnings growth.
  
• Shiseido is improving global cost efficiencies by achieving planned effects and expanding its structural reform efforts globally. This is expected to improve net margins and free cash flow by reducing operational costs.

Shiseido Company Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shiseido Company's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.1% today to 4.6% in 3 years time.
• Analysts expect earnings to reach ¥50.1 billion (and earnings per share of ¥125.37) by about April 2028, up from ¥-10.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥64.8 billion in earnings, and the most bearish expecting ¥32.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.8x on those 2028 earnings, up from -85.4x today. This future PE is greater than the current PE for the JP Personal Products industry at 25.5x.
• Analysts expect the number of shares outstanding to decline by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.16%, as per the Simply Wall St company report.

Shiseido Company Future Earnings Per Share Growth

Risks

• Reduction in dividends from ¥30 per share to ¥10 per share could indicate financial strain or prioritization of cash reserves, potentially affecting investor confidence and impacting shareholder returns. [Cash flow and shareholder returns]
  
• Sluggish consumer spending in key markets such as China and challenges in Travel Retail could hinder expected revenue growth, potentially leading to lower-than-anticipated sales. [Revenue]
  
• Structural reform expenses and provisions for financial expenses have led to a net income deficit, highlighting potential ongoing financial restructuring challenges that may constrain profitability. [Net margins and earnings]
  
• Intense competition and slower-than-expected recovery in the Drunk Elephant brand could result in continued sales decline in the Americas, affecting overall revenue and market position. [Revenue and competitive positioning]
  
• The need for further structural reforms and the focus on cost reduction, including personnel reductions, might lead to uncertainties in operational efficiency and execution, posing risks to maintaining profit margins. [Operational efficiency and profit margins]

Valuation

• The analysts have a consensus price target of ¥2817.538 for Shiseido Company based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥3240.0, and the most bearish reporting a price target of just ¥1700.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥1080.2 billion, earnings will come to ¥50.1 billion, and it would be trading on a PE ratio of 26.8x, assuming you use a discount rate of 6.2%.
• Given the current share price of ¥2313.0, the analyst price target of ¥2817.54 is 17.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.