K-beauty shines globally, but big players face growing pains

Korean beauty’s export boom shows no signs of slowing, with shipments through September nearly matching last year’s total. But third-quarter earnings at the industry’s biggest players paint a less rosy picture.

APR, Korea’s most valuable beauty company worth roughly 10 trillion won ($7.35 billion), led the pack. It doubled its third-quarter sales to a record 773.1 billion won and lifted operating profit 69 percent to 160.6 billion won, with overseas markets supplying 94 percent of revenue.

Despite its strong growth, APR’s operating profit fell short of market expectations, while its operating margin narrowed to 20.8 percent from 24.8 percent in the second quarter. Even so, the margin remained well above those of its larger rivals.

APR estimates that the won’s 12.6 percent rise against the dollar during the quarter shaved 27.8 billion won off operating profit, shrinking both the value of outstanding receivables and the won-denominated value of overseas sales.

To overcome these challenges, APR is pushing ahead with its US expansion. It entered Costco in October and plans to reach some 3,000 CVS Pharmacy stores by year-end.

"A growing overseas share raises currency risk in the short term, but cosmetics-led growth and diversified global channels keep the long-term outlook intact," a report issued by IBK Investment & Securities noted.

Amorepacific met market expectations, with operating profit up 25 percent to 115.2 billion won on an 11 percent rise in sales to 1.13 trillion won. Domestic operations outperformed overseas markets, with operating profit jumping 42 percent at home, compared with a more modest 14 percent increase abroad.

Non-operating results, however, swung to a 44.2 billion won loss from a 6.9 billion won gain a year earlier, dragging net profit down 14.3 percent.

"Most of the non-operating loss came from currency losses after the won strengthened," an Amorepacific official explained, adding that the company is closely monitoring exchange rates.

Amorepacific's lower-priced brands, including Innisfree, Etude and Espoir, remained under pressure, with operating profit plunging 29 percent and sales falling 12 percent amid a sales channel overhaul and fierce competition from indie brands.

LG Household & Health Care’s recovery remains a work in progress. Companywide, operating profit jumped 52 percent to 70.4 billion won, while sales slipped 0.2 percent. Its key beauty division cut its operating loss sharply to 10.9 billion won but has yet to return to the black.

The company’s overseas operations continue to weigh on its performance. Overseas sales fell 12.5 percent, dragged down by China’s 21.1 percent drop and lost revenue from US unit Avon, which it sold in September for 8.4 billion won after investing more than 500 billion won.

Meanwhile, contract manufacturers are faring better, since they largely bill Korean brands in won and face less currency exposure.

Kolmar Korea posted record third-quarter sales of 828.2 billion won, up 21.3 percent, while operating profit jumped 40.5 percent to 81.9 billion won. Its overseas units are still a drag, though, even with the US unit narrowing its loss modestly.

"Sun care and skincare grew evenly, and global clients kept launching new products, delivering our best third quarter on record," a Kolmar Korea official said.