Shiseido Co Ltd

TSE:4911

Earnings Call Transcript 2022-Q3

[Takayuki Yokota, executive]

I would like to present to you the third quarter results for fiscal year 2022. First, please have a look at Page 3. This is the key headlines for Q3 of 2022. There are 5 key points I would like to cover today. The like-for-like net sales, excluding impact from all business transfers and exchange rate was up by 2% year-on-year. The growth was led by Japan, which experienced recovery even in the mid-price range in Q3, and EMEA keeping its strong momentum.

The China market experienced slow recovery due to the continued lockdowns in different cities, resulting in slow trend of shipment sales. .

However, consumer purchase showed strong growth exceeding global competitors, expanding our share. Along with the uncertainties in the economic market environment, there has been global retail inventory adjustments. This is especially seen in China, but the company as a whole is experiencing stronger consumer purchase over shipment sales, showing improvement in trend compared to the previous year. The sales ratio of Skin Beauty brands remained high at 74%. The e-commerce ratio was 31%. The Q3 year-to-date growth rate turning around to plus 2% year-on-year. This was thanks to strengthening the EC platform touch points, growing the EC sales in China. .

The core operating profit was JPY 36.2 billion, an increase of JPY 6.5 billion year-on-year. This was due to the continuous efforts on company-wide agile cost management, reduction of fixed costs through structural reforms and FX impact. We are also continuing with our global transformation. In Q3, we are booking a total of JPY 12.7 billion of impairment loss on transfer of manufacturing business for personal care products in Kuki and Vietnam plans. We are also booking gain of JPY 10.9 billion from transfer of professional business, which was completed on July 1.

Next is Page 4, the P&L executive summary. As previously mentioned, the core operating profit was JPY 36.2 billion, an increase of JPY 6.5 billion year-on-year. The operating profit was JPY 35.7 billion, a decrease of JPY 59.9 billion year-on-year. This was due to the minus JPY 66.4 billion year-on-year in the nonrecurring items. Last year, there was a gain of JPY 65.9 billion from items such as transfer personal care business, which was booked in nonrecurring items.

However, this year, the impairment loss from personal care manufacturing business transfer was offset by a gain from professional business transfer, resulting in minus JPY 600 million. The profit before tax was JPY 43.6 billion from the finance income and share of profit of investments accounted for using equity method. As a result, profit attributable to owners of parent for the quarter was JPY 29 billion, a decrease of JPY 18 billion versus last year.

Next is Page 5, net sales by brand. In regards to these 9 months year-to-date, the difficult market environment in China and slow recovery in the Japan market are negatively impacting some brands that have big exposures to these markets on a year-on-year basis, such as Shiseido, IPSA and ELIXIR. However, in Q3, due to the momentum recovery in both Japan and China regions, the minus level decreased in each of the brands compared to the first half of the year. ELIXIR that had struggled to this point had a renewal launch of its core products, the lotion and emulsion in Japan on September 21, which resulted in a growth of plus 7% in Q3 from its minus 13% in the first half, and it continues to perform well after October. We will continue strategic marketing activities in Q4 to drive strong consumer purchases.

Clé de Peau Beauté grew even in China that had impact from the multiple lockdowns. On top of the success in enhancing brand value in Q3, other regions, including Japan, contributed to the growth. Also, NARS realized very strong growth in all regions, expanding its share. Fragrance brands, such as narciso rodriguez, is also keeping its high performance.

Drunk Elephant resulted in minus 7% versus last year. As mentioned at the beginning of this presentation, we have experienced global retail inventory adjustments that negatively impacted the shipment sales. The brand-made media investments mainly around digital in Q3, capturing great trend in consumer purchases. So we plan to continue and accelerate the momentum in Q4.

Next is Page 6, the net sales year-on-year. Even though the first half recorded minus 1% versus previous year in consolidated net sales on a like-for-like basis, Q3 was positive 7%. Q3 year-to-date was also positive 2%, turning around to positive growth. One of the reasons is that on top of the market recovery in Japan, the ELIXIR renewal impacted positively marking the Japan region with plus 9%, showing solid recovery. Also, the minus shrink to 2% in China for Q3 as well as EMEA sustaining its strong performance.

