KOSE Holdings (4922) FY2026 Q2 Earnings Report

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Executive Summary

Despite higher revenue, operating income declined significantly, making the deterioration in profitability the most important issue for the current period. Revenue increased to ¥1649.2B (+2.7% year on year), but Operating Income declined to ¥66.2B (-41.5%), Ordinary Income to ¥88.2B (-8.2%), and Net Income to ¥56.6B (-27.0%), resulting in lower profit at every level. While the expansion of overseas sales drove the increase in revenue, deteriorating profitability in both the Cosmetics and Cosmetary Businesses, along with higher company-wide expenses, were the causes of the profit decline.

Factors Affecting Performance

【Revenue】Revenue increased 2.7% year on year to ¥1649.2B. The Cosmetics Business (80.8% of composition) grew to ¥1333.0B (+4.2%), while the Cosmetary Business (18.3%) declined to ¥301.9B (-3.4%). By region, Japan declined to ¥1012.0B (-3.4%), while overseas markets supported revenue growth, with Asia at ¥261.4B (+24.0%), North America at ¥326.6B (+5.9%), and Other regions at ¥49.2B (+28.3%).

【Profit and Loss】Operating Income declined 41.5% to ¥66.2B, and the Operating Margin fell significantly to 4.0% from 7.0% in the same period of the previous year. The profit margin of the Cosmetics Business declined to 5.9% (7.7% in the previous year), while that of the Cosmetary Business fell to 4.7% (12.1% in the previous year), with deteriorating profitability in both businesses being the primary cause. Ordinary Income declined 8.2% to ¥88.2B, with the extent of the decline reduced by non-operating income, including foreign exchange gains of ¥12.8B, while Net Income declined 27.0% to ¥56.6B. In conclusion, this was a case of higher revenue but lower profit.

Segment Analysis

The Cosmetics Business recorded Revenue of ¥1333.0B (+4.2%), Operating Income of ¥78.8B (-19.5%), and a profit margin of 5.9% (7.7% in the previous year). The Cosmetary Business recorded Revenue of ¥301.9B (-3.4%), Operating Income of ¥14.1B (-62.6%), and a profit margin of 4.7% (12.1% in the previous year), representing the largest deterioration. The Other Businesses generated Revenue of ¥15.7B and Operating Income of ¥6.1B (profit margin of 39.0%), remaining small in scale but highly profitable. Adjustments for company-wide expenses and other items increased from ¥29.6B in the previous year to ¥32.8B, placing additional pressure on Operating Income.

Key Financial Indicators

【Profitability】The Operating Margin of 4.0% declined significantly from 7.0% in the same period of the previous year, while the Net Profit Margin remained at 3.4%.【Cash Quality】Operating Cash Flow (OCF) was ¥110.4B, approximately 1.9 times Net Income of ¥56.6B, indicating strong cash backing for earnings.【Investment Efficiency】ROE was low at 1.9% (annualized), while capital expenditures of ¥178.4B reached approximately 3.6 times depreciation and amortization of ¥49.0B, indicating a phase of expansionary investment. Inventories totaled ¥444.4B, accounting for 11.4% of total assets, making improved inventory turnover efficiency an issue.【Financial Soundness】The Equity Ratio was 77.9%. Interest-bearing debt was extremely small relative to cash and deposits of ¥768.4B, indicating a solid financial foundation.

Cash Flow Analysis

Operating Cash Flow was ¥110.4B, a significant improvement from -¥3.5B in the same period of the previous year, and exceeded Net Income of ¥56.6B. A decrease in trade receivables (+¥57.2B) contributed to the increase in cash, while an increase in inventories (-¥15.9B) was a negative factor. Investing Cash Flow represented an outflow of -¥192.5B, primarily due to capital expenditures of ¥178.4B, resulting in investment spending substantially exceeding OCF. Consequently, Free Cash Flow was -¥82.1B, indicating that current-period investment could not be funded solely by internally generated cash. Financing Cash Flow was -¥84.1B due to dividend payments, share repurchases, and other items; however, cash and deposits remained ample at ¥768.4B, and investment activities were conducted using available liquidity without relying on financial leverage.

