[Edaily Reporter Kim Kyung-eun ] Forecasts suggest that cosmetics stocks, which have been undergoing a correction this month, will bottom out around the Chuseok holiday and begin a rebound starting in October. While concerns are growing that the strong won could worsen profitability, analysts say the actual impact on earnings will be limited. APR(278470)and SILICON 2 Co.,Ltd.(257720), which have seen sharp declines recently, are cited as the stocks likely to lead the rebound.

Kim Myung-ju, an analyst at Korea Investment & Securities, stated in a report on the 11th, “Looking back, price corrections in the cosmetics sector have always presented buying opportunities.”

Cosmetics stocks have been undergoing a correction this month after continuing their upward trend in July and August. This is interpreted as the result of a combination of factors: concerns over export data and profit-taking demand stemming from the stock market correction, all occurring against a backdrop where the appeal of valuations has diminished due to the previous rise in stock prices.

Analyst Kim explained, “It is presumed that the export data for Canada from August 1–10 was incorrect, yet it was not corrected throughout August,” adding, “Consequently, this will act as a negative base effect (MoM) for the export data from September 1–10.” She further elaborated, “Since exports to the U.S. were better than expected in July and August, there is a possibility that they may take a breather in September.”

Concerns over earnings due to the strong won are also weighing on stock prices. While the won has been strengthening since last July, analysts note that the possibility of downward earnings revisions—driven by increased profit-taking demand for cosmetics stocks this month—is now serving as a major factor in the stock price correction.

However, the outlook suggests that the impact of the strong won on cosmetics companies’ earnings will not be as significant as the market fears. As of July, the U.S. accounted for 21.8% of total cosmetics exports. It is estimated that if the won-dollar exchange rate falls by 5%, the cosmetics industry’s operating profit margin could decrease by 0.7 to 0.8 percentage points.

Analyst Kim stated, “Since brand companies can adjust the intensity of their promotions and incur local payment costs, the impact of the exchange rate on actual earnings is unlikely to be as significant as feared.”

In particular, he predicted that if the won does not show a sustained trend of appreciation, cosmetics stocks are likely to rebound ahead of the fourth-quarter global shopping season. Last year, Ulta Beauty held its “Early Black Friday” event starting October 26, while Amazon hosted its “Prime Big Deal Days” even earlier, on October 7–8.

Analyst Kim predicted, “Unless the won enters a sustained strengthening trend, cosmetics sector stock prices are expected to rebound rapidly starting in October, driven by expectations for fourth-quarter shopping momentum.” He highlighted APR and SILICON 2 Co.,Ltd. as the stocks likely to lead the rebound, explaining that both had recently undergone relatively sharp corrections due to exchange rate concerns.

APR’s stock price has been sluggish due to recent controversy over the detection of Red Sudan in some of its products and a decline in the number of products ranking in Amazon’s global Top 100 Beauty list. However, since the company’s internal tests did not detect Red Sudan, it has been suggested that the products in question may be counterfeits.

The decline in Amazon rankings was also attributed to the conclusion of the “Back to School” event held last month in Europe. Although the number of APR products in the top 100 has decreased, it remains higher than the average for the first half of the year. The company is also continuing to expand its offline distribution network in the U.S. The number of APR SKUs sold at Ulta Beauty has increased from about 30 in July to about 50 currently, and the company is expected to begin selling at Costco in the second half of the year.

For SILICON 2 Co.,Ltd. as well, while the strong Korean won is a negative factor affecting gross profit margin (GPM), profitability in the second half is expected to be better than the market fears. As the sales share from Boots and iHerb—which have relatively high margins—increases, the gross profit margin is projected to rise from 30% in the first quarter of this year to 31% in the third quarter. Analysts suggest that if sales to Douglas are generated through collaboration with CVC Capital, the improvement in second-half earnings could be even greater.

However, analysts noted that if the won continues its trend of strengthening—contrary to market expectations— LG H&H(051900)and AMOREPACIFIC CORPORATION(090430)are expected to fare relatively better. They explained that both companies manufacture their own cosmetics and derive a high proportion of their revenue from the domestic market, which has allowed them to maintain relatively strong stock price performance even during past periods of won appreciation.