Next is Page 7 about the Japan business. First, in terms of the Japanese market recovery situation, we are seeing different trends in Q3 from the past, which is recovery of mid-price range. Along with the social occasions increase in Japan, the recovery of mid-price range market in base makeup in sun care have been apparent since July. In the 3 months of Q3, these 2 categories have been exceeding the year-on-year market performance in low price range. On the other hand, skin care was a step behind, but the market trend has started to recover that of last year from September. That for September alone, the skin care exceeded the market growth of low price range.

Along with the renewal launch of ELIXIR driving the growth, the consumer skin care mindset has come back, which has benefited ELIXIR to acquire new loyal users from low price range brands. The company's performance for Q3 is as shown here. Clé de Peau Beauté is accelerating its growth in the high price range, certainly increasing its loyal user base. We believe this will result in continued expansion in share. New products that launched from PRIOR and BENEFIQUE are also experiencing a good start and the core brands are showing positive impacts from the increased strategic marketing investments from September. There will be further enhancements on investment from October and onwards to maximize this opportunity of market recovery.

Next slide is about ELIXIR that just went through the renewal of its lotion and emulsion on September 21. During the difficult market environment, the initial performance exceeded the previous renewal in 2018. When we look at the lotion and emulsion alone, in about the first 40 days until end of October, they performed positive 40 percentile versus previous year. And for the whole ELIXIR brand, it was in the high teen percentage versus previous year. As a result, the brand is leading the growth of mid price range market, significantly increasing the market share as a brand.

The key point for this great initial start is the consumers actually feeling the amazing value for money, the usability, absorption and skin results are receiving outstanding reaction from the consumers. Furthermore, we are strengthening the wrinkle cream to be the solid #1 player in wrinkle improvement market, which continues to grow. We are seeing our business partners in consideration of store profitability focused to elevate their sales ratio of mid-price range brands. So together with the company, they are engaging to recover the mid-price range market.

In Q4, we will execute the strengthened strategic marketing investments. For ELIXIR, we will enhance the investment by almost 3x compared to previous year to accelerate the good momentum and to build solid loyal user base, so we can build certainty for the growth expansion in 2023.

Recovery. As I have just explained, the market recovery is becoming more solid in the fourth quarter, and we are making a shift to proactive marketing, strategically making additional marketing investment in order to achieve substantial growth in 2023. In addition to ELIXIR, we will focus on core brands and proactively execute a strategic investment to achieve significant growth, not only in the fourth quarter but also in 2023, including continuous expansion of loyal users for high-performing Clé de Peau Beauté; Shiseido, which we will strengthen brand value at a very competitive department store market; PRIOR, whose growth is accelerating in an expanding senior market and further increasing the loyal consumer base for MAQuillAGE, which holds the #1 market share in the mid-price base makeup market.

From Page 10, I will explain about the China business. First, with regards to the China market, tough environment persists in the market as with the first half of the year. There are still uncertainties for the recovery of the overall cosmetics market because of lockdowns in multiple cities, retail inventory adjustment due to unclear outlook and consumers focused more on savings, among other factors.

Amid such challenging environment, we outperformed market growth. Consumer purchases for the total business were up high single-digit percent in the third quarter. While the prestige market was down low single digits, our prestige sales grew high single digit, achieving highest growth among our major peers.

In particular, in Shiseido future solution, which we started to strengthen our initiatives from the beginning of the year continue to grow at a high level, and off-line sales of Shiseido turn to positive growth along with NARS. Our e-commerce achieved high growth at high 20% level in the third quarter, while the overall e-commerce market was stagnant. Expansion of brand rollout on multi-platform is also contributing to e-commerce sales growth.

In the third quarter, we made additional investment into marketing, which focused on enhancing brand equity and technology appeal centered on major brands such as Shiseido and Clé de Peau Beauté. For Shiseido, we executed the marketing plan, both online and offline channels, leveraging the 150-year anniversary, and the brand has gained support and sympathy of consumers in response to the brand holistic beauty proposals. These marketing efforts are aimed at enhancing brand equity over a long-term perspective, but have also brought about short-term gains such as Shiseido achieving 10% growth in the third quarter, and a huge increase in the number of brand searches and e-commerce flagship store visits.