Earnings Quality

The difference between Ordinary Income and Net Income was primarily attributable to extraordinary gains and losses and the tax burden. Extraordinary income of ¥1.5B, including gains on the sale of investment securities, was recorded against extraordinary losses of ¥3.2B, including impairment losses of ¥0.4B. As a result, extraordinary gains and losses were negative on a net basis, and Profit Before Tax was ¥86.5B, slightly below Ordinary Income of ¥88.2B. Foreign exchange gains of ¥12.8B accounted for the largest portion of non-operating income of ¥23.6B, meaning that items differing in nature from recurring business income contributed to Ordinary Income. Comprehensive Income was ¥62.6B, slightly above Net Income of ¥56.6B. Foreign currency translation adjustments of +¥12.3B made a positive contribution, while adjustments related to retirement benefits of -¥8.4B had a negative effect, resulting in only a limited divergence between Comprehensive Income and Net Income. The fact that OCF exceeded Net Income indicates good accrual quality.

Earnings Forecast and Guidance

The Full-Year earnings forecast remains unchanged at Revenue of ¥3500.0B (+6.0% year on year), Operating Income of ¥200.0B (+8.3%), and Ordinary Income of ¥210.0B (-2.2%). The first-half achievement rates were 47.1% for Revenue, 33.1% for Operating Income, and 42.0% for Ordinary Income, with progress in Operating Income substantially below the standard 50% level. Achieving the forecast will require approximately ¥133.8B in Operating Income in the second half, making recovery in the profit margin, which declined in the first half, a key focus. No revision to the forecast was made during this quarter.

Shareholder Returns

The interim dividend is ¥70.00 per share. For the Full Year, the Company plans to pay a total of ¥150.00 per share, comprising an interim dividend of ¥70.00 and a year-end dividend of ¥80.00 (ordinary dividend of ¥70.00 and commemorative dividend of ¥10.00). The Payout Ratio based on first-half Net Income is approximately 74.6%, a high level. The Payout Ratio based on the annual dividend forecast relative to the Full-Year forecast EPS of ¥213.21 is approximately 70.4%. As Free Cash Flow was -¥82.1B, current-period dividends could not be funded by post-investment cash flow; however, the Company has sufficient payment capacity due to cash and deposits of ¥768.4B and low interest-bearing debt.

Risk Factors

1. Deteriorating profitability in the Cosmetary Business: While Revenue declined 3.4%, segment profit fell 62.6%, and the profit margin declined from 12.1% in the previous year to 4.7%. There is a risk that the combined deterioration in sales volume, pricing, and promotional efficiency will continue.

2. Declining domestic sales: Revenue in Japan declined 3.4% year on year to ¥1012.0B, placing pressure on Revenue and the profit margin of the core Cosmetics Business.

3. Inventory and working capital accumulation: Inventories totaled ¥444.4B, accounting for 11.4% of total assets, and increased from the previous year. If demand forecasts are revised downward, the gross margin could deteriorate further through inventory write-downs and discount sales.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company's profitability is substantially below the industry median and ranks toward the lower end of the industry in terms of margins.

Growth and Capital Efficiency

The Revenue Growth Rate is also below the industry median, indicating that top-line growth is relatively moderate within the industry.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. The expansion of overseas sales (Asia +24.0%, North America +5.9%, and Other regions +28.3%) supported higher revenue, while domestic sales declined 3.4%, indicating an ongoing shift in the regional sales mix.

2. The Operating Margin declined from 7.0% in the previous year to 4.0%, with margins deteriorating in both the Cosmetics and Cosmetary Businesses. The first-half achievement rate against the Full-Year Operating Income forecast was 33.1%, below the standard level, making recovery in the second-half profit margin essential to achieving the plan.

3. OCF remained above Net Income, indicating good cash conversion of earnings; however, capital expenditures exceeded OCF, resulting in negative Free Cash Flow. The utilization and recovery of investments will determine future funding trends.

