KOSE Corporation FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥240.51B
• Operating Income: ¥13.57B
• Net Income: ¥10.35B
• EPS: ¥164.50

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

KOSÉ Co., Ltd. (TSE: 4922) reported FY2025 Q3 consolidated results under JGAAP showing modest top-line growth but pronounced margin compression. Revenue rose 0.7% year over year to ¥240.5bn, while operating income fell 27.8% to ¥13.6bn, indicating significant negative operating leverage. Gross profit was robust at ¥166.8bn, translating to a high gross margin of 69.4%, but SG&A intensity remained heavy, with implied SG&A of roughly ¥153.2bn (63.7% of sales). Ordinary income (¥13.5bn) was broadly in line with operating income, suggesting minimal non-operating drag; interest expense was negligible at ¥3m and interest coverage was extremely strong at about 4,525x. Net income declined only 0.3% YoY to ¥9.39bn, outperforming the drop in operating profit, likely reflecting a mix of tax and non-operating factors; however, the detailed tax bridge is not disclosed. The DuPont breakdown yields a reported/derived ROE of 3.23%, driven by a 3.90% net margin, asset turnover of 0.643x, and low financial leverage of 1.29x, indicating that profitability rather than leverage is the main constraint on shareholder returns. The balance sheet is conservative: total assets are ¥374.0bn and total liabilities ¥94.5bn, implying liabilities-to-equity of 0.33x; equity stands at ¥290.3bn. Although the disclosed equity ratio field shows 0.0%, simple computation indicates an equity ratio of approximately 77.6% (equity/assets), underscoring low balance sheet risk. Liquidity is strong with a current ratio of 337.7% and a quick ratio of 281.2%, supported by current assets of ¥240.3bn and current liabilities of ¥71.2bn. Inventories are ¥40.2bn; relative to cost of sales, this implies roughly 204 days of inventory, which merits monitoring in the context of demand normalization and product lifecycle risk. Cash flow statement line items were not disclosed (zeros indicate unreported), limiting assessment of earnings-to-cash conversion and free cash flow. EPS was ¥164.50, implying an estimated weighted-average share count around 57.0 million shares (derived, as share data were not disclosed). Dividend data were also not disclosed this quarter, so payout and cash coverage cannot be assessed directly. Overall, the quarter evidences resilient gross margins but material SG&A pressure and subdued ROE, offset by a very strong liquidity and solvency profile. The key near-term focus is on operating margin recovery through expense discipline and sell-through improvement, while safeguarding brand equity investments.

Profitability Analysis

ROE_decomposition: Reported/derived ROE is 3.23%, decomposed into Net Profit Margin 3.90% × Asset Turnover 0.643x × Financial Leverage 1.29x. The drag is primarily the modest net margin; leverage is intentionally low and asset turnover is moderate for the sector. margin_quality: Gross margin is high at 69.4%, highlighting solid pricing/mix and/or premium positioning. Operating margin is 5.64% (¥13.6bn/¥240.5bn), down markedly YoY as operating income fell 27.8% against a 0.7% revenue increase, implying SG&A inflation (marketing, promotions, personnel, logistics) outweighed gross profit growth. Ordinary income margin is 5.63%, indicating negligible non-operating noise. Net margin is 3.90%. The tax line (¥8.14bn) versus net profit (¥9.39bn) implies a high effective rate on an estimated pre-tax basis, but the reconciliation to ordinary income is not disclosed; treat the derived rate with caution. operating_leverage: Negative operating leverage is evident: a 0.7% revenue increase alongside a 27.8% operating profit decline implies a significantly higher cost base, particularly SG&A. With a high fixed-cost component (brand investment and channel support), incremental sales recovery is needed to restore margin.

Growth Assessment

revenue_sustainability: Top-line growth of 0.7% YoY is modest and likely reflects mixed regional/channel dynamics amid a normalization from post-pandemic tailwinds and varying inbound demand. Sustainability hinges on domestic sell-through, recovery in key Asian markets, and product innovation cadence. profit_quality: Gross profit growth appears intact given the 69.4% margin, but profit quality is pressured at the operating level by elevated SG&A. Ordinary profits track operating profits closely, suggesting low reliance on non-operating gains. The tax/extraordinary items bridge is unclear, limiting visibility into bottom-line normalization. outlook: Near-term growth will depend on marketing ROI, inventory normalization, and demand in China/inbound-related channels. If expense growth moderates and sell-through improves, operating margin can mean-revert. Conversely, sustained promotional intensity or soft China/inbound traffic could cap margin recovery despite stable gross margins.