With Clé de Peau Beauté, we have enhanced technology appeal and as a result, e-commerce sales of the eye cream grew more than 2.5x in the third quarter. We will continue to approach consumers who got interested in our products. And in the fourth quarter, we will strive to expand loyal users for high Prestige line of Shiseido and with Clé de Peau Beauté, we will use the eye cream in order to enhance awareness for the entire product lines of the brand.

Next, to shift away from price-oriented consumption we are working on to reduce sales ratio from large-scale promotional events. Because in such large-scale events, competition is mainly based on prices. Therefore, we are trying to increase the ratio of sales generated at normal times by communicating brand value. Based on that direction, we are using KOL at Shiseido's e-commerce stores and increasing live streaming by our beauty consultants and R&D personnel. We are also collaborating with dermatologists to enhance communications centered on our technology.

Furthermore, by expanding touch points to communicate information, we aim at realizing increasing consumer touch points as well as a well-balanced channel operation.

Next Page 13, on performance of other regions. In Americas, market growth continued in all categories, and we also achieved growth. In EMEA, strong momentum continued with the market maintaining a favorable trend with growth in all categories. In Travel Retail, despite impact from lockdowns in Hainan, we made progress more or less in line with the plan. We will continue to closely monitor retail inventory in the market situations.

In Asia Pacific, we achieved continuous growth in South Korea and Southeast Asia. Despite a delay in recovery in some countries and markets, including Taiwan, the forecast Prestige category is achieving steady growth. Next, Page 14, on the COGS ratio. The COGS ratio in Q3 year-to-date was at 31.4% due to the impact from recording impairment losses on transfer of personal care manufacturing business. But excluding impacts from impairment loss, and product supply due to business transfer, the like-for-like COGS ratio was 24.8%, an improvement of 0.7 percentage points year-on-year, which was driven by factors, including: favorable product mix from business transfers; as well as lower inventory write-offs despite increasing costs due to launch of Fukuoka Kurume factory and higher raw materials and logistics costs.

Now on Page 15, regarding the cost structure. The basic trend remained unchanged from the first half of the year. Marketing investments decreased due to business transfers and agile cost management. Personnel expenses and other SG&A also decreased by 0.9 points and 1 point, respectively. as a result of the series of structural reforms, including business portfolio optimization centered on America and EMEA. On the other hand, to build a base for medium- to long-term growth, we have not cut back investments in DX-related areas, brand development and R&D to enhance brand equity.

Next, Page 16 shows core operating profit by segment. In Japan, core operating profit declined mainly due to the impact of personal care business transfer. China, core operating profit decreased due mainly to lower margins from declining sales despite cost control. In Americas and EMEA, core operating profit increased, thanks to higher margins from sales growth and decrease in fixed costs due to organizational and structural reforms.

Travel Retail achieved core operating profit growth due to higher margins on increasing sales. Decrease of core operating profit in other is mainly attributable to decreased shipments from headquarters in line with lower sales in China and new factories and DX-related investments. Finally, Page 17 on our brand enhancement action in the fourth quarter. At the first half earnings announcement, we explained that we would make JPY 5 billion strategic additional investment to enhance brand values. We are undertaking various actions in the fourth quarter centered on these 4 brands listed on the page. We will promote brand equity enhancement in each region, not only in Japan and China, where detailed actions were presented today in order to realize sustainable growth from next year onwards.

In terms of the outlook for this fiscal year, the forecast announced in August remains unchanged. Core operating profit after the third quarter was JPY 36.2 billion reaching close to the full year guidance of JPY 40 billion. But since we are making investments in Q4, as explained earlier, we are forecasting a decline in profit. Although a challenging environment continues in China, we are committed to achieving JPY 40 billion of core operating profit for this fiscal year by offsetting the situation in China with other regions. Profit attributable to owners of [ parent ] through to the third quarter was JPY 29 billion. which exceeds this fiscal year's forecast of JPY 25.5 billion.