Theoretical Share Price (Reference Value)

Sensitivity: ¥4,337–¥4,581 at ±1% for the Cost of Equity, and ¥4,438–¥4,467 at ±0.1 for ω.

Notes:

• Goodwill amortization of ¥28.6 per share is added back to earnings (due to its non-cash nature and for comparability with IFRS companies).
• As forecast ROE is below the Cost of Equity, the theoretical value is below Book Value per Share.
• Net assets as of the end of the quarter are used (there is a timing difference relative to the Full-Year forecast).

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated value based solely on publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting with a professional advisor as necessary.

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AI Financial Analysis

Executive Summary

FY2026 Q2 was a mixed earnings release: modest top-line growth and strong operating cash generation were outweighed by a sharp deterioration in operating profitability. Revenue increased 2.7% YoY to ¥164.9bn. Gross profit increased to ¥116.5bn and the gross margin was broadly stable at 70.6%, approximately 10bp above the prior-year level. However, SG&A expenses rose 7.9% YoY to ¥109.9bn, materially faster than revenue growth. Consequently, operating income fell 41.5% YoY to ¥6.6bn. The operating margin contracted to 4.0% from approximately 7.1%, a decline of about 300bp. Profit attributable to owners of the parent declined 19.9% YoY to ¥5.7bn, and the net margin fell to 3.4% from approximately 4.4%, or about 100bp. Higher non-operating income, notably ¥12.8bn of foreign-exchange gains and ¥0.6bn of interest income, cushioned the decline from operating income to ordinary income, which fell only 8.2% YoY to ¥8.8bn. This means reported bottom-line resilience was supported substantially by non-core income rather than by an improvement in the underlying earnings engine. Operating cash flow was robust at ¥11.0bn, equal to 1.94x net income and 0.96x EBITDA, supporting the cash realization of reported earnings. Nevertheless, capital expenditures of ¥17.8bn exceeded operating cash flow, resulting in negative free cash flow of ¥8.2bn. The investment program is substantial, with construction in progress representing 39.6% of PPE, indicating that future returns depend on timely commissioning and effective utilization of projects under development. The Cosmetics business remained the core business by segment profit contribution, but its profit declined despite sales growth. Overseas expansion was the principal revenue offset to domestic weakness, with Asia, North America and other regions growing while Japan declined. Management maintained its full-year outlook, but Q2 operating-income progress of 33.1% versus the full-year target is materially below the standard 50% midpoint pace. The second half therefore requires a meaningful improvement in operating leverage, cost discipline and/or seasonal demand realization for the full-year operating-profit target to be achieved.

Profitability Analysis

Annualized DuPont ROE was 3.7%, comprising a 3.5% net profit margin, 0.843x asset turnover and 1.28x financial leverage. The low net margin is the principal constraint on returns, rather than leverage, as the balance sheet remains conservatively financed. Asset turnover of 0.843x provides reasonable support for ROE, but it cannot compensate for the compression in operating profitability. Financial leverage of 1.28x is modest and confirms that the company is not relying on debt to support shareholder returns. The largest adverse movement was the approximately 300bp operating-margin contraction to 4.0%, which is below the 5% operating-efficiency threshold identified in the quality alert. Revenue grew 2.7%, while SG&A increased 7.9%, evidencing negative operating leverage. Promotion expenses rose 11.2% YoY to ¥25.4bn, advertising expenses rose 23.3% to ¥16.4bn, and salaries and allowances increased 5.5% to ¥28.8bn. These cost increases more than absorbed the modest gross-profit gain, even though gross margin remained stable at 70.6%. EBITDA was ¥11.5bn, with a 7.0% margin, while EBITDA before JGAAP goodwill amortization was ¥12.3bn. Goodwill amortization was ¥0.8bn, or 6.6% of pre-goodwill-amortization EBITDA, a moderate JGAAP accounting drag but not the primary cause of the operating-profit decline. The 5-factor analysis shows a tax burden of 0.657 and an interest burden above 1.0x; the latter reflects non-operating income exceeding interest costs rather than debt-driven earnings pressure. Non-operating income totaled ¥2.4bn, or 14.3% of revenue, led by FX gains of ¥1.3bn, interest income of ¥0.6bn and dividend income of ¥0.1bn. This contribution supported ordinary income but should not be treated as equivalent in quality to recurring operating profit. The cosmetics segment is the core business, with revenue of ¥133.3bn, up 4.2% YoY, and segment profit of ¥7.9bn, down 19.5%; its segment margin declined from 7.6% to 5.9%. Cosmetary revenue declined 3.4% YoY to ¥30.2bn and segment profit fell 62.6% to ¥1.4bn, reducing its margin from 12.1% to 4.7%. Other revenue increased 5.5% to ¥1.4bn and segment profit declined 15.0% to ¥0.6bn. Unallocated corporate and basic research costs increased to ¥3.2bn from ¥3.0bn, adding to the pressure on consolidated operating income.

