KOSE Holdings Corporation FY2026 Q2 Earnings Report

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Executive Summary

The second quarter was characterized by higher revenue but lower earnings, as the upfront burden of promotional and advertising investments pressured profitability. Revenue increased to 1,649.2B yen (+2.7% year on year), while Operating Income declined to 66.2B yen (-41.5%), Ordinary Income to 88.2B yen (-8.2%), and consolidated Net Income to 56.6B yen (-27.0%). The sharp decline in Operating Income was primarily attributable to advertising expenses (+23.3%) and sales promotion expenses (+11.2%) significantly outpacing revenue growth. Ordinary Income declined less than Operating Income because of increased non-operating income, including a foreign exchange gain of 12.8B yen.

Factors Affecting Performance

【Revenue】The Cosmetics segment drove overall revenue growth, with revenue of 1,333.0B yen (+4.2% year on year), accounting for 80.8% of total revenue, while Cosmetaries posted revenue of 301.9B yen (-3.4%), representing a decline. By region, Japan softened to 1,012.0B yen (-3.4%), while Asia increased to 261.4B yen (+24.0%) and North America to 326.6B yen (+5.9%), with overseas growth supporting the overall increase in revenue.

【Profit and Loss】Gross profit was 1,164.7B yen, maintaining a gross margin of 70.6%, but selling, general and administrative expenses expanded to 1,098.5B yen (+7.9% from 1,018.4B yen in the previous year), putting pressure on Operating Income. The primary drivers of the increase were advertising expenses of 163.9B yen (+23.3%) and salaries and allowances of 288.4B yen (+5.5%). The expansion in expenses significantly exceeded revenue growth of +2.7%, causing operating leverage to reverse. By segment, Operating Income was 78.8B yen for Cosmetics (-19.5%, margin of 5.9%) and 14.1B yen for Cosmetaries (-62.6%, margin of 4.7%), indicating lower profitability in both segments. Non-operating income increased to 23.6B yen from 11.1B yen in the previous year, primarily due to the recognition of a foreign exchange gain of 12.8B yen, supporting Ordinary Income of 88.2B yen (-8.2%). Consolidated Net Income of 56.6B yen (-27.0%) was also pressured by extraordinary losses of 3.2B yen, including impairment losses of 0.4B yen, exceeding extraordinary income of 1.5B yen. Higher revenue but lower earnings.

Segment Analysis

The reported segments comprise Cosmetics and Cosmetaries. Cosmetics recorded revenue of 1,333.0B yen (+4.2% year on year) and Operating Income of 78.8B yen (-19.5%), with its margin declining to 5.9% from 7.4% in the previous year. The segment accounted for 80.8% of the revenue mix, indicating a high degree of dependence. Cosmetaries recorded revenue of 301.9B yen (-3.4%) and Operating Income of 14.1B yen (-62.6%), with its margin falling substantially to 4.7% from 8.0% in the previous year, making it the segment with the most pronounced deterioration in profitability. Regional revenue was 1,012.0B yen in Japan (-3.4%), 261.4B yen in Asia (+24.0%), 326.6B yen in North America (+5.9%), and 49.2B yen in other regions (+28.3%). Overseas revenue as a whole grew by double digits year on year, and geographic diversification contributed to overall revenue growth.

Key Financial Indicators

【Profitability】The Operating Income margin was 4.0%, down approximately 3.0pt from 7.1% in the same period of the previous year. The consolidated Net Income margin also declined to 3.4% from 4.8% in the previous year, while ROE remained at 1.9%. 【Cash Flow Quality】Operating CF of 110.4B yen was approximately 1.95 times consolidated Net Income of 56.6B yen, indicating that earnings were supported by cash generation. 【Investment Efficiency】Capital expenditures of 178.4B yen reached approximately 3.6 times depreciation and amortization of 49.0B yen. Construction in progress accumulated to 384.5B yen (+72.7% year on year), indicating an investment-led phase and reflected in low capital efficiency. 【Financial Soundness】The Equity Ratio was 77.9%. Current assets of 2,107.4B yen compared with current liabilities of 601.4B yen resulted in a current ratio of approximately 350%. Cash and deposits were 768.4B yen (-16.9% year on year), while the financial foundation remained strong.

Cash Flow Analysis

Operating CF improved significantly to 110.4B yen from -3.5B yen in the same period of the previous year, generating cash equivalent to approximately 1.95 times consolidated Net Income of 56.6B yen. The primary driver of the improvement was collection progress resulting from a decrease in trade receivables of 57.2B yen, partially offset by an increase in inventories of -15.9B yen and a decrease in trade payables of -21.3B yen. Investing CF was -192.5B yen, including capital expenditures of 178.4B yen, approximately 3.6 times depreciation and amortization of 49.0B yen. Large-scale investments continued, with construction in progress accumulating to 384.5B yen (+72.7% year on year). Financing CF was -84.1B yen, primarily reflecting shareholder return expenditures such as dividend payments (39.95B yen) and share repurchases. Free cash flow, calculated as the sum of Operating CF and Investing CF, turned negative at -82.1B yen. Although cash and deposits declined to 768.4B yen (-16.9% year on year), the financial foundation remained strong, with an Equity Ratio of 77.9% and a current ratio of approximately 350%.