But we haven't changed the forecast as we factor in one-off expenses related to structural reforms to be recorded in the fourth quarter. That brings me to the end of my presentation. Thank you very much. So we will move on to the Q&A session.

[Operator]

If you have any questions, please use a raise hand button at the bottom of Zoom. If you're called out, and if you see a pop-up, quick participate as a panelist and turn on your microphone and camera and identify yourself with the company name. Please limit your question down to one and make question in Japanese and make your questions as succinct as possible. Takes some time to switch the screen, so please understand. So please start asking questions.

First from Daiwa Securities, Hirozumi-san. We will switch over the screen. [Operator Instructions] Please wait.

[Hiroshi Saji, analyst]

Can you hear me?

[Operator]

Yes, we can hear you.

[Hiroshi Saji, analyst]

You can see me as well? Great I have, okay, one question. I had a lot, but we're limited to one. Q4 action I want to hear more about the fourth quarter action. You said you will be using costs. This is the strategic investment that you were talking about in the first half? Or will there be additional investment when you talk about the fourth quarter action. So I want to know the actions in Q4, it will be additional cost or investment or not?

[Takayuki Yokota, executive]

No, the marketing investment, the JPY 5 billion that we talked about in the last presentation, majority of that is in the Q4 activities. So it doesn't mean that we will be investing more than that. It's not additional investment.

[Hiroshi Saji, analyst]

I See. So it's already announced in the last call -- earnings call?

[Takayuki Yokota, executive]

Yes, part of this JPY 5 billion is in the Q3, but majority of it is in the Q4 activity. So most of the investment that we talked about, the JPY 5 billion, there's partial usage in Q3, but most of it will be in Q4 to really accelerate this momentum and to heighten the brand value.

[Hiroshi Saji, analyst]

'I'm going to ask what -- so you have JPY 4 billion, you're almost there to JPY 40 billion. So this JPY 5 billion. Even with this JPY 5 billion, I feel like it would exceed that easily. So how do you envision the outlook?

[Takayuki Yokota, executive]

We are actually being very careful about this outlook because we do have to be cautious and careful of the situation in China looking at the results from Q3 and Q4. We are not seeing much of a return and recovery in China. So there's still underlying risks there. And furthermore, other regions, the risks can we all -- we are thinking that other regions can offset the risks at the same time. So compared to last year, there is partial Q3 and Q4, JPY 3 billion. The phasing of the sample costs. But compared to last year, what's -- what the big difference is is this additional strategic investment, the JPY 5 billion that we talked about, that's one thing. And the other is about Russia. We -- the shipment and advertisement to Russia is still suspended at this moment.

This Russia business have been skewed more to the fourth quarter. So there will be -- when we talk about versus last year, there will be impact in Q4 as well in regards to this Russia situation.

[Hiroshi Saji, analyst]

And this year's inflation impact?

[Takayuki Yokota, executive]

On an annual basis, JPY 7 billion, we're estimating about JPY 7 billion impact of inflation. But the inflation, the timing that it will actually hit the P&L. There are things that are under negotiation and there are periods where we hold the inventory. So the impact tends to be big in Q4. So that's JPY 3 billion to JPY 4 billion that will hit the Q4 numbers.

[Hiroshi Saji, analyst]

So when we calculate all this, -- are we going to easily exceed this JPY 40 billion in target?

[Takayuki Yokota, executive]

No. There are a lot of other factors. But having said that, as a role as the CFO of the company, it's -- of course, I need to as a company, as a team, as one team, we will do what we can to exceed this JPY 40 billion. Of course, so we are targeting to exceed this JPY 40 billion, but it's not as easy as seen.

[Hiroshi Saji, analyst]

So JPY 3 billion of that sample cost, what was it about?

[Takayuki Yokota, executive]

This is a technical thing on accounting, which means that when we manufacture, there's a sample cost that we need to count and record. The timing for that, there is a time gap between Q3 and Q4. So -- we can't look at the sample cost on a quarterly basis. It's more on an annual basis, especially the sample cost for China. There could be some time difference or time gap between Q3 and Q4, and that's JPY 3 billion.

