Shiseido AR

Shiseido commenced operations as Japan’s first Western-style pharmacy in

Tokyo’s Ginza district in 1872. The name Shiseido derives from a Chinese expression

meaning “praise the virtues of the great Earth, which nurtures new life and brings forth

new values.” In line with this expression, our founding spirit of “serving our cus-

tomers and contributing to society by integrating all things on Earth to create new

value” lives on in our corporate mission of “identifying new, richer sources of value and

using then to create a beautiful lifestyle.” This policy has led to high-value-added

products and services in the cosmetics and other businesses promoting people’s

beauty and well-being.

The fiscal year ending March 2009 is the first year of our new Three-Year Plan of fur-

ther reforms to “improve quality of activities across the board.” Our objective is to

“become a global player representing Asia with its origins in Japan.” By successfully

implementing these reforms, we aim to assist society, customers and all people in expe-

riencing “This moment. This life. Beautifully.”

Contents

Forward-Looking StatementsIn this annual report, statements other than historical facts are forward-looking statements that reflect the Company’s plans and expectations.These forward-looking statements involve risks, uncertainties and other factors that may cause actual results and achievements to differ fromthose anticipated in these statements.

Financial Highlights···························································· 4

Shiseido at a Glance ···························································· 6

To Our Stakeholders··························································· 8

An Interview with President Maeda································· 10

Shiseido’s Unique Identity and Strengths ······················ 16

Feature: “Become a global player representingAsia with its origins in Japan”

Domestic Cosmetics Business ····································· 18

Overseas Cosmetics Business ······································ 24

Corporate Social Responsibility (CSR)···························· 30

Corporate Governance························································ 34

Board of Directors, Corporate Auditors and Corporate Officers···························································· 38

Main Subsidiaries and Affiliates ······································· 40

Financial Section·································································· 41

Six-Year Summary of Selected Financial Data ·········· 42

Management’s Discussion and Analysis ···················· 43

Consolidated Financial Statements ····························· 54

Notes to the Consolidated

Financial Statements ··················································· 59

Report of Independent Auditors··································· 76

Corporate Information ························································ 77

4 SHISEIDO ANNUAL REPORT 2008

Financial HighlightsShiseido Company, Limited, and SubsidiariesFor the years ended March 31, 2006, 2007 and 2008

● Net sales increased 4.2 percent to a record ¥723.5 billion due to growth in overseas business.

● Operating income increased 26.9 percent to a record ¥63.5 billion due to higher sales, a reduction in cost of sales and efficient management of selling, general and administrative expenses, and operating profitability increased 1.6 percentage points to 8.8 percent. Shiseidoalso achieved record net income.

● Return on equity increased 2.6 percentage points to 9.2 percent.

● Cash dividends per share increased ¥2.0 to ¥34.0.

Thousands of U.S. dollarsMillions of yen (Note 1)

(Except per share data) Percent change (Except per share data)

2006 2007 2008 2008/2007 2008

Operating Results:

Net sales ········································· ¥670,957 ¥694,594 ¥723,485 +4.2% $7,220,409

Operating income ···························· 38,879 50,005 63,465 +26.9 633,383

Net income ····································· 14,436 25,293 35,460 +40.2 353,892

Financial Position:

Total assets ····································· ¥671,842 ¥739,833 ¥675,864 –8.6% $6,745,150

Net assets······································· 387,613 403,797 399,739 –1.0 3,989,411

Per Share Data (In yen and U.S. dollars):

Net income (Note 2)························· ¥ 34.4 ¥ 60.9 ¥ 86.1 +41.4% $0.86

Net assets (Note 2) ·························· 906.1 940.8 946.2 +0.6 9.44

Cash dividends ································ 30.0 32.0 34.0 +6.3 0.34

Financial Ratios:

Operating profitability ······················· 5.8% 7.2% 8.8%

Return on equity ······························ 3.9 6.6 9.2

Total return ratio (Note 3)·················· 105.1 52.6 108.8Notes: 1. All dollar amounts herein refer to U.S. currency. Yen amounts have been translated, solely for the convenience of the reader, at the rate of ¥100.20 to US$1 prevailing

on March 31, 2008.2. Net income per share (basic) is calculated based on the weighted average number of shares outstanding during each respective year. Net assets per share is calcu-

lated based on the number of shares outstanding at the end of each respective year.3. Total return ratio = (Cash dividends + Share buybacks*) ÷ Net income *Excluding odd-lot purchases

5SHISEIDO ANNUAL REPORT 2008

Note: Segment sales represent sales to external customers only and do not include intersegment sales or transfers.

7.6

3.9

6.6 6.6

45,808 44,282 47,527 53,969 53,969

68,104 74,929 80,395 79,326 79,326

48,485 56,465

197,241224,798 224,798

29.432.4 32.4

(Billions of yen) (%)

162.4175.7

197.2224.8

264.3

04 05 06 07 08

26.0 27.529.4

32.436.5

Americas Europe Asia/OceaniaOverseas Sales Ratio

22.0 30.0

32.0 32.0

(%)(%)

Domestic Cosmetics Business

Overseas Cosmetics Business

Others Japan Americas

Europe Asia/Oceania

63.77.8

14.3

14.2

52.4

6.614.8

26.2

60.7

36.4

2.9

68.5

28.43.1

(Billions of yen)

624.2 639.8 671.0 694.6 723.5

04 05 06 07 08 04 05 06 07 08

(Billions of yen)

Operating IncomeOperating Profitability

(%)

37.5

26.5

38.9

50.0

63.5

6.04.1

5.87.2

8.8

04 05 06 07 08

(Billions of yen)

27.5

14.4

25.3

35.5

(8.9)

04 05 06 07 08

(%)

7.6

(2.4)

3.9

6.6

9.2

04 05 06 07 08

(Yen)

64.9

(21.5)

34.4

60.9

86.1

04 05 06 07 08

(Yen)

22.0 24.0

30.0 32.0 34.0

Net Sales

Return on Equity Cash Dividends per Share

Operating Income /Operating Profitability

Net Income (Loss)

Overseas Sales /Overseas Sales Ratio

Net Income (Loss) per Share

Business Segment Information(Year ended March 31, 2008)

Net Sales (Outer circle)Operating Income (Inner circle)

Geographic Segment Information(Year ended March 31, 2008)

Net Sales (Outer circle)Operating Income (Inner circle)


Others

Tsubaki

IPSA

Elixir Superieur

Notes: Segment sales represent sales to external customers only and do not include intersegment sales or transfers.

Uno Sengan Senka

Ferzea Soka-MockaCollagen EXRENASCENT

Integrate

Qi

The domestic cosmetics business segment handles prod-ucts/services for the Japanese market, primarily cosmetics.The core cosmetics division manufactures and markets cos-metics, cosmetics equipment and toiletries. The professionaldivision manufactures and markets products/services for hairand beauty salons. The healthcare division manufactures andmarkets health and beauty foods and over-the-counter drugs.The non-Shiseido and mail-order division manufactures andmarkets cosmetics that are not branded as Shiseido products.

Domestic CosmeticsBusiness

Share of totalnet sales

Share of totaloperating income

68.5

60.7

Maquillage Bénéfique

Cosmetics

Professional Healthcare Non-Shiseido and Mail-Order

Counseling

Self-selection Toiletries


2.9


3.1The others business segment includes the frontier

sciences division, which manufactures and mar-kets medical-use drugs and cosmetics, and con-ducts a variety of other activities including the sale ofclothing and accessories, restaurant operation, andreal estate rental.

Shiseido at a Glance

clé de peau BEAUTÉ

Aqua Label


Composed of the cosmetics division and the professionaldivision, the overseas cosmetics business segment handlesproducts for overseas markets. It manufactures and marketscosmetics and other products/services in the Americas, Europeand Asia/Oceania.

