Shiseido is a Japanese cosmetics company founded in 1872 by Arinobu Fukuhara, the former head pharmacist for the Imperial Japanese Navy. Fukuhara opened a pharmacy after leaving the navy and added a soda fountain after visiting stores in the United States. In 1917, the company introduced face powder and began expanding its footprint. Today, Shiseido is one of the world’s leading cosmetics businesses with 2024 sales of nearly $7 billion.
In addition to Shiseido products, the company owns leading brands such as NARS and Cle de Peau. Drunk Elephant is among its up-and-coming marks. Unfortunately, revenues have been on a downward trend since 2022 when sales to China began to decline. The recession caused by the Chinese real estate collapse has been a problem for most luxury brands. Shiseido (SSDOY) stock has fallen by over 66% over the past five years, and the market capitalization stands at $6.4 billion (909 billion JPY).
I became interested in Shiseido when I saw that Independent Franchise Partners, the London-based activist firm, had taken a 5.2% position in the company. Japan’s notoriously sclerotic corporate culture is slowly becoming more accountable to shareholders. The company has introduced its 2026 “Action Plan” which aims to grow sales and expand margins. Changes can’t come fast enough. Shiseido stumbled to a loss of 9.3 billion yen in 2024.
The contrast with the French cosmetics giant L’Oreal is stunning. L’Oreal posted sales of $49.6 billion last year, and operating profits of $9.4 billion. L’Oreal (LRLCY) has a market capitalization of $208.7 billion and trades at an EV/EBITDA multiple of 18.6x. L’Oreal boasts a return on capital nearing 19%. Operating margins are a healthy 19%. Meanwhile, Shiseido trades for a multiple of 14.4x with much more debt than the French company.
The most glaring difference between the two glamour brands is the level of employment costs. L’Oreal generated nearly $525,000 per employee last year while Shiseido sales-per-employee amounted to roughly $250,000. Although Shiseido employees are about $30,000 less expensive per head, the overall labor effectiveness for the French company is more than 35% better.
I don’t have any insights into why such a disparity exists. Japan has a famously attentive customer service culture that may demand a higher number of sales staff. Perhaps L’Oreal outsources more aspects of their business. Whatever the case, Shiseido will have to dramatically reduce headcount if they are going to reach their stated goal of 7% operating margins.
Judging by 2024 financial results, Shiseido remains overvalued despite its protracted market slump. I used an earnings power valuation method to calculate the value of the business based upon last year’s numbers. I applied a discount rate of 6.12% for capitalization purposes. Debt, 30% of the weighting, costs Shiseido 1.64%. I estimated the cost of equity to be 8.2%, given Japan’s higher default spread and equity risk premium. On this basis, Shiseido has a value of less than 228 billion yen. The result of my equation is more punitive than illustrative – Shiseido book value exceeds 632.4 billion yen.
What happens if the company achieves the sought-after 7% margins? I adjusted the numbers and the market capitalization reaches 988 billion yen, only slightly better than the current market price. Finally, I wondered what could happen with L’Oreal’s margins. “Le Shiseido” is worth about 2.3 trillion yen – or about 150% more than its current value.
I’m pressing the pause button. There is no margin of safety at the current price, and the resuscitation of the Chinese consumer will probably take a few more years. The leadership of Shiseido recognizes the problem, but it’s not clear that the “Action Plan” goes far enough. I’m sure Independent Franchise Partners won’t find the projections sufficient for their return requirements.
Will radical changes come to Shiseido? Japan, Inc. seems serious about unlocking shareholder value. Even beleaguered Estee Lauder (EL) manages an operating margin of 8% excluding impairment and restructuring charges, so the target seems underwhelming. Shiseido has rarely delivered returns on capital in excess of the high single digits – even in the heady days of lockdown makeovers.
An opportunity may arise to own part of a 150-year-old brand which is a staple of the Asian beauty market for what it traded for ten years ago, but it will require much more than an “Action Plan”. Some day, perhaps soon, a slimmed-down Shiseido may eventually beckon from the mirror.
DISCLAIMER
The information provided in this article is based on the opinions of the author after reviewing publicly available press reports and SEC filings. The author makes no representations or warranties as to accuracy of the content provided. This is not investment advice. You should perform your own due diligence before making any investments.