[Hiroshi Saji, analyst]

I see. So you said 4 things. One is the JPY 5 billion, the strategic investment that you've already mentioned. And the two is Russia. Three is the cost and inflation, and four is the sample cost of JPY 3 billion. So those are all the same. Is that correct?

[Takayuki Yokota, executive]

Yes, in principle, that is correct. And the other is the Chinese -- the risk from China market, we need to offset in other regions.

[Operator]

Next question is from JPMorgan, Kuwahara-san. Please turn on your microphone and camera. If you see yourself on the screen, please start.

[クワハラ, analyst]

Thank you very much. This is Kuwahara from JPMorgan. Third quarter -- you have seen the recovery in Japan, it's quite encouraging. If you look at July to September period, your results compared against forecast by region, could you give us some color, sales trend and profit trend? Could you give us a trend by region, particularly the return on marketing? Especially you talked about ELIXIR, are you seeing increase in return on marketing investment? And is your effort sustainable looking into next fiscal year?

[Takayuki Yokota, executive]

Thank you very much for the question. As for Q3, to be honest, we have outperformed against our forecast in terms of profit. As for sales, sales were lower in China against the forecast. Because first half, China was negative 14%.

Second half, we're going to make up for the losses to achieve slight positive. That was the original forecast. But we still recorded negative 2%. Sell-out was pretty good. But there was a tough retailers' inventory adjustment. So we have seen a gap compared against our forecast. That was a major downside.

But we have been able to offset that impact in EMEA, outperforming quite substantially against the forecast both in terms of sales and profit. And there were some timing differences in booking headquarter costs and strategic investment, and there were some FX impact. As for Japan, sales were in line with our expectations, and profit slightly exceeded the plan because the marketing activities and strategic investment -- we pushed back some investment from Q3 to Q4. So that's why the profit was higher than our original plan. So that was the main story.

As for the return for our marketing investment, as I just explained, short-term returns leading to sales growth. We're not making such kinds of investment, but we are making investments through enhanced brand equity. But as I explained in China, leveraging 150-year anniversary, we have seen the increase in sales and also increase for Clé de Peau Beauté online. For those benefits, we expect to see clear benefits in next year and onwards.

[クワハラ, analyst]

One confirmation, please. EMEA -- it seems that you're accelerating sales growth. What's the background? What's the reason? In Q4, you have impact from Russia, but there are inflation and geopolitical risks in Europe. But why is it so strong? And also, how do you see the sustainability of this strong trend in EMEA?

[Takayuki Yokota, executive]

Well, in all categories, fragrance, makeup, skin care, the market is recording double-digit -- more than double-digit growth. That's the major driver for our good performance. In addition, as for Shiseido, in September, we increased prices for some of our products. And we were concerned that we might see reactionally fall in September, but didn't -- it didn't happen and the business trended favorably. So that's the major reason why. Thank you very much.

[Operator]

Now next question from Jefferies, Miyasako-san. We will switch the screen, please wait. Please wait until your face is shown on the screen.

[Mitsuko Miyasako, analyst]

This is Miyasako from Jefferies. So I want to ask, Japan sales -- so the market is recovering. This market recovery was it according to what you had expected? And also, you mentioned some numbers around ELIXIR performance. But ELIXIR, is that sell-in or sell-out? Is that for shipment basis? So what's Q4 -- how do you see ELIXIR in Q4? Is it sustainable? Is it real recovery?

[Takayuki Yokota, executive]

So first of all, the market growth. Right now, on an overall basis, it's about 5% growth versus previous year. And one thing -- one factor that was -- that had benefited us is the mid-price range grew by a single digit. So it's turned into a positive recovery and that which has impacted us.

And within that, the base makeup and sun care in terms of the mid-price range from July, and for skincare, it's slightly behind, but started to recover into positive from September. So for skin care, of course, there is impact from our ELIXIR products. But we are certainly seeing the change in consumer mindset, meaning that we can feel that the mid-price range market will recover and come back.