Overseas CosmeticsBusiness



28.4

36.4

Shiseido ParlourBio-hyaluronic acid

White Lucent

NARSISSEY MIYAKEJean Paul GAULTIER

URARA

CARITA

JOICO

DECLÉORBenefiance Bio-Performance

AUPRES be

Cosmetics Professional

Shiseido Global Lines

Non-Shiseido

China


To Our Stakeholders

Operating Environment in the Fiscal Year Ended March 2008

Fiscal 2007, the year ended March 2008, was the final year of the Three-Year Plan initiated

in April 2005 to maximize growth potential and increase profitability. In line with our stated

intention to break down and rebuild the corporate structure, over the past three years we mod-

ified and updated all the Company’s functions in Japan. We also implemented domestic mar-

keting reforms to establish a more competitive and profitable business model. Overseas, we

aimed for double-digit sales growth, centered on China. At the same time, we withdrew

from unprofitable businesses. We also worked to improve organizational capabilities and

corporate governance so that we could implement these reforms swiftly and effectively.

In the fiscal year ended March 2008, we accomplished remaining marketing reforms and

worked to establish a foundation for stable profitability. In addition, Shiseido continued to invest

aggressively in overseas markets with high growth potential, primarily China.

Concurrently, we continued working to implement structural reforms designed to qualitatively

transform our cost structure. As a result, for the fiscal year ended March 2008 consolidated net

sales increased 4.2 percent year-on-year to ¥723.5 billion, supported by growth in overseas sales.

Operating income increased 26.9 percent year-on-year to ¥63.5 billion, with operating prof-

itability of 8.8 percent. Net income increased 40.2 percent year-on-year to ¥35.5 billion. As per

our original target when we announced the Three-Year Plan, we achieved operating prof-

itability above 8 percent. We also achieved record net sales, operating income and net

income, and raised return on equity to 9.2 percent. Moreover, over three years Shiseido

also generated total shareholder returns, consisting of dividends and share buybacks, of

over 90 percent of consolidated net income.

Roadmap for the Next 10 Years

The reforms of the past three years have established a management foundation for sustained


growth in a global market. Going forward, Shiseido aims to “become a global player repre-

senting Asia with its origins in Japan.” In working toward this goal, we have divided the

next 10 years into three phases. During the first phase, which will end in March 2011, we will

improve quality of activities across the board. Under this new Three-Year Plan, Shiseido will

work to “create a brand loved by customers throughout the world,” “establish unsurpassed,

world-class quality of business management” and “strengthen the solidarity of the Shiseido

Group across countries and organizations.” Our targets for the fiscal year ending March

2011 are operating profitability of 10 percent or higher and return on equity that is 1-2 per-

centage points above operating profitability.

Shiseido will continue to implement reforms. Our goal is to go beyond mere sales of

products to reveal the beauty of customers as well as to enrich their spirits. By doing so, we will

reinforce Shiseido’s unique position and enhance corporate value as we move forward to

earn the support of all stakeholders. Shiseido’s medium-term target for the total return

ratio, which is the sum of dividends and share buybacks divided by net income, is 60 percent.

The Company will continue to flexibly buy back and retire treasury stock while emphasizing

cash dividends.

We look forward to the continuing support of our valued stakeholders.

June 25, 2008

SHINZO MAEDA KIMIE IWATA

President & CEO (Representative Director) Vice President (Representative Director)

Shiseido’s renewal resulted in record sales, operating income and net

income in the fiscal year ended March 2008, the final year of the Three-

Year Plan, and Shiseido’s performance exceeded all the initial goals of the

plan. Based on the business foundation created through the reforms of the

past three years, Shiseido now aims to “become a global player represent-

ing Asia with its origins in Japan” that generates sustained growth.


The Previous Three-Year Plan

Please explain why the reforms of the previ-

ous Three-Year Plan resulted in such signifi-

cant achievements?

I outlined three key themes when Shiseido started

the Three-Year Plan in April 2005: “become thoroughly

committed to customer-oriented marketing,” “give

Shiseido a solid profit structure” and “improve the

execution and speed of all reforms.” At that time,

Shiseido had fallen into a pattern of not achieving its

plan targets. We therefore had to implement drastic

reforms including raising employee awareness, with

the resolve to break down and rebuild the Company

structure if necessary. Over the ensuing three years, we

implemented an array of challenging reforms, but

employees met every expectation in taking them on.

Implementing these reforms without delay allowed us to

achieve our numerical targets, and I believe we have

made progress toward being a corporation that can

deliver results. However, we still have work to do in

aggressively developing growth markets such as

health and beauty care and mail-order. We will imple-

ment initiatives to achieve further progress during

the new Three-Year Plan.

Shiseido’s Direction

Shiseido announced its Roadmap for the

Coming Decade in April 2008. What are

Shiseido’s goals for the future?

Three years ago, Shiseido may have been a top

player in Japan, but a large gap existed between it and

An Inter view with President Maeda

During the previous Three-Year Plan, Shiseido created a foundation for establishing an advanta-

geous position in a competitive global environment. We are now taking on the challenge of further

change with the goal of becoming a “global player representing Asia with its origins in Japan.”

SHINZO MAEDAPresident & CEO (Representative Director)


Roadmap for the Coming Decade

Ten years from now: Net sales in excess of ¥1 trillion (over 50% overseas sales); Consistently generate solid operating profitability (12% or higher); ROE comparable to that of global competitors (15% or higher)

Sustained growth as a global player representing Asiawith its origins in Japan

FY2005 FY2008 FY2011 FY2014 FY2017

Establish foundationas a global player

Phase 1

Improve quality of activities across

the board

Phase 2

Get into growthtrajectory

Phase 3

Make a leapforward

Establish foundation Establish an undisputed presence in Asia Become aglobal player

Previous Three-Year Plan

New Three-Year Plan

other global corporations in terms of indicators such as

profitability and market capitalization. By executing

the Three-Year Plan, Shiseido has created a manage-

ment foundation for sustained growth in a global market.

In my view, Shiseido is now at the stage where the

true value of the reforms we have implemented to

achieve sustained growth will be put to the test.

Shiseido aims to build on the foundation it has

established over the past three years to become a

global player representing Asia with its origins in

Japan. Yet we must clear many hurdles to do so. The first

is that we must increase our growth potential in global

markets, and must exceed the growth rate of the global

cosmetics market. The second is an issue I have stated

repeatedly: we must establish a management structure

capable of maintaining return on equity and operating

profitability on par with our global competitors.

We have divided the next 10 years into three phases

to achieve our aim of becoming a global player. During

the first phase, ending March 2011, we will improve

quality of activities across the board. In the second

phase we will achieve a growth trajectory that estab-

lishes an undisputed presence in Asia, and in the third

phase we will continue to make significant progress by

improving growth and profitability on a global scale.

Within 10 years, Shiseido is aiming to surpass net

sales of ¥1 trillion, more than half of which will be

overseas sales. We also aim to consistently achieve

operating profitability of 12 percent or higher and

return on equity of at least 15 percent, putting us on a

level comparable to our global competitors. We will

work wholeheartedly to realize this scenario.

The New Three-Year Plan

The new Three-Year Plan is the first phase of the

roadmap for the next 10 years. What are its

strategies and numerical targets?

The new Three-Year Plan contains three declara-

tions to improve quality of activities across the board

toward becoming a “global player representing Asia

with its origins in Japan.”


1. Create a brand loved by customers throughout

the world;

2. Establish unsurpassed, world-class quality of

business management; and

3. Strengthen the solidarity of the Shiseido Group

across countries and organizations.

The key theme that all of these strategies share is

unchanged from the previous Three-Year Plan: maxi-

mize growth potential and improve profitability. In addi-

tion, we will accelerate globalization and distinction and

concentration to optimize the allocation of resources

from an international perspective. Moreover, rather

than adhering to the principle of self-sufficiency as we did

in the past, we will utilize external knowledge and

resources through means including alliances.