Growth Assessment

Revenue growth was modest but geographically diversified. Japan revenue declined 3.4% YoY to ¥101.2bn, while Asia grew 24.0% to ¥26.1bn, North America increased 5.9% to ¥32.7bn, and other regions rose 28.3% to ¥4.9bn. The geographic mix therefore shifted further toward overseas markets, reducing reliance on Japan but increasing exposure to international demand conditions and currencies. Cosmetics revenue growth of 4.2% was the main contributor to consolidated growth, whereas the 3.4% decline in Cosmetary sales limited momentum. The fact that both major reportable segments generated lower profits indicates that current sales growth is not yet translating into scalable earnings. The full-year revenue forecast is ¥350.0bn, and Q2 cumulative revenue progress is 47.1%, slightly below the standard 50% midpoint but within a normal seasonal range. Full-year operating-income guidance is ¥20.0bn; Q2 progress is 33.1%, 16.9 percentage points below the standard 50% midpoint pace. Ordinary-income progress is 42.0% against the ¥21.0bn forecast, also below the midpoint pace but partly supported by FX-related non-operating income. Profit attributable to owners progress is 47.0% against the ¥12.1bn forecast, close to the standard midpoint pace. The maintained forecast implies a pronounced second-half operating-income recovery, as full-year operating profit is forecast to increase 8.3% YoY despite the 41.5% first-half decline. The outlook is thus dependent on restoring SG&A efficiency, particularly in promotional and advertising spending, and converting overseas sales growth into higher segment margins. The current CapEx intensity is 10.8% of first-half revenue and CapEx/depreciation is 3.64x, signaling a major capacity, infrastructure or modernization investment phase rather than maintenance spending. Construction in progress of ¥38.4bn, equivalent to 39.6% of PPE, reinforces the need to monitor execution timing and subsequent return generation.

Financial Health

Financial health is strong despite the operating-profit weakness. The current ratio is 350.4% and the quick ratio is 276.5%, supported by ¥76.8bn of cash and deposits, ¥50.8bn of receivables and a working-capital surplus of ¥150.6bn. Total liabilities are only 22.1% of total assets, while total equity is ¥304.7bn and the equity ratio is 72.7%. Interest-bearing debt is limited to ¥0.8bn of short-term loans, producing a debt-to-equity ratio of 0.28x, debt/EBITDA of 0.07x and debt/capital of 0.3%. Interest coverage is exceptionally strong at 213.45x on EBIT and 371.61x on EBITDA. The reported 100% short-term debt ratio triggers the refinancing-risk quality alert because all borrowings mature in the short term. In this case, the economic impact is limited because short-term debt is only ¥0.8bn and cash covers it by 96.77x; the maturity profile is a technical monitoring point rather than a material solvency threat. Current assets of ¥210.7bn substantially exceed current liabilities of ¥60.1bn, so there is no current maturity mismatch. Lease obligations total ¥10.0bn, comprising ¥1.7bn current and ¥8.3bn non-current, and represent the principal disclosed fixed payment obligation beyond short-term loans. Accounts payable increased 26.3% YoY to ¥11.6bn, which should be monitored alongside purchasing activity and working-capital discipline. Treasury stock increased in absolute value by ¥2.5bn to negative ¥11.5bn, a 27.8% YoY change, consistent with continued shareholder-return activity and a modest reduction in equity flexibility. Goodwill is ¥4.8bn, just 1.6% of equity and 1.2% of assets, while goodwill/EBITDA is 0.42x; M&A-related balance-sheet risk is low. Intangible assets equal 6.0% of assets, also below levels that would suggest material intangible-asset concentration.

