South Korea’s largest cosmetics conglomerate AmorePacific Group (AmoreG) reported weaker-than-expected profits for the first quarter of this year due to a sharp fall in its duty-free sales following Beijing’s travel ban on its citizens to Korea in protest against Seoul’s decision to host the United States’ antimissile system.

AmoreG said in a regulatory filing on Monday that it raised 266.2 billion won ($235.6 million) in net income on a consolidated basis in the January-March period, down 18.2 percent from the same period a year ago. Operating profit also slipped 9.7 percent on year to 378.5 billion won, coming in below the market estimation of 417.7 billion won. Its sales rose 5.5 percent to 1.86 trillion over the same period.

A slowdown in profits is owed to a prolonged slump in the domestic economy and a drop in the number of foreign tourists visiting Korea in March, the conglomerate said. An unnamed group official added the group missed the market expectations due to a sharp fall in sales at local duty-free stores in line with the drop in the number of Chinese tourists to the country amid China’s retaliation against Seoul’s decision to host the United States’ Terminal High Altitude Area Defense (THAAD) system.

Flagging sales across tax-exempt outlets, especially, weighed on the group’s flagship unit AmorePacific Corp. (AmorePacific) that saw its operating income dropped 6.0 percent to 316.8 billion won despite a 6.0 percent gain in sales to 1.57 trillion won over the same period.

It was the first time for the company’s first-quarter operating profit to retreat on year since the first quarter in 2013. As the company’s full-year results have hinged on its first-quarter performance accounting for about one third of its annual operating profit in the recent three years, its business prospects for the full 2017 period are bleak.

Outlook on both AmoreG and AmorePacific’s stock performance is also gloomy as relations between Korea and China show no sign of any immediate recovery, a key to restore the company’s duty-free sales that have been a major driver to prop up its profitability in recent years.

“(The company’s) highly profitable duty-free sales are forecast to fall 30 percent year over year,” said Park Shin-ae, an analyst at KB Securities Co. “Amid lingering uncertainties over how long China’s THAAD retaliatory measures would last and how severe they would be, it is hard to predict the company’s earnings for the latter half of this year.”

On poor earnings, shares of AmoreG on Monday declined 3.2 percent, or 4,500 won, to 135,500 won from the previous session, and AmorePacific dropped 3.3. percent, or 10,500 won, to 307,000 won. The slide in their shares also came after their stocks recouped more than 10 percent over the first three weeks of this month on bargain hunting.

By regional sales, AmoreG reported a 2 percent on-year gain in the domestic market to 1.1 trillion won in the first quarter, but a 13 percent on-year drop to 234 billion won in operaing profit. Operating income from its overseas business reached 88.1 billion won, up 11 percent from a year ago while sales 477 billion won, up 17 percent over the same period on a rise in sales in Southeast Asian markets.

By units, operating income of its budget beauty product maker Innisfree Corp. dropped 11 percent to 46.3 billion won in the first quarter from a year ago on sales of 198.4 billion won that gained 6 percent. Etude`s operating profit for the quarter also declined 29 percent to 8.8 billion won from a year ago.

By Park Eun-jin

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