Our numerical targets for the fiscal year ending

March 2011, the final year of the Three-Year Plan,

include operating profitability of 10 percent or higher

and return on equity that is 1-2 percentage points

above operating profitability. Our target for net sales is

average growth of 4-5 percent annually over the three

years, with domestic sales increasing 1-2 percent each

year, slightly more than the overall domestic market

growth rate. Overseas, our target is average annual

sales growth of 10 percent or higher on a local currency

basis. In the final year of the plan, we aim for net sales of

at least ¥800 billion, based on exchange rates of ¥100 to

the U.S. dollar, ¥155 to the euro, and ¥14.5 to the

yuan, with overseas sales accounting for more than 40

Three Declarations of New Three-Year Plan

Create a brand loved by customers throughout the world1Establish unsurpassed, world-class quality of business management2Strengthen the solidarity of the Shiseido Group across countries and organizations3

Overview of New Three-Year Plan

Become a global player representing Asia with its origins in Japan;Improve quality of activities across the board

Strategic directionKeyw

ords

Expand growth potential and improve profitability

Strengthen global solidarity

Globalization

Create solid brands Improve quality of business management

Distinction and concentration Utilization of externalknowledge and resources

Strengthen cultivation ofthe global brand

Nurture human resources on global basis

Raise organizational capabilities

Advance corporate governance system

Pursue structural reforms

Target proactive CSR initiatives

Full-scale rollout of “masstige” marketingFurther expand business in ChinaSolidify No.1 position in Japan

Accelerate innovation of Beauty Consultant activitiesReinforce value creation powerEstablish global production systems

Establish an undisputed presence in Asia

Strengthen foundation for raisingthe Shiseido Group’s corporate value


percent of net sales. In addition, we have resolved to dis-

continue the Takeover Defense Measures, concentrating

on implementing the new Three-Year Plan while raising

corporate value.

Brand Creation

The goal of creating a brand loved by cus-

tomers throughout the world is challenging.

Specifically, what kind of brands will Shiseido

develop, and where?

Earning the love of customers throughout the

world is an imposing goal, and will not be easy to

achieve. However, I am proud of the successes

Shiseido has achieved in vigorously creating glorious

lines, such as the introduction of mega lines in Japan.

Now that we have created a management foundation for

sustained growth on a global scale, I am certain that we

can achieve our goals of creating brands/lines that

are loved throughout the world.

Our first task is working to strengthen cultivation of

the global brand , which is sold world-

wide, as the prestige brand that symbolizes the

Shiseido Group. We will gradually integrate our lines

and renew the product portfolio. In addition, we are

concentrating resources city by city to ensure

aggressive marketing under a marketing strategy

called the “City Concept.”

Next, to establish an undisputed presence in Asia,

we will begin developing “masstige” marketing, and

build a new business model ranging from improving the

manufacturing framework to lines and channels.

Shiseido is also working to further expand its busi-

ness in China and intends to maintain high average

annual sales growth of 20 percent. We will also solidify

our number one position in Japan through our brand

strategy and by furthering sales reforms with the aim of

expanding high-quality sales.

We will also globally promote our expertise in

customer service, which is based on the spirit of

omotenashi (hospitality), a Shiseido strength, and

achieve the highest level of customer satisfaction in

the world. In addition, to reinforce our value creation

capabilities we will further concentrate on research

into skincare and new domains such as health and

beauty care, while using alliances and other means to

mobilize global knowledge both inside and outside

the Company to strengthen research that makes skin

beautiful and enriches the spirit. (Please see pages 18 to

23 of the feature section, “Domestic Cosmetics,” for a

detailed explanation of initiatives including Shiseido’s

brand strategy and sales reforms. Please see pages

24 to 29 of the feature section, “Overseas Cosmetics,”

for a detailed discussion of strategies including the

“City Concept” and “masstige” marketing overseas.)


Targets of New Three-Year Plan

Average annual growth of 4-5%; overseas sales ratio over 40%10% or higher1-2 points above operating profitability

Net sales:

Operating profitability:ROE:

¥723.5 billion

FY2010(target)

FY2009(target)

FY2008(target)

FY2007

10%or higher8.8%

Net sales Operating profitability


Building the Management Foundation

Building a high-quality management foundation is

one of the three key strategies you have stated, and

during the previous Three-Year Plan, Shiseido

moved to reform its human resource and organi-

zational structures and corporate governance.

What are Shiseido’s reasons for emphasizing

building its management foundation?

To achieve sustained growth in a globally competi-

tive environment, Shiseido must cultivate human

resources, raise its organizational capabilities, build a

corporate governance system and carry out other

reforms on a global basis. Cultivating human

resources includes cultivating senior management,

and the removal of distinctions between domestic and

foreign employees. Furthermore, in April 2008

Shiseido established a training center in Shanghai,

the Company’s first outside of Japan. We will raise

organizational capabilities by strengthening strategic

functions and our business support system while

working to raise management efficiency. Efforts will

center on standardizing and reforming business

processes with a new SAP core business processing sys-

tem to be introduced in the fiscal year ending March

2009. For corporate governance, we have handpicked a

small and able group of corporate executive officers

and have moved to appoint younger people.

Moreover, we have two independent directors, and

have also promoted diversity by appointing our first

non-Japanese director, Carsten Fischer, and promot-

ing Kimie Iwata to the position of Representative

Director and Vice President. We will further clarify

the functions and responsibilities of our corporate

executive officers. We are also actively promoting

CSR. Shiseido’s unique social contribution activities

will include offering personal makeup advice globally

for people with serious skin concerns. In working to

protect the environment, Shiseido has established

the Environmental Committee as one of the CSR

Committees that reports directly to the Board of

Directors. It will be central in enabling the entire

Shiseido Group to work together globally. (Please

see pages 30 to 33 for a detailed explanation of CSR

activities and pages 34 to 37 for a detailed explanation of

corporate governance.)

Shareholder Returns

Cash dividends have increased by ¥10 per share

over the past three years, and return on equity has

risen to 9.2 percent. What are Shiseido’s policies

for shareholder returns?

Our basic policy for shareholder returns will con-

tinue to be a total return ratio of 60 percent over the

Kimie IwataResponsible for Consumer Information,Corporate Culture, Public Relations,Corporate Culture Reform andCommittees under Direct Control ofDirectors (Chair of Corporate ValueCreation Committee, ComplianceCommittee and EnvironmentalCommittee) Joined Shiseido in December 2003 afterserving as Director-General, EqualEmployment, Children and Families Bureau,Ministry of Health, Labour and Welfare.

Representative Director, Vice President

Carsten FischerResponsible for Global Business(International Business, China Businessand Professional Business); Chief Officerof International Business Division andProfessional Business Operations Division

Joined Shiseido in October 2006 afterserving as Corporate Officer, President,Professional Care at Procter & GambleCompany.

Director, CorporateExecutive Officer



medium term, meaning that we will use 60 percent of

consolidated net income for dividends and share buy-

backs. We will continue to buy back and retire treasury

stock while taking account of changes in the stock

market with an emphasis on cash dividends. Cash

dividends per share for the fiscal year ended March

2008 increased by ¥2.00 compared with the previous fis-

cal year to ¥34.00. Moreover, we plan to raise total

cash dividends for the fiscal year ending March 2009 by

¥16.00 to ¥50.00. This will be the seventh consecutive

fiscal year in which Shiseido has increased dividends.

Determining a correct balance between future

growth and improved capital efficiency, we will maintain

our emphasis on delivering solid returns to share-

holders while investing in mergers, acquisitions and

other means to generate future growth.

To Shareholders and Investors

Please conclude by giving shareholders and

investors a summary of your thoughts on the

new Three-Year Plan.

In 2007, Shiseido participated in an employee sat-

isfaction survey in Japan. I was most delighted and

encouraged by the ratings given to Shiseido by its

employees when asked about “Pride in your company,”

“Affection for your company,” and “Hopes you have for

your company’s future.” Our ratings were far higher

than those of other companies that implemented the

survey. These results reflect in part the heritage of

the many people who have worked at Shiseido since its

foundation, as well as the confidence and pride

employees have gained from overcoming the chal-

lenging obstacles to our reforms over the past three

years. I believe that the strong solidarity and “spirit of

Shiseido people” will be our biggest strengths as we

build a unique identity in the highly competitive

global marketplace and move forward.