Notable B/S Changes

Accounts payable: +¥2.4bn (+26.3% YoY) to ¥11.6bn - higher trade payables provide some supplier financing, but should be monitored with purchasing levels and the extended cash conversion cycle. Treasury stock: -¥2.5bn (-27.8% YoY) to -¥11.5bn - reflects expanded share repurchases/capital returns; manageable given the strong equity base, but it increases the importance of monitoring total shareholder returns against free cash flow. Construction in progress: +¥16.2bn (+72.7% YoY) to ¥38.4bn - a substantial investment pipeline equal to 39.6% of PPE, creating execution, completion-timing and return-on-capital risk.

Cash Flow Quality

Cash-flow quality was strong in the first half. Operating cash flow was ¥11.0bn, compared with net income of ¥5.7bn, resulting in an OCF/net-income ratio of 1.94x and avoiding the concern threshold of 0.8x. Cash conversion was 0.96x of EBITDA, indicating that EBITDA translated effectively into operating cash flow. The accruals ratio was negative 1.4%, which is consistent with favorable cash realization rather than aggressive accrual-based earnings recognition. Receivables generated a ¥5.7bn operating cash-flow inflow, supporting liquidity. Inventory changes represented a ¥1.6bn cash outflow, requiring attention given the inventory-efficiency alerts. Two reported inventory-day alerts cite 285 days and 167 days under alternative metric presentations; both exceed their respective warning thresholds and point to materially elongated stockholding. The 297-day cash conversion cycle is also far above the 120-day warning threshold. For a cosmetics manufacturer, elevated inventory can reflect broad SKU portfolios, product launches and international distribution lead times, but it also raises obsolescence, markdown and inventory-write-down risk if sell-through weakens. The long cash conversion cycle ties up capital and makes cash flow more sensitive to demand volatility, notwithstanding the favorable first-half receivables movement. Capital expenditure of ¥17.8bn exceeded operating cash flow, producing negative free cash flow of ¥8.2bn. CapEx was 3.64x depreciation, confirming an expansionary investment phase rather than a shortfall in maintenance investment. Investing cash flow of negative ¥19.3bn was therefore predominantly directed toward tangible and intangible investment. Cash and cash equivalents declined by ¥15.9bn to ¥74.9bn, but the remaining cash balance and minimal financial debt preserve substantial funding capacity. The key cash-flow issue is not earnings conversion, which is strong, but whether elevated investment and inventory requirements can be supported by recurring operating cash generation without prolonged negative free cash flow.

Dividend Sustainability

The interim dividend is ¥70 per share, equivalent to an indicated first-half payout ratio of 74.6% based on attributable earnings. The FY2026 dividend forecast is ¥150 per share, consisting of the ¥70 interim dividend and a planned ¥80 year-end dividend, including a ¥10 commemorative dividend. Based on forecast EPS of ¥213.21, the implied full-year dividend payout ratio is approximately 70.4%. This is above the <60% benchmark for a conservatively sustainable payout, but below the 100% level that would indicate an earnings-funded dividend shortfall. Dividend sustainability is supported by the large net-cash balance, low debt and strong liquidity metrics. It is not covered by first-half free cash flow, however: FCF was negative ¥8.2bn and the reported FCF coverage ratio was negative 1.94x. The FCF deficit reflects elevated CapEx rather than weak operating cash conversion. Treasury-stock purchases of ¥3.5bn were also recorded in financing cash flow; including the approximately ¥4.0bn interim dividend commitment, the first-half total return ratio is approximately 131% of attributable earnings. This elevated total return ratio is manageable in the short term given balance-sheet strength, but it would be difficult to sustain through internal cash generation if operating margins remain at 4.0% and investment intensity remains high. The planned year-end commemorative dividend should be viewed as non-recurring when assessing normalized shareholder distributions. The central determinant of dividend flexibility is the recovery of recurring operating profit and free cash flow after completion of the current investment cycle.