Financial Health

liquidity: Current assets ¥240.3bn vs current liabilities ¥71.2bn yield a current ratio of 337.7% and a quick ratio of 281.2% (quick assets ≈ ¥200.1bn). Working capital is ¥169.2bn, providing ample buffer for seasonal needs. solvency: Total liabilities ¥94.5bn vs equity ¥290.3bn imply liabilities-to-equity of 0.33x and an implied equity ratio of ~77.6% (despite the disclosed 0.0% field). Interest expense is de minimis at ¥3m; interest coverage is ~4,525x, indicating negligible refinancing risk. capital_structure: Low leverage (financial leverage in DuPont of 1.29x) suggests capacity to fund investment or dividends if desired, albeit ROE is constrained by profitability rather than balance sheet structure.

Cash Flow Quality

earnings_quality: Operating cash flow and investing/financing cash flows were not disclosed this quarter (zeros indicate unreported). As a result, OCF-to-net income, FCF, and cash conversion cannot be evaluated directly. FCF_analysis: Free cash flow cannot be computed without OCF and capex data. Depreciation/amortization was also undisclosed, limiting EBITDA analysis. Given high inventory days (~204), working capital could be a headwind to near-term FCF if demand softens. working_capital: Inventories ¥40.2bn vs COGS ¥71.9bn imply ~204 days of inventory on hand, elevated for a premium cosmetics model and warranting monitoring for obsolescence risk and markdowns. Other working capital components were not disclosed.

Dividend Sustainability

payout_ratio_assessment: Dividend per share, payout ratio, and cash coverage were not disclosed. EPS is ¥164.50, which would support ordinary dividends under typical payout policies, but without OCF we cannot assess payout safety quantitatively. FCF_coverage: FCF coverage cannot be assessed due to missing OCF and capex data. Balance sheet strength (equity ratio ~78%, liabilities/equity 0.33x) provides flexibility, but sustained dividend growth would require confirmation of cash generation. policy_outlook: Given the conservative capital structure and historically industry-typical preference for stable dividends, maintenance of dividends appears feasible in principle; however, actual policy signals should be confirmed upon disclosure of cash flows and formal guidance.

Risk Assessment

Business Risks:

• Demand volatility in China and other Asian markets impacting travel retail and cross-border e-commerce
• Inbound tourism sensitivity affecting domestic prestige and duty-free channels
• Intense competition and promotional activity in premium cosmetics compressing SG&A efficiency
• Product lifecycle and innovation risk across skincare/makeup portfolios
• Brand equity risk if cost cuts reduce marketing effectiveness
• Channel mix shifts (EC vs. department store vs. drugstore) influencing margins
• Regulatory and compliance changes in key markets (ingredients, advertising, animal testing)

Financial Risks:

• Margin sensitivity to SG&A inflation (advertising, logistics, personnel)
• Inventory obsolescence and markdown risk given ~204 days of inventory
• Foreign exchange translation and transaction exposure impacting revenue and COGS
• Tax rate volatility given limited visibility into pre-tax/extraordinary items
• Low ROE (3.23%) relative to typical cost of equity, constraining valuation support if not improved

Key Concerns:

• Operating income down 27.8% YoY despite revenue up 0.7%, evidencing negative operating leverage
• SG&A ratio elevated at ~63.7% of sales, requiring efficiency gains or stronger growth
• Insufficient disclosure on cash flows this quarter, limiting assessment of earnings-to-cash conversion
• High inventory days that could pressure gross margin if sell-through slows
• ROE at 3.23% remains subdued, necessitating margin and/or asset turnover improvement

Investment Implications

Key Takeaways:

• Top line is broadly stable (+0.7% YoY) but operating margins compressed significantly
• Gross margin remains strong at 69.4%, indicating pricing/mix resilience
• Balance sheet and liquidity are very strong (implied equity ratio ~77.6%, current ratio 338%)
• ROE at 3.23% is low due to slim net margins and conservative leverage
• Minimal financial risk (interest expense ~¥3m; coverage ~4,525x) but execution risk on SG&A
• Cash flow insights are limited this quarter due to undisclosed OCF/FCF data

Metrics to Watch:

• Operating margin and SG&A-to-sales ratio trajectory
• Inventory turnover and sell-through trends by channel/region
• Gross margin stability amid promotional activity and input cost changes
• Ordinary income vs. tax/extraordinary items bridge to clarify bottom-line sustainability
• Operating cash flow, capex, and free cash flow once disclosed
• ROE progression via margin recovery and asset turnover
• Regional sales mix (China/inbound exposure) and EC/channel mix shifts

Relative Positioning: Within Japanese cosmetics peers, KOSÉ retains premium gross margins and a notably conservative balance sheet, but currently lags on ROE and operating margin momentum; successful SG&A normalization and inventory management are key to closing the profitability gap.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
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