Moreover, Shiseido will work resolutely to clearly

define and further strengthen its unique identity and

strengths that set it apart from other global players. I

believe Shiseido’s unique identity and strengths are

“to realize the beauty of customers as well as to enrich

their hearts.” These strengths are supported by rich-

ness, human science and the spirit of omotenashi. As

Shiseido employees, we need to renew our awareness of

the unique identity and strengths we share, while

working to implement the new Three-Year Plan.

(Please see pages 16 to 17 for a detailed explanation of

Shiseido’s unique identity and strengths.)

As we take our first steps as a global player repre-

senting Asia in the new Three-Year Plan, our goal is for

our customers to recognize, cherish, and trust

Shiseido’s unique value and appeal, and to remain an

integral part of society. We are counting on the con-

tinued support of shareholders and investors as we

implement further reforms.


Our goal is to go beyond merely selling products to reveal

the beauty of customers as well as to enrich their spirits.

RichnessBeing thoroughly meticu-lous about the high qualityof products and services.

Human ScienceIn R&D, not only making theskin beautiful, but also pur-suing benefits that reach allthe way to people’s minds.

Spirit of omotenashi

(hospitality)

Enriching people’s spiritsthrough interactions

between customers andproducts.

Making life beautiful through not

only momentar y beauty but also

spiritual enrichment — This corpo-

rate message embodies Shiseido’s

unique identity and strengths, and

its promise to society.

Shiseido’s Unique Identity and Strengths


Examples of Shiseido’s Strengths

Shiseido’s trademark, used since1915, was originally drawn by ShinzoFukuhara, the company’s first presi-dent. The flowing art nouveau linesare still part of the design.

Shiseido handled hair and makeup (one or both)for a total of 45 brands for the New York andParis Fall/Autumn 2007 collections and for 41brands for Spring/Summer 2008.

circa 1916 1917 1918

1921 Present

■ Recognizing the importance of corporate design early on, Shiseido established its creative division over 90 years ago. Nearly 100 in-house staff are engaged in the design of packag-ing, advertisements and stores. Created soon after the division’s foundation, the original refined design called “Shiseido Medium”has evolved and been carried on to the present.

■ The Shiseido Gallery, opened in 1919, provides a place for the activities of young artists. By dispatching numerous in-house hair and makeup artists to fashion shows around the world such as the Paris Collection and other activities, the Gallery maintains a deep, mutually influential relationship with art and fashion.

Shiseido was the first to scientificallyprove the effect of psychological stresson skin. Research is also revealing theeffect of scent on the autonomic nerv-ous system, the endocrine system andimmunity.

■ Over 1,000 staff work at Shiseido R&D bases in Japan, Southeast Asia, Europe, the Americas and China, and the Company actively promotes alliances with universities and research institutions around the world. We work to ensure beautiful skin for cus-tomers around the world by researching skin types and cosmetics traditions to develop products tailored to regional characteristics and by linking bases that have unique features.

The IFSCC has about 20,000 members.The IFSCC Congress is the most authoritativevenue for presenting research findings, as itbrings together cosmetics specialists fromaround the world. The full-scale Congressand a smaller scale Congress, held inalternating years, feature the very latestfindings in cosmetics research.

of the 22 IFSCC congresses (the Basic Research Award seven times and the Honorary Mention for Basic Research four times). Shiseido is highly evaluated globally not only for its new discoveries and the techniques it develops, but also for its contributions to the cosmetics industry and society. Working from basic research, the Company has developed numerous original pharmacological agents and has received approval from the Japanese government for four non-prescription base compounds in the area of skin bright-ening. Shiseido is committed to raising the level of science, tech-nology and esthetics in cosmetics to provide customers with maximum value and superior quality that brings peace of mind.

BCs are the essential “face ofShiseido,” conveying the value of theCompany to customers everywhere.

■ After joining, BCs in Japan undergo three months of training and practical experience before officially working at a store. Wide- ranging content covers topics from basic knowledge of skin science and products to skincare and makeup techniques, deportment and appearance, followed by regular training, the nationally rec-ognized BC Certificate Test and other efforts to raise their abilities.

The Global Beauty Consultant Contestis held the same year as the Olympics.BCs selected from qualifying trials con-ducted in various countries and regionsgather to express their spirit of hospi-tality as well as cosmetic techniques.

■ We dispatch highly qualified BCs every year to spread Shiseido’s omotenashi around the world. The Global Beauty Consultant Contest, held every four years, encourages friendly rivalry and mutual exchange, bringing together 20,000 highly skilled individuals.

Creativity That Promotes Richness

R&D That Explores Human Science

Beauty Consultant (BC) Training That Spreads the Spirit of Omotenashi (Hospitality)

■ The International Federation of Societies of Cosmetic Chemists (IFSCC) has a membership roster comprising cosmetics companies from 45 nations around the world. We have received awards at 11


“Become a global player representing Asiawith its origins in Japan”

Domestic Cosmetics Business

Under the previous Three-Year Plan, the domestic cosmetics

business established a new business model by executing

marketing reforms to achieve “100 percent customer-oriented”

marketing. Under the new Three-Year Plan, we will further

advance efforts of the past three years to innovate brand strategy,

sales and Beauty Consultant activities in order to firmly secure

the number one position in Japan.


Domestic CosmeticsNet Sales

Operating Income

Sales by Division

(Billions of yen)

444.3 445.3 453.4 447.6 439.0

04 05 06 07 08 04 05 06 07 08

(Billions of yen)

38.9

25.5

34.336.9

43.1

Professional3.4%

Healthcare 3.3%

Counseling 50.8%

Toiletries 11.8%

Self-selection 22.7%

Non-Shiseido and Mail-Order 8.0%

Cosmetics85.3%

Note: Segment sales represent sales to external customers only and do not include intersegment sales or transfers.

Domestic Cosmetics: Operating Environment

The domestic cosmetics market is essentially not

growing. Conditions remain challenging, with intensifying

competition in the areas of new product development,

advertising and promotions as participants fight a zero-sum

battle for market share. In this environment, Shiseido

implemented domestic “100 percent customer-oriented”

marketing reforms under its previous Three-Year-Plan

from the fiscal year ended March 2006.

Achievements under the Previous Three-Year

Plan and in the Fiscal Year Ended March 2008

The fiscal year ended March 2008 was the final

year of the previous Three-Year Plan. Domestic cos-

metics sales decreased 1.9 percent year on year

because of factors such as cooling consumer senti-

ment. However, compared with the fiscal year ended

March 2005, over the entire three years of the plan

sales were essentially unchanged while operating

income increased 69.0 percent and operating prof-

itability increased 4.0 percentage points from 5.7 percent

to 9.7 percent.

Shiseido’s performance was the result of the

steady implementation of various reforms that com-

pletely revamped Shiseido’s business structure and

established a new business model. Aiming to create

“broad and strong” brands/lines, we executed a reno-

vation of brand strategy that selectively concentrated

marketing resources mainly on mega lines. We also

implemented sales reforms that entailed integrating

the cosmetics and toiletries business divisions and

establishing a channel-specific salesforce structure.

Moreover, Shiseido innovated the activities of Beauty

Consultants to raise corporate value at the point of

contact with customers. Over the past three years,

Shiseido’s domestic cosmetics business has created a

balanced profit structure through optimal, focused

deployment of resources. (Please see page 45 of the

Management’s Discussion and Analysis for a detailed

discussion of the results of the Domestic Cosmetics

segment.)

The addition of the high-performance line GoldenRepair for damaged hair toTsubaki, drove the introduc-tion of the mega line, result-ing in another year of highgrowth.