Risk Assessment

Business risks include Profitability risk is high: the operating margin fell about 300bp to 4.0%, below the 5% quality-alert threshold, as SG&A grew 7.9% versus 2.7% revenue growth., Cosmetary execution risk is elevated: sales declined 3.4% and segment profit fell 62.6%, with segment margin compressing to 4.7%., Domestic-demand risk remains material because Japan still accounted for 61.4% of revenue and declined 3.4% YoY., International growth increases exposure to regional consumer-demand volatility, channel execution and currency movements; FX gains of ¥1.3bn were material to first-half reported earnings., Industry-specific cosmetics risk includes elevated inventory, product-life-cycle and markdown exposure. Reported DIO alerts of 285 days and 167 days both indicate holdings above relevant warning levels., Construction and project-execution risk is elevated because construction in progress is ¥38.4bn, or 39.6% of PPE; delayed commissioning or low utilization could depress returns on the current investment program..

Financial risks include The 100% short-term debt ratio is a refinancing-risk alert. Its practical impact is currently low because short-term loans are only ¥0.8bn and cash/short-term debt is 96.77x., The 297-day reported cash conversion cycle indicates capital is tied up for an extended period and could pressure cash flow if receivable collection or inventory sell-through deteriorates., Negative free cash flow of ¥8.2bn and CapEx/depreciation of 3.64x create a funding call on cash balances during the investment phase., The interim payout ratio of 74.6% and estimated first-half total return ratio of approximately 131% leave less internally generated capital available if earnings recovery is delayed..

Key concerns include The ROIC quality alert of 3.8%, below 5%, indicates that returns on invested capital are currently below an acceptable value-creation threshold., The maintained full-year operating-income forecast requires a significant second-half recovery because first-half progress is only 33.1% versus a standard 50% midpoint pace., Non-operating income was 14.3% of revenue and included ¥1.3bn of FX gains, making ordinary income less representative of recurring operating performance., High construction in progress and inventory days require evidence that capital deployment and stock levels will translate into revenue growth and margin recovery..

Investment Implications

Key takeaways include Revenue growth and overseas expansion are intact, but first-half earnings demonstrate a material failure to convert sales growth into operating profit., Stable gross margin indicates that the earnings issue is primarily SG&A intensity and operating leverage rather than a broad deterioration in product gross profitability., Operating cash conversion, liquidity and leverage are strong, providing financial capacity to execute the investment program and absorb near-term earnings volatility., The core Cosmetics segment remains profitable and growing, but its lower margin and the severe Cosmetary profit decline make margin recovery the central operating issue., The balance sheet carries low M&A and debt risk, while inventory, construction-in-progress execution and capital-return coverage represent the more relevant financial monitoring areas..

Metrics to watch include Consolidated operating margin and SG&A growth relative to revenue growth, Cosmetics and Cosmetary segment profit margins, Japan revenue trend versus Asia and North America growth, Q3 and FY2026 operating-income progress versus the ¥20.0bn full-year forecast, Inventory days, cash conversion cycle and inventory-related cash flow, Construction-in-progress conversion into productive PPE and post-investment ROIC, Free cash flow after CapEx and the total return ratio, FX gains or losses relative to operating income.

Regarding relative positioning, The company is financially more resilient than a highly leveraged consumer-products peer because of its 72.7% equity ratio, ¥76.8bn cash balance and negligible interest-bearing debt. Operationally, however, a 4.0% EBIT margin, 3.8% ROIC and long inventory/cash-conversion metrics place current efficiency below the stated quality benchmarks. JGAAP goodwill amortization is a moderate but manageable comparability factor, while low goodwill and intangible-asset ratios limit acquisition-related balance-sheet risk.