Beauty Industry Faces Deficit Shock... "Second Half Will Be Even Harder"

[Asia Economy Reporter Yujin Cho] Major domestic beauty companies posted disappointing results again in the second quarter. The main cause is the consumption contraction due to the economic downturn caused by the novel coronavirus infection (COVID-19). Although they are striving to escape the crisis by strengthening online channels, the prevailing view is that the deficit shock will continue into the second half of the year.

According to the electronic disclosure system on the 11th, Aekyung Industrial announced yesterday through a preliminary earnings report that its consolidated operating loss in the second quarter of this year was 1.3 billion KRW, turning to a deficit compared to the same period last year (operating profit of 6.1 billion KRW). During the same period, sales amounted to 121.9 billion KRW, down 22.5% from the previous year, and net loss turned to a deficit of 4 billion KRW. For the entire first half, sales also decreased by 16.0% to 282.3 billion KRW compared to the same period last year, and operating profit fell by 61.1% to 11.3 billion KRW.

The cause of the poor performance is the deterioration of the cosmetics business. The slump in the core business of color cosmetics deepened due to COVID-19, leading to worsening results. According to domestic A Home Shopping, Age 20's Essence Cover Pact, Aekyung Industrial's largest cosmetics sales source, was excluded from the top 10 sales list for the first time in the first half of this year. An Aekyung Industrial official explained, "Although the hygiene products division recorded steady sales due to exports of masks and hand sanitizers to China, the slump in color cosmetics and intensified competition in the mid-to-low price range led to poor performance."

Able C&C, which is scheduled to announce its earnings on the 14th, is also expected to inevitably return to a deficit in the second quarter following the first quarter. However, the deficit in the second quarter is expected to improve compared to the first quarter. As earnings plummeted due to the impact of COVID-19, the company is focusing on structural improvements to create a turning point, including recent personnel restructuring.

Able C&C stated, "The consumption landscape of the cosmetics industry is changing almost in real time due to the impact of COVID-19, and since it is uncertain how long the COVID-19 situation will continue, it is difficult to foresee even a short distance ahead." AmorePacific, which previously announced its earnings, also saw its overseas business operating profit turn to a deficit, with second-quarter operating profit falling 60% to 35.2 billion KRW. On the other hand, LG Household & Health Care recorded an operating profit of 303.3 billion KRW, up 0.6%, managing to perform relatively well among the four major beauty companies.

The industry expects the deficit trend to continue for the time being in the second half of the year. The dominant view is that recovery will be difficult unless the impact of COVID-19 ends. According to securities analysts' estimates, all four major domestic beauty companies are expected to record negative growth in operating profit in the third quarter. LG Household & Health Care, which was the only company to show positive growth in the second quarter, is expected to see a 1.45% decrease, while Aekyung Industrial and AmorePacific are forecasted to record operating profit declines of 11.48% and 41.30%, respectively.