Domestic Marketing Strategy

Previous Three-Year Plan (FY2005-FY2007) New Three-Year Plan (FY2008-FY2010)

Launch and cultivate mega linesLaunch: FY2005-2006Cultivate: FY2007~

Strengthen cultivation ofmega lines

BC activity innovation:Global development of service methods

Launch new brands/lines

Strengthen Bénéfique and &FACE

Strengthen clé de peau BEAUTÉ and d program

BC activity innovation: Conduct evaluation of service based on level of customer satisfaction

Strengthen relationship-building brands/lines

Mega lines

Relationship-building

brands/lines

Beauty Consultant (BC)activity innovations

Sales reformsPhase 2 sales reforms:Eliminate sales quotas for sales representatives/Establish process-based targets

Phase 1 sales reforms:Build channel-based sales structure


Brand Strategy


Relationship-Building Brand Strategy

During the previous Three-Year Plan, Shiseido

succeeded by introducing mega lines that lead their

respective product categories, and implementing

brand/line strategy renovation that selectively con-

centrated marketing resources to create “broad and

strong” brands/lines. During the new Three-Year

Plan, Shiseido will focus on relationship-building

brands/lines1 based on our strength in building

strong ties with customers. Under this relationship-

building brands/lines strategy, Shiseido will make

full use of its strength at stores, which was

enhanced by innovating the activities of Beauty

Consultants and sales reforms during the previous

Three-Year Plan. Specifically, we plan to nurture

exclusive lines for existing channels such as

Bénéfique and & Face. Moreover, in the second half of

the fiscal year ending March 2009 we will add a

high-end line to clé de peau Beauté, and plan to

launch a new brand that generates strong interest.

1. Relationship-building brands/lines: Brands/lines that deepen relationships with customers through counseling.

Focusing on Mega Lines in Cultivating Existing

Brands/Lines

Four to five years ago, Shiseido’s spending was

dispersed over more than 100 lines. Over the past

three years, we have changed this situation by reor-

ganizing and consolidating our brand/line portfolio. As

a result, we are now concentrating costs and human

resources on a total of 27 core brands/lines. We will

further reduce this number to 21. We will concen-

trate marketing investment and manpower on these 21

In the year ended March2008, a high-performancefoundation and pre-makeupbase were added to theexclusive voluntary chainstore line Bénéfique NT.We will strengthen cultiva-tion of this line in thefuture.

Reduce Number of Core Brands/Lines

21 Core Brands/Lines of New Three-Year Plan

6 Mega Lines

Prestige

Channel specific

Specialty

5 Relationship-Building Brands/Lines

21 Core Brands/Lines

New brand


Feature: “Become a global player representing Asia with its origins in Japan”

brands/lines, which will include 6 mega lines and 5

relationship-building brands/lines, in order to further

raise marketing efficiency. In addition to scaling back

the number of core brands/lines, we will work to

reduce the number of product categories handled by

the Shiseido Group by approximately 30 percent.

During the first half of the fiscal year ending

March 2009, Shiseido will implement a large-scale

summer campaign across brands/lines and chan-

nels, centered on mega lines. At structured retailers in

particular, through this campaign Shiseido will

achieve higher sales and profitability by not only

presenting best-selling products effectively, but also

making proposals from the perspective of customers

that are in tune with seasons and trends.

Strengthening Efforts at Voluntary Chain Stores

We are further strengthening the voluntary chain

store channel because it is crucial to our aim of providing

high-quality services and counseling. Specifically,

Shiseido will use its collective technical capabilities

and expertise to provide seminars and other means

that help the employees of voluntary chain stores

acquire fully developed service skills with high-level

techniques and the spirit of omotenashi (hospitality) in

order to respond to customer needs. Moreover, we

will enhance our support for sales activities for mega

lines with numerous points of contact with customers,

such as Maquillage and Elixir Superieur. We will promote

activities using mega lines to draw customers to

stores, and have them experience our counseling serv-

ices, which will make them want to visit again. In this

way, we will energize the voluntary chain store channel.

Promotional activities were revised for Elixir Superieur in the fiscal year endedMarch 2008. We will further enhance handling of the line at voluntary chain stores.


Ensuring “100 Percent Customer-Oriented”

Marketing

Improving quality of activities across the board is

one of the themes of the new Three-Year Plan. Sales

reforms are crucial to the goal of raising the quality of

sales. During the previous Three-Year Plan, we

developed a system devoted to Beauty Consultant

activities that satisfy customers, with the main evalu-

ation metrics and other features based on the

results of a customer survey. Under the new Three-

Year Plan, although sales targets are maintained for

branch managers, we introduced a system that

ensures “100 percent customer-oriented” marketing by

eliminating evaluation of sales representatives based

on achievement of those targets and shifting to an

emphasis on process over sales performance.

Specifically, in place of sales targets we have

established evaluation metrics such as the number

of customers served, the customer return ratio and

counter creation ratio. Moreover, business partner

evaluation is also a key point. We therefore conduct

business partner surveys twice a year and employ

them as metrics that also lead to measures that

address the survey results.

During 2007 we introduced this evaluation sys-

tem in a limited number of locations prior to nation-

wide introduction from April 2008, and saw a clear

connection between the system and higher sales. In

addition, the system was in line with the activities of

Beauty Consultants, and sales representatives were

able to share a common goal of increasing the number

of new customers and continuing to help returning

The Second Phase of Sales Reforms


The second phase of management reforms brings

“100 percent customer-oriented” marketing.

Focusing on process will increase the importance

of communication between sales representatives

and Beauty Consultants.

Twice yearly, we conductsurveys of business part-ners channel by channel.



customers enhance their beauty. As a result, we

confirmed effects such as synergy among activities

and a higher sales counter realization rate.

Shiseido will work toward steady growth in the

future and even higher quality sales rather than a

short-term gain in sales. Moreover, we will use

mobile terminals and expand training and education to

strengthen the activities of Retail Supporters who

visit stores, create new sales counters and handle

product inventory control and ordering.

Strengthening Our R&D Framework

The Shiseido Group will work to increase its value

by enhancing R&D. We will focus not only on making

skin more beautiful, but also on enriching the spirit

as we establish an R&D framework that allows us to

capitalize more fully on our strengths.

Specifically, in the field of skincare, where

Shiseido excels, we will complement our conventional

focus on skin-brightening and anti-aging by stepping up

R&D to improve skin quality in areas such as dry

skin and pores. In addition, to make products that

enrich the spirit we will promote R&D covering product

textures, treatments and formulations that allow people

to clearly feel the effect of usage.

Shiseido will also focus on new domains such as

health and beauty care and cosmetic dermatology

treatments, and will energetically promote strategic

alliances and open innovation1. This will allow

Shiseido to mobilize knowledge both inside and outside

the Company, thus strengthening research that

makes skin beautiful and enriches the spirit.

1. Open innovation: An approach to R&D in which Shiseido openly expresses needs in areas where its own technologies are not sufficient and solicits ideas from around the world.

Initiatives to Raise the Value of the Shiseido Group


Shiseido operates R&D bases in five regions of the

world with a total of over 1,000 staff members.

The beauty/dermatology-oriented Navision has

been on the market since November 2005.



Overseas Cosmetics Business

Under the previous Three-Year Plan, the overseas cosmetics business

worked to establish a business base for a full-scale growth trajectory by

accelerating expansion in China, restructuring underperforming

businesses and implementing structural reforms for North American oper-

ations. Under the new Three-Year Plan, we will strengthen and

nurture the global brand and establish an undisputed presence

in Asia to further enhance our competitiveness in the global market.


Business Environment

Intensifying competition with global competitors

defines the operating environment of the overseas cos-

metics business. The markets of Asia, centered on

China, are growing strongly, while the markets of

Europe and North America are mature. In this environ-

ment, during the previous Three-Year Plan Shiseido

worked to accelerate expansion of its business in China,

and to improve profitability by restructuring underper-

forming businesses and implementing structural

reforms for North American operations.

