Kao Earnings: Sales Dented by Cosmetics Weakness but Margin Leap Lifts Profits; Guidance Cautious

Wide-moat Kao’s JPY 5 billion shortfall in fourth-quarter business profits is worse than our forecast, although we had expected a profit miss as a demand slump dragged China’s cosmetics sales. While the result looks somewhat disappointing at first sight, profits were depressed by a boost of marketing investment and brand rationalization of the cosmetics business. On the other hand, we are encouraged by the fact that price hike benefits continued to progress while volume turned positive during the quarter.