Kose Earnings: Continued Domestic and Tarte Strength Lift Profits; China Recovery Is Not in Sight

Narrow-moat Kose reported another robust quarter, with sales and operating profits up more than 7% and 27% year on year, respectively. Despite China and travel retail headwinds, growth in domestic sales and Tarte, a United States makeup brand, remained healthy in the second quarter. Yet, fear of a deteriorated China outlook and an absence of upward revision sent shares down 15% in two days. While comparison hurdles will become easier from the third quarter, management’s attempt to reduce excess inventory will depress shipment. Yet, we expect the company to revise up profit guidance on the back of rigorous cost control and solid domestic and Tarte sales.