Achievements under the Previous Three-Year

Plan and in the Fiscal Year Ended March 2008

During the fiscal year ended March 2008, growth in

Asia was highlighted by a 30 percent increase in sales in

China on a local currency basis. The global brand

, which is sold worldwide, and strong

performance by fragrances in Europe and Asia also

contributed to a 10.7 percent year-on-year increase in

sales on a local currency basis.

Over the past three years, sales increased more

than 50 percent compared with the fiscal year ended

March 2005 and operating profitability increased 6.3

percentage points from 0.4 percent to 6.7 percent.

Moreover, the overseas sales ratio increased to over

36 percent.

This performance was the result of a strong presence

in China, where we have earned greater customer sat-

isfaction by promoting a channel-based marketing

strategy. The strategy of distinction and concentration

executed overseas was another contributing factor.

Over the past three years, Shiseido’s overseas cosmetics

business has made progress in strengthening its busi-

ness base for a full-scale growth trajectory. (Please

see page 45 of the Management’s Discussion and

Analysis for a detailed discussion of the results of the

Overseas Cosmetics segment.)

Overseas CosmeticsNet Sales

Operating Income

Sales by Division

(Billions of yen)

04

161.1 174.5196.3

224.3263.7

(1.2)

0.72.8

10.4

17.9

05 06 07 08 04 05 06 07 08

(Billions of yen)

Professional14.0%

Cosmetics (Americas, Europe and Asia/

Oceania excludingChina) 63.0%

Cosmetics (China)23.0%

Cosmetics86.0%

Notes: Segment sales represent sales to external customers only and do not include intersegment sales or transfers.

A top brand in China, AUPRES underwent its first com-

prehensive renewal in 14 years.

The City Concept Marketing Strategy

Over the next three years we will successively

integrate lines and renew our product portfolio to

cultivate and strengthen the global brand

, which is sold in countries worldwide.

We will roll out a detailed marketing strategy called

the “City Concept.” Under the City Concept, we will

consider the world’s major markets as city-based

rather than country-based units, and we will con-

centrate allocation of resources in target cities. The

aim is to increase our presence and achieve growth

for the entire Shiseido Group through a ripple

effect. We have identified “City Intensive” and “City

Cultivation” as the two types of city marketing

strategies, and will roll out marketing suited to

their respective market environments. Shiseido will

use the City Intensive marketing strategy in cities

where the global brand is currently

weak but market characteristics suggest that the

injection of concentrated resources will generate

rapid growth. For example, under this strategy we

will expand our presence in Moscow and St.

Petersburg, the two consumption centers of Russia,

through a concentrated injection of resources. On

the other hand, we will apply the City Cultivation

marketing strategy in cities where the global brand

has a certain presence, such as

Bangkok, Thailand. In these cities, we will harness

Group synergies to roll out multiple brands/lines.

Key elements of our multiple brand/line rollout strategy

are the designer fragrances of French subsidiary

Beauté Prestige International S.A. and the makeup

artist brand of U.S. subsidiary Nars Cosmetics, Inc.

During the new Three-Year Plan we will step up

efforts to nurture fragrances, as they are a particularly

important product category that accounts for around 30

percent of the cosmetics markets of Europe and


Cultivating and Strengthening the GlobalBrand


White Lucent has gained strong customer support

worldwide as a skin-brightening product that

makes skin radiant and clear by bringing out its

inner shine.

Bio-Performance Intensive SkinCorrective Program received the

Prix d’Excellence from MarieClaire, a French fashion maga-

zine.

The Makeup is sold in 68 coun-

tries around the world, including

Japan.

North America.

An extension of the City Concept entails developing

promotions linking several cities simultaneously.

One example was last autumn’s promotion of the

global brand fragrance Zen in Europe

ahead of other markets. In this highly successful

campaign, we promoted Zen through street and airport

billboards, in-flight magazines, and in-store events

in duty-free stores and department stores in major

European cities.

We will further strengthen the travel retail busi-

ness, which continues to be a highly profitable and

growing area. In addition to emphasizing the designer

fragrances of Beauté Prestige International and the

global brand at duty-free stores and

other locations, we will execute promotions linking

multiple cities.

Strengthening Marketing Channels in China

Shiseido aims to further expand its business in

China, which has grown remarkably. In the depart-

ment store channel, we executed the first comprehen-

sive renewal of the exclusive China brand AUPRES in 14

years covering products, sales counters, customer

service and brand communication. Going forward, we

aim to maintain and improve the position of AUPRES as

the national brand that represents China.

On the other hand, we will introduce a newly

designed sales counter for the global brand

and work to strengthen marketing

overall by launching lines that are already popular in

Japan. Our aim is stable average annual growth of 10



Establishing an Undisputed Presence in Asia


Sales of Beauté Prestige International

designer fragrances increased strongly,

including sales of the travel retail

business.

The Zen “Cityjack Promotion” linked major cities

across Europe. This promotion had a big impact on

the market.

Sales in China

1999 2000 2001 2002 2003 2004 2005 2006 2007

Globalize Innovation of Beauty Consultant Activities

In Japan, Shiseido innovated Beauty Consultant

activities during the previous Three-Year Plan in ways


percent on a local currency basis.

In the cosmetic specialty store channel, we have

established new “PURE & MILD Excellent Stores,” a

format that permits stores to handle only the exclusive

cosmetic specialty store brand PURE & MILD. In

the fiscal year ending March 2011, we aim to have a

total of more than 5,000 stores under these con-

tracts and are working to generate average annual

sales growth of 20 to 30 percent.

As a result of the above, Shiseido intends to maintain

a high average annual growth rate of 20 percent, twice

the projected growth rate for China’s overall cosmetics

market on a local currency basis.

Masstige Marketing across All of Asia

Shiseido will use its knowledge of the skin types

and tastes of Asian people and its business expertise in

Japan in expanding masstige1 marketing across all of

Asia. The full-scale roll out will happen during the

Three-Year Plan beginning in the fiscal year ending

March 2012, but during the new Three-Year Plan that

began April 1, 2008, Shiseido will prepare by succes-

sively expanding mega line sales from Japan to the rest of

Asia. Our aim is to transform our Japanese mega lines

into Asian mega lines. During this time, we will build a

robust and unique earnings model for our masstige

business in preparation for a full-scale rollout.

Advancing Innovations of BeautyConsultant Activities


In the cosmetic spe-c ial ty store channelin China, the China-exclusive brand URARAsold well, and salesat existing storesincreased.

We will expand ourcustomer base byincreasing the num-ber of PURE & MILDExcellent Stores.

1. Masstige: Coined word from “mass” and “prestige,” and positioned as moreexpensive than mass-produced products, but more moderately priced than prestigeproducts.

We aim to develop theAqua Label skincare lineinto an Asian mega line.

Establishing a Global Production System

Production bases (15 locations) (Professional products)R&D bases (5 locations)

Factory in New Zealand(Closed June 2008)

Vietnam: Factory(Scheduled to beginoperating December 2009)

such as establishing the customer satisfaction evalua-

tion system and the Beauty Training Control Group.

During the new Three-Year Plan, we will further

advance and strengthen those activities on a global

scale. We plan to systemize the customer service

expertise based on the spirit of omotenashi that

Shiseido has developed in Japan as the “Shiseido

Beauty Way” and focus on the daily activities and training

of Beauty Consultants both in Japan and overseas. At

the same time, the customer service skills that have

been so successful in Japan during the previous Three-

Year Plan will be applied on a global scale. These initia-

tives will serve as the foundation for service that

ensures counseling precisely tailored to customer

needs. Shiseido is currently renewing its customer rela-

tions software in preparation for the global rollout, and

plans to begin using it in countries around the world

during the fiscal year ending March 2009. In addition, we

will expand the program for assigning superior Beauty

Consultants overseas and step up on-the-job training

and reciprocal exchanges. Our aim is to raise the status of

the profession of Beauty Consultants and achieve the

highest level of customer satisfaction in the world.