Quality of Earnings

There was a divergence between Operating Income of 66.2B yen and Ordinary Income of 88.2B yen. This difference resulted from non-operating income of 23.6B yen, including a foreign exchange gain of 12.8B yen, substantially exceeding non-operating expenses of 1.6B yen. Because foreign exchange gains are partly dependent on market conditions, they should be distinguished from recurring earnings power. Extraordinary income of 1.5B yen, consisting of gains on the sale of investment securities, was outweighed by extraordinary losses of 3.2B yen, including impairment losses of 0.4B yen, resulting in a net negative contribution. Profit Before Tax of 86.5B yen was therefore slightly below Ordinary Income of 88.2B yen. Operating CF of 110.4B yen exceeded consolidated Net Income of 56.6B yen, indicating low accruals and sound cash support for earnings. Comprehensive income was 62.6B yen, including 62.5B yen attributable to owners of the parent. Foreign currency translation adjustments of +12.3B yen and valuation differences on securities of +2.0B yen were added to Net Income attributable to owners of the parent of 56.8B yen, while adjustments related to retirement benefits of -8.4B yen were a downward factor. As a result, comprehensive income was slightly above Net Income.

Earnings Outlook and Guidance

Progress against the full-year company forecast was generally at an appropriate level for first-half results: revenue was 47.1% (1,649.2B yen/3,500.0B yen), Ordinary Income was 42.0% (88.2B yen/210.0B yen), and Net Income attributable to owners of the parent was 47.0% (56.8B yen/121.0B yen). In contrast, progress for Operating Income was substantially lower than that of the other indicators at 33.1% (66.2B yen/200.0B yen). Improving the Operating Income margin in the second half will be necessary to achieve the full-year plan (+8.3% year on year). No revisions were made to the earnings or dividend forecasts during the quarter.

Shareholder Returns

An interim dividend of 70 yen was paid, and the full-year dividend forecast is 150 yen, comprising a regular year-end dividend of 70 yen plus a commemorative dividend of 10 yen, for a total year-end dividend of 80 yen. Based on the full-year company forecast for Net Income attributable to owners of the parent of 121.0B yen and approximately 56.75 million shares outstanding after excluding treasury shares, the annual dividend payout is calculated at approximately 85.1B yen, resulting in a Payout Ratio of approximately 70.4%. Operating CF of 110.4B yen exceeds the annual dividend payout, but free cash flow was negative at -82.1B yen for the current period, and share repurchases are continuing. The availability of funds for shareholder returns after capital expenditures peak is an item requiring monitoring.

Risk Factors

1. Profitability risk from the expansion of SG&A expenses: Advertising expenses increased by +23.3% and sales promotion expenses by +11.2%, significantly exceeding revenue growth of +2.7%. The Operating Income margin declined to 4.0% from 7.1% in the previous year. If similar expense increases continue in the second half, efficiency improvements will be necessary to achieve the full-year Operating Income plan of 200.0B yen (progress rate of 33.1%).

2. Investment recovery risk associated with front-loaded capital expenditures: Construction in progress accumulated to 384.5B yen (+72.7% year on year), while property, plant and equipment expanded to 970.0B yen (+18.6%). Capital expenditures of 178.4B yen were approximately 3.6 times depreciation and amortization of 49.0B yen. Until the facilities commence operations, the increase in depreciation and amortization may continue to pressure profit margins.

3. Differences in profitability by segment: Operating Income at Cosmetaries declined sharply to 14.1B yen (-62.6% year on year), with its margin falling to 4.7%. Dependence on Cosmetics, which has a margin of 5.9% and accounts for 80.8% of the revenue mix, is increasing. The high degree of dependence on a single segment is evident.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The company's Operating Income margin and Net Income margin are both below the industry median, placing its profitability relatively low within the industry.

Growth and Capital Efficiency

Revenue growth 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 Financial Results

1. The primary reason Operating Income declined sharply by -41.5% despite higher revenue was the increase in advertising and sales promotion expenses. The gross margin of 70.6% remained largely unchanged from the previous year. Changes in the SG&A expense structure, rather than the cost of sales structure, primarily explain the earnings fluctuation in the current period.

2. Construction in progress reached 384.5B yen, an increase of +72.7% year on year, confirming progress on large-scale investments. Capital expenditures at approximately 3.6 times depreciation and amortization indicate future production capacity expansion, while the period until operations commence will increase the fixed-cost burden.

3. Operating CF was approximately 1.95 times consolidated Net Income, indicating that cash-generating capacity supporting earnings has been maintained. However, expanded capital expenditures resulted in free cash flow of -82.1B yen. The balance between investment and shareholder returns will be an important focus in assessing future funding trends.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly available data using a residual income model (Ohlson-type model with an explicit 5-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥4,337–¥4,581 at a ±1% change in the cost of equity, and ¥4,438–¥4,467 at a ±0.1 change in ω.

Notes:

• Goodwill amortization of 28.6 yen per share is added back to earnings (for non-cash expense treatment and comparability with IFRS companies).
• Because forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end are used, resulting in a timing difference from the full-year forecast.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value does not forecast or guarantee future share prices)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary 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 responsibility, and you should consult a professional as necessary.

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