Amorepacific, LG H&H face contrasting outlooks for Q2

A new campaign picture for Sulwhasoo featuring Tilda Swinton, a Hollywood actress who was appointed as Sulwhasoo's global ambassador in March (Amorepacific)

Amid the generally sluggish business results of the Korean beauty industry during the first quarter, market analysts provided contrasting second quarter expectations for leading beauty giants LG Household & Health Care and Amorepacific. While the former's prospects appear dim, the latter is expected to rebound with the company's aggressive expansion of sales of its flagship brand Sulwhasoo, said stock market observers Monday.

According to financial market tracker FN Guide, LG H&H's operating profit forecast for the second quarter stood at 19.7 billion won ($14.9 million), a 7.8 percent decrease from the same period last year.

The negative outlook for LG H&H's future performance followed the company's spluttering business results last quarter, during which the company saw a 15.3 percent fall in net profit from a year earlier and a 16.9 percent dip in operating profits.

Analysts largely attributed the company's poor performance during the first quarter to a rise in fixed costs for manufacturing commodities -- in addition to a delayed recovery in consumption sentiment in China, the company's biggest overseas market.

In line with the sluggish performance in the first quarter, market observers added that LG H&H's dull earnings are likely to continue into the second quarter.

"There is a lot of uncertainty in the (cosmetics) business environment, especially in the Chinese cosmetics market," said Cho So-jung, an analyst at Kiwoom Securities in a recent report conjecturing LG H&H's future performance.

"Major (cosmetics) competitors in China are expected to aggressively expand their marketing strategies starting in the second quarter," said Cho, noting that Chinese consumers have recently been showing a strong preference for "buying makeup products from local brands." Cho explained that such factors led to the negative analysis of the company's future performance.

"Uncertainty in the (cosmetics) market is expected to continue for the time being, due to marketing competition among Chinese brands, political risks and uncertainties in consumer preferences," she added.

On the other hand, market observers predicted that Amorepacific will turn to black during the second quarter, despite having suffered tumbling sales which fell 21.6 percent on-year to 913.7 billion won and operating profit which fell by 59.3 percent to 64.4 billion won in the January-March period.

"The estimation is that Sulwhasoo's sales in the second quarter are showing three-digit growth centering on sales in offline channels, reflecting the output of Sulwhasoo's rebranding strategy in its (second quarter) earnings," said Park Hyun-jin, a researcher at Shinhan Investment & Securities.

Recently, Amorepacific initiated a slew of strategies to reconstruct Sulwhasoo's brand image in a bid to lessen its dependence on Chinese sales and attract consumers mainly from North America and Europe -- such as by appointing global celebrities as ambassadors for the brand and launching Sulwhasoo advertisements that appeal to more universal tastes.

Park suggested that Sulwhasoo's drastic change will positively affect other brands in the group, such as the company's low-cost cosmetics brand Innisfree and Laneige.

"Innisfree's share of e-commerce sales in China is estimated to grow by 80 percent during the second quarter," Park said in a report.

"We expect as the demand recovery from China and the effect of brand restructuring will be reflected in Amorepacific's second quarter performance, the company's stock prices will trend upward in the mid- to long-term," Park added.

By Lee Yoon-seo(yoonseo.3348@heraldcorp.com)