Reinforce Core Domains

During the previous Three-Year Plan, we achieved

results by reducing the number of domestic production

facilities from six to four, and intend to reorganize

our overseas production bases in the future. First, in

preparation for masstige marketing throughout Asia, we

are constructing a new 100,000m2 factory in Vietnam

that is scheduled for completion in October 2009. It

will begin operating in December 2009, and we are

preparing a framework for stable operation during

the new Three-Year Plan. In addition, we will target

focused reinforcement of our core domains while

strategically outsourcing certain functions in an effort to

establish an optimal global production system.



Establishing a GlobalProduction System



Corporate Social Responsibility (CSR)

Basic CSR Policy

Shiseido actively promotes both fundamental

CSR required of a company and selective CSR

unique to Shiseido.

With the start of the new Three-Year Plan in the

year ending March 2009, Shiseido places serving

customers at the center of its CSR activities. This

focus on meticulously addressing all customer

needs is reflected in the corporate message of “This

Moment. This Life. Beautifully.” Specifically,

Shiseido will further strengthen social activities that

employ its unique cosmetics, enhance measures

that address environmental problems, which is an

important global issue, support women who make

up 70 percent of Company employees and 90 per-

cent of its customers, and enhance the safety and

reliability that are the basis of trusting relationships

with customers.

Fundamental CSR

Fundamental CSR, the most basic responsibili-

ties of a company, involves efforts for our cus-

tomers, respect for employee diversity, business

partnerships, the protection of personal information,

and work environment safety and hygiene. Shiseido

addresses these various issues as a Group.

In the year ended March 2008, we introduced

Kangaroo Staff across Japan to work evening hours at

sales counters in place of Beauty Consultants with

young children, and expanded operations of

Hanatsubaki Factory, a special subsidiary staffed pri-

marily by developmentally challenged individuals.

Shiseido’s environmental initiatives include

acquisition of ISO 14001 certification for 13 domestic

and overseas factories. We also promote environ-

mentally conscious products with a basic policy of

choosing environment-friendly materials, limiting

and reducing excessive packaging, designing con-

tainers that are easy to recycle and enhancing our

lineup of refillable products. In addition to these

existing activities carried out pursuant to Shiseido’s

Eco-Policy, all Shiseido employees made original

contributions to the Eco-Idea program implemented by

the Company in Japan in March 2008. We will

strengthen efforts to nurture a corporate culture in

which all employees carry out their daily duties with

regard for the environment.

Shiseido’s Unique “Selective CSR” Activities

Shiseido carries out initiatives in its core cosmetics

business that are most expected by society and best

reflect our unique character. Specific activities

include developing and disseminating cosmetics and

beauty methods for troubling facial features such as

birthmarks or scarring, holding beauty seminars to

support active lifestyles of the elderly and develop-

mentally challenged individuals, and providing accu-

rate cosmetics and beauty information to young people.

Shiseido strives to help women lead beautiful,

happy and healthy lives. The range of activities

extends globally, and includes the contribution of

funds by the Shiseido Social Contribution Club

Creation of new markets Proposal of new values

Social contribution activities (Corporate philanthropy)

Environmental protection, information disclosure, personal information protection, human rights advocacy

Provision of high-quality products and servicesEmphasis on employees

Business partnershipsProfit and dividends

Payment of taxes, provision of employment opportunitiesCorporate viability

Shiseido’s UniqueCSR

Fundamental CSR

Legal compliance

CSR Activity Domains


(Hanatsubaki Fund) to selected support groups that

help improve the daily lives of women. Shiseido also

supports beauty courses for women in China ahead of

the 2008 Beijing Olympics.

Through various social activities, Shiseido con-

tinues to fulfill its mission of actively disseminating the

cultural capital it has cultivated since the Company’s

foundation 136 years ago. We provide unique sup-

port for promising new talent and art, including “shi-

seido art egg,” public exhibitions for up-and-coming

artists held at the Shiseido Gallery since the year

ended March 2007.

For further information regarding Shiseido’s

CSR activities, please see the CSR Report 2008 on

our website.

http://www.shiseido.co.jp/e/csr/

Principal CSR Activities

Cosmetics-Related Social Activities

Personal Makeup Advice for Serious Skin Concerns

Shiseido provides optimum products and beauty

methods to customers with serious skin concerns to

further enhance inner and outer beauty and raise

their quality of life.

Shiseido develops foundation to cover birth-

Shiseido CSR Report 2008 on the Shiseido website

marks and other skin concerns, and cooperates with

medical institutions in providing free makeup advice to

people with serious skin concerns.

We opened a central facility in the Shiseido head

office in Ginza, Tokyo, in June 2006 to further

expand these activities. Ten beauty consultants with

practical training at medical institutions and special-

ized on-the-job education give advice on cosmetic

cover-up techniques and makeup tailored to a vari-

ety of skin coloring concerns including birthmarks

and scarring. Services are by advance reservation

only to provide private spaces that ensure a relaxing

atmosphere and peace of mind. Customers comment

that they have more confidence and hope, and that

because they are able to cover troubling areas well,

they now look forward to putting on makeup. We are

now able to offer advice for a wider range of skin

concerns with the addition of new products in

March 2008. Through research and development for

unique products and beauty methods we will

strengthen CSR activities using cosmetics.

Business partners and medical institutions

throughout Japan that have received education and

support these activities are now conducting similar

makeup introduction activities at 300 locations.

Beauty Seminars

Shiseido holds approximately 3,600 Beauty

Seminars every year throughout Japan with partici-

pation by some 83,000 customers.

The atmosphere of privaterooms in the facil ity isrelaxed.


Initiatives to Support Women

Establishment of the Shiseido Science Grant

for Women in Research

In the fiscal year ended March 2008, Shiseido

established the Shiseido Science Grant for Women

in Research supporting the research activities of tal-

ented women specializing in the field of natural sci-

ence. Our aim is to cultivate the next generation of

leading female researchers. The grant covers all nat-

ural sciences and is not subject to age or qualification

restrictions in order to support the widest range of can-

didates. Moreover, the grant supports continued

research regardless of an individual’s life stage by

permitting the use of funds for the employment

expenses of assistant researchers. The first grant

was awarded to 9 individuals after a stringent review of

132 applicants. Recipients commented among other

things that the establishment of a grant that could

be used for the employment expenses of assistant

researchers was extremely encouraging.

Shiseido foresees the growing importance of

female researchers in the natural sciences and sees

this grant as a way to help further the efforts of

promising individuals.

Beauty Support for Women in China

Shiseido’s AUPRES was selected as the sole

sponsoring brand for the China Women’s

Association’s “Feminine from the Heart: Educational

Project to Cultivate Beauty Ideal for Chinese

Women,” a program conceived to improve the image

of Chinese women. The project is being held in

advance of the 2008 Beijing Olympics with the goal of

cultivating the inner and outer beauty of Chinese

women. This year the Company has distributed 2.3

million copies of an educational booklet about basic

beauty knowledge and held a total of 220 beauty

seminars attended by over 10,000 people in 15 cities

At Beauty Seminars, launched in 1949, Beauty

Consultants convey correct cosmetics application

methods directly to customers throughout Japan

while offering ideas about how the use of makeup

can be a richer, more enjoyable experience.

In addition, we actively hold Beauty Seminars for

the elderly and developmentally challenged.

The benefits of makeup therapy have also

received attention in the medical community.

Makeup therapy is a process whereby cosmetics

play a useful role in creating a positive outlook in

patients, motivating them to complete their physical

therapy, and enriching their interactions with society.

Environmental Initiatives

Afforestation Activities in China

Shiseido will carry out afforestation activities in

Lanzhou, Gansu Province on the Loess Plateau in

inner China over 10 years beginning the fiscal year

ended March 2008. The city is known as a waypoint on

the Silk Road. Over a period of 10 years, Shiseido

employees including those from local subsidiaries

will participate in planting trees on 69,300m2 of land.

We will plant 7,000 deciduous and other trees in the

year ending March 2009. Lanzhou is working for the

greenification of the Loess Plateau, and Shiseido is

the first overseas corporation to carry out afforestation

activities there.

Employees from three localShiseido subsidiaries carryout afforestation activities.


including Beijing and Shanghai.

Shiseido is also proposing ways for women in

China to cultivate a beautiful appearance through a

variety of programs including beauty seminars at

companies and universities.

Shiseido is eager to continue contributing to the

beauty of women in China through a variety of pro-

grams such as these.

Cultural Capital Initiatives

Shiseido Gallery Receives the

Grand Mecenat Award

Shiseido’s founding president Shinzo Fukuhara

opened the Shiseido Gallery in 1919, the oldest

existing gallery in Japan. The Gallery encouraged

young artists with few chances to present their

works to make a start by providing them with a free

exhibition space, and has continued such philan-

thropic activities over the 88 years since its opening.

The Kigyo Mecenat Kyogikai (English name:

Association for Corporate Support of the Arts) rec-

ognized the Gallery for these activities with the

Grand Mecenat Award, the highest honor of the

2007 Japan Mecenat Awards. In announcing its deci-

sion, the Association stated, “With a highly original

approach to supporting young artists, the Shiseido

Gallery is a ground-breaking presence in corporate

philanthropy in Japan. Its long history and the

remarkable artists it has supported are the very history

and essence of corporate philanthropy in this country.

Although long-established initiatives tend to become

routine, we praise the Shiseido Gallery for continuing

to open roads and maintaining an innovative

approach.”

Beauty seminars have beenheld in 15 cities in China.

Light Passage — Cai Guo-Qiang & Shiseido 2007Photo: Tadahisa Sakurai

The Shiseido Gallery, locatedin the Ginza, Chuo Ward,Tokyo, has held more than3,000 exhibits and hostedmore than 5,000 artists.

This photo shows theShiseido Gallery in 1934.

Corporate Social Responsibi l i ty (CSR)

General Meeting of Shareholders

Appointment, terminationResolution at the General Meeting ofShareholders based on laws

Appointment,termination

Appointment,termination

Advisory committees to the Board of Directors

Advisory committees to the Board of Directors

Board of Directors,Shiseido Company, Limited

Decision-Making Meeting of Corporate Officers

Environmental Committee

Report

AuditAudit

Supervision

Accounting Auditors Board of Auditors

Compliance Committee

Corporate Value Creation Committee

Policy Meeting of Corporate Officers

Corporate Executive Officer Committee

Proposal of material issues based on laws

Resolution,approval Proposal Resolution, approval

NominationAdvisory Committee

Remuneration Committee


Corporate Governance

Corporate Governance Policy

Shiseido is setting higher standards of corporate

governance based on the understanding that maximizing

corporate and shareholder value, fulfilling social

responsibilities and achieving sustainable growth and

development are key to maintaining support as a valuable

company from stakeholders (customers, business part-

ners, shareholders, employees and society).

Management and Execution Structure

Composed of eight members including two independent

directors, the Board of Directors is small and able to

make decisions quickly. The number of directors

decreased by one from nine in the year ended March

2008. The Board of Directors meets at least once a month to

discuss all significant matters. Attendance at the 14 Board of

Directors meetings in the year ended March 2008 was 98

percent (93 percent for external directors).

Through the adoption of a corporate executive officer

system, we are separating the decision-making and

supervisory functions of the Board of Directors from the

business execution functions of corporate officers. The

Corporate Executive Officer Committee, which acts as

the final decision-making body regarding corporate offi-

cers’ material issues, serves to transfer authority to cor-

porate officers, thereby clarifying their responsibilities

and accelerating operational execution. Shiseido’s

President & Chief Executive Officer, who also serves as the

Chief Operating Officer, chairs this Committee. The term of

office of directors and corporate officers is one year.

To obtain an outside point of view and further

strengthen the Board of Directors’ supervisory function in

regard to business execution, Shiseido appointed two

independent directors from the fiscal year ended March

2007. Having independent directors has stimulated dis-

cussion on significant management matters at Board of

Directors meetings and strengthened its independence.

In addition, two of the six non-independent direc-

tors have careers outside of Shiseido, promoting diversity

among the directors. Wide perspective and insight

based on differing backgrounds and areas of expertise

will promote objectivity and strengthen the Board’s

supervisory function.

We are also working to improve the execution capa-

bilities of corporate executive officers by handpicking a

small and able group and recruiting younger members.

To promote transparency and objectivity in manage-

ment, Shiseido established two committees to play an

advisory role to the Board of Directors: the Remuneration

Committee, charged with setting executive remuneration,

and the Nomination Advisory Committee, which evaluates

and nominates candidates for directors and corporate offi-

cers. Both committees are chaired by independent directors

to maintain objectivity.

The Remuneration Committee revised the system of

remuneration for directors, corporate officers and cor-

porate auditors in the fiscal year ending March 2009 to fur-

ther reflect the achievement of performance targets and

■ Shiseido’s Management and Business Execution Structure


share price to promote further globalization. The

Nomination Advisory Committee, in addition to nominating

new candidates for executive positions, has built and is

enforcing a fair and highly transparent framework

designed to enhance the capabilities of top management

and ensure that all executives deliver a consistently high

level of results. Measures include the establishment of

term limits for corporate officers and the formation of

rules governing promotions, demotions and retirements.

The term limit of corporate officers is four years per

position in principle and six years maximum.

Audit Structure

Shiseido’s Board of Auditors consists of two standing

corporate auditors and three independent corporate

auditors. Corporate auditors monitor the legality and

adequacy of directors’ performance by attending Board of

Directors meetings and other important meetings.

Representative directors and corporate auditors

meet regularly to exchange opinions on actions that will

resolve corporate governance issues. Shiseido maintains a

framework to ensure that corporate auditors discharge

their duties effectively. For example, it arranges liaison

meetings with the accounting auditors and the Internal

Auditing Department in addition to assigning full-time

staff to assist in audits. Corporate auditor attendance

was 94 percent for the 14 Board of Auditors meetings

and 92 percent for the 14 Board of Directors meetings

held in the fiscal year ended March 2008.

Internal audits of the entire Group are conducted to

ensure that business is executed in an appropriate manner,

and audit results are reported to the Board of Directors

and Board of Auditors.

Remuneration to Directors, Corporate

Officers and Corporate Auditors

The unfunded retirement benefit plan for directors

and corporate auditors was abolished in the fiscal year

ended March 2005. Remuneration for directors, corpo-

rate officers and corporate auditors consists of a basic

fixed portion and a performance-linked portion that fluc-

tuates depending on achieving financial results targets and

share price. Since the fiscal year ended March, 2006,

these portions have been nearly equal. Effective the fiscal

year ending March 2009, the performance-linked por-

tion has been revised upward to 60 percent of remunera-

tion in order to further raise the incentive for attaining per-

formance targets. Performance-linked remuneration

consists of an annual short-term incentive bonus based on

consolidated results, a medium-term cash incentive

based on level of achievement of the targets of the new

Three-Year Plan that started in the fiscal year ending

March 2009, and long-term incentive stock options, pri-

marily aimed at fostering a shared awareness of profits

with shareholders. Performance-linked remuneration is

designed to give directors and corporate officers a

medium-to-long-term perspective, not just a single-year

focus, and to motivate management to become more

aware of Shiseido’s performance and share price.

Independent directors receive fixed basic remunera-

tion only because of the importance of a stance inde-

pendent from business execution in their supervisory

President & CEO of ASKUL Corporation.

Dean of Faculty of Law and the School of Law, Professor ofWaseda Law School and Waseda University.

As an incumbent management executive in another industryand business, to provide Shiseido management with a per-spective not limited by the Company’s established structure.

To provide Shiseido management with legal knowledge asa professor specializing in legal studies, as well as experi-ence and insight concerning capital markets and corporategovernance.

■ External Directors: Background and Reason for AppointmentName Background Details Reason for Appointment

Shoichiro Iwata

Tatsuo