And in terms of the numbers for ELIXIR that we showed in the PowerPoint slide, those are the sellout numbers. So after the relaunch of September '21, till end of October, those are the numbers that is -- that our numbers are based on sell-out basis. So how do we continue to accelerate that throughout to the end of the year?

But from the launch timing, it's been 4 to 5 weeks, but the performance continues to be good. So we want to continue to accelerate that and focus on doing so. But the Japan team, we feel quite confident about this outcome. So -- and I personally too have high expectations for this.

[Mitsuko Miyasako, analyst]

So rather than a realistic success, you are saying that you'll push and -- to continue the momentum in Q4 to capture the success?

[Takayuki Yokota, executive]

Well, no, I would say -- it's not just wishes and hopes. Compared to the timing that we did our last renewal in 2018 for ELIXIR, we are acquiring new users, and that's about double this time around compared to the relaunch that we had in 2018. So we are actually seeing tangible good results and outcome. And so we want to continue that and even accelerate that.

So rather than we have to wait and see, we're actually seeing tangible results. It's realistic and we're confident. So we want to accelerate the investments even more.

[Mitsuko Miyasako, analyst]

ELIXIR, you want to do double-digit growth. So this will be -- do you think this will -- ELIXIR will grow? Are you talking about sell-in?

[Takayuki Yokota, executive]

No.

[Mitsuko Miyasako, analyst]

What about -- how about sell-out?

[Takayuki Yokota, executive]

Sellout growth, I think it will grow according to the plan.

[Operator]

Next question is from Goldman Sachs, Yamaguchi-san, please. I will switch the screens. So please turn on your screen and microphone. If you see your face on the screen, please start.

[Keiko Yamaguchi, analyst]

This is Yamaguchi from Goldman Sachs. I have questions regarding Japan. Regarding profitability. In Q3, the shipment grew, but GP margin increased -- we hardly saw GP margin increase. And I understand that you are making investment in Q4. So how do we think about the profitability in Q3?

[Takayuki Yokota, executive]

If you look at the third quarter core OP was JPY 1.4 billion, the first time in black for this fiscal year. On a year-on-year basis, it grew by JPY 2 billion. But last year due to lockdowns of COVID-19, the extraordinary losses, COVID-19-related expenses were booked in extraordinary losses last year. So if you take that into account, the real core operating profit growth was JPY 3.2 billion year-on-year on higher sales. So that was the profitability in the third quarter.

[Keiko Yamaguchi, analyst]

I see -- so in Q4, -- on a year-on-year basis, you will increase investment. And as for next fiscal year, what should it be in terms of the profitability improvement in the next fiscal year for Japan.

[Takayuki Yokota, executive]

2

If you look at Q3 as a base, basically if you see top line growth, the core OP grew by JPY 3.2 billion. The profit margin grew by -- profit grew by JPY 3.2 billion. And looking into next fiscal year, since the restrictions were lifted as of October 1, but for Chinese tourists, we have started to see recovery of inbound sales in FY 2019, compared against FY '19. About 10% of the inventories were outside -- from outside of China, and we expect to see recovery of those inventories -- about 10% of the inventories recorded back in FY '19.

China still continues at a 0 COVID policy. But from Q2 onwards, if we see some recovery Q2 onwards, we believe that we are able to secure reasonable profits in the next fiscal year. But worse, we haven't finalized next year's budget. So depending on the situation in Q4, we will finalize the budget for next year.

[Keiko Yamaguchi, analyst]

So -- in Q3, in real terms, OP margin was around 6%. So with the recovery of inventories, you're aiming at high single-digit profitability in Japan?

[Takayuki Yokota, executive]

Well, I would like to refrain from making specific comments for next year. But in addition to top line growth, cost reductions not relying on sales growth of 3% is proceeding in Japan. So we will continue those efforts in the next year so that we can use the fund to increase the marketing spend to drive the top line and secure reasonable profits. So that's the plan for next fiscal year.

if you expect to see the momentum in the mid-price segment, that should drive the top line growth. And market might recover mid-single digit to high single digit. So we'd like to grow in line or above the market. And in addition, we expect to see recovery of inventories. So those are some of the assumptions for the next fiscal year.

[Operator]

We'll go on to the next question. From UBS, Kawamoto-san. [Operator Instructions]

[Hisae Kawamoto, analyst]

This is Kawamoto from UBS, thank you very much for your presentation. I want to know more about Travel Retail. Q1, Q3, the top line was [ 2,159 ], but the margin Q2 went up to 23%. So 3 quarters consecutively, it's been going up. And you mentioned about the Hainan Island lockdown. The inventory adjustments, I know you had that happen, but the profits went up. Well, how did that profit go up? And now Estee Lauder, they announced their forecast for October to December months. And for that, the October, Hainan Island traffic went down by 70%. So they were talking about a harsh environment in Hainan Island. What is your company situation? Are you concerned about that? And also sustainability for Q4 in Travel Retail. So could I have a little bit more detail in Travel Retail for Q4?

[Takayuki Yokota, executive]

For Travel Retail, originally, the first half was 18% in growth. And we were forecasting the future growth and acceleration, so the sell-in went higher. Therefore, the second half, we're looking at 10% the growth -- we're looking at about 10% for second half, so that on an annual basis, it's about 14% growth was what we had explained in the last earnings call.

And the reason why the numbers went down is because we had advanced shipments, the inventory, and so that the retailer inventory continues to decline. And in Q3, the Hainan sales is pretty much flat year-on-year. So to that, that's pretty much in line with what we had forecasted. Within that, on October 28, we do have a new store opening. We did have a big store -- new store opening, so there is positivity from that, too. But there are still uncertainties due to the COVID situation.

So sell in and sell out, we will continue to watch carefully to make adjustments, and that's how we are approaching the TR strategy.

[Hisae Kawamoto, analyst]

So profitability has improved in Travel Retail. What would be the main reason the profit could improve in TR?

[Takayuki Yokota, executive]

One would be the -- in order for the company-wide profit increase, there is profit contributed to the company. And the product mix is improving as well. Therefore, the gross margin for TR is improving, too. So these are the main areas as to why profit is increasing in TR.

[Hisae Kawamoto, analyst]

Okay. Lastly, so are you stealing from competitors in China and Hainan Island? So within the competition, the consumers in China, their preferences are switching?

[Takayuki Yokota, executive]

Actually, in Q3, we are -- yes, in Q3, we are winning the share. Yes.

[Hisae Kawamoto, analyst]

Now I want to know why you were able to capture more share amongst the competitors? And what's the sustainability around that?

[Takayuki Yokota, executive]

That has to be around -- we are avoiding the kind of focused sales promotion activities, and we're working on sustainable brand value elevation and brand value. So we will -- it will be a brand-led marketing activity, not a channel-led marketing activity so that we don't spend all that money on big promotions, but we continue to stabilize and sustainable growth to enhance our brand equity.

[Operator]

The next question is Morgan Stanley, Miyake-san. [Operator Instructions]

[Haruka Miyake, analyst]

This is Miyake from Morgan Stanley. Related to Kawamoto-san's question, I have questions regarding China. First, cost reduction was achieved in China, but in real terms, OP margin in Q3 and year-to-date, how did they trend on a year-on-year basis?

And I don't know whether I understood sufficiently. But according to Yokota-san's presentation, in Q3, you were able to increase share because other companies are still concentrating their promotions on the big sale events. But Shiseido is making investment in nonevent seasons. And is that the reason why you increased the market share? So in Q4, you're pulling back. So on a quarterly basis, your share will decline.

In China, you won't -- I think that you wanted to maintain sales growth in line with the market. So you don't expect market share to increase, but rather maintain the sales share? So what's your expectation for this future?

[Takayuki Yokota, executive]

So the questions regarding the margin and your market share. In Q3 -- or year-to-date Q3, the current China profit on a management accounting basis negative 3% versus last year. Because of the top line decline, fixed cost couldn't be absorbed. So that's the influencing factor on margin in China year-to-date up to Q3.

In terms of the market share, large-scale events, we're trying to reduce sales on those event timings. So temporarily, our share could decline during the event seasons. But at normal times, we will increase brand equity to drive the top line growth. As a result, over a medium- to long-term perspective, we expect to increase market share. And -- of course, in terms of the profitability, that should be positive for our profitability as well.

[Haruka Miyake, analyst]

A question again. So on a quarterly basis, not only on a quarterly basis. Currently, the sales are concentrated on the event season. So you might see some share decline, but eventually over a long-term perspective, you expect to achieve market share gains, correct?

[Takayuki Yokota, executive]

If we see the situation quarter-by-quarter, depending on the promotion season, the share could go up or down, but at normal times, we would like to increase our sales -- so over a long span like 1 year, we expect to see -- realize top line growth and also market share gains.

[Haruka Miyake, analyst]

Question again. As to the first -- up to the first half of this year, could you give us that margin?

[Takayuki Yokota, executive]

I'm sorry that I don't have that figure.

[Operator]

We'll go on to the next question. CLSA, Oliver. Please wait until we switch the screen. Please wait. Please wait until your face is shown on the screen.

[Oliver Matthew, analyst]

I have a question in regards to China. Margin is minus 3%. Next year, when you think about next year, the marketing investment at this level, what kind of marketing investment are you thinking about for next year? Can we go back to a normal margin? Or are there other concerning risks?

For example, let's say, the COVID situation doesn't really change something like that. So if there's any risks around that.

[Takayuki Yokota, executive]

In principle, next year, we want to recover what we dropped this year. And of that, we briefly talked about this in the last presentation, but the marketing investment, in order to secure the fund for marketing investment, we are doing the cost structure reformation, which we are doing in China.

We are consolidating the procurement, and we -- that will give us some impact. And we will continue to heighten that and elevate that for next year in terms of cost structure reformation and negative performing stores, especially the AUPRES negative performing stores we will continue to close.

And compared to last year, this year, we had a little less than 100 stores, which we had to shut down, the negative performing stores. And AUPRES marketing reform and EC functions. We've integrated it into Shanghai so that the top line for AUPRES can grow even more. So therefore, what we had in minus this year, we will enhance our marketing investments so that we can, in the least catch up to last year's level or to offset the negatives that we have.

But when we talk about marketing, we're not just doing additional investment. We need to make sure that we have the right ROI when -- when we talk about investments. So we will continue to do ROI optimization activities so that we can offset the negative that we had for this year. Thank you very much.

[Operator]

We'd like to take a final question Mitsubishi UFJ Morgan Stanley. Sato-san, please. [Operator Instructions]

[Wakako Sato, analyst]

This is Sato. Can you hear me?

[Operator]

Yes.

[Wakako Sato, analyst]

When I looked at the China number, your number looked quite different from the market. China is event driven and maybe 50% or more of sales are concentrated on the events. So from Q3, you are trying to shift away from those events, so June '18 sales next year? How do you expect a year-on-year sales was more focused on profitability? So in Q4 in China, do you expect your business to be lower than the market and putting more focus on profitability?

[Takayuki Yokota, executive]

Well, it's difficult to explain, but we're of course, not doing things dramatically. So we will -- our measures will be more gradual, reducing this ratio of sales like the Double 11 or -- but look, we will look at the situation at Double 11 and the KOLs. But at the same time, we will shift away from those events seasons with a focus more on profitability so that we can spend more on enhancing the brand value. I think that's the right strategy.

[Wakako Sato, analyst]

But looking at the sell-out number compared against L'Oréal and Estee Lauder, your numbers don't look that strong, right?

[Takayuki Yokota, executive]

No. We have more long-term perspective rather than short-term perspective. Because it's difficult to make a judgment over a short-term perspective. So more on the medium to long-term perspective, I would like to take measures. We'd like to strengthen brand equity. That's the main intention. So we will be allocating more investment into increasing brand value.

[Operator]

With this, we would like to close the Q&A session. We will be sending you a survey questionnaire from the IR department so that we can improve and enhance our IR activities going forward. So please do cooperate with us to answer these questionnaires. Once again, thank you very much for attending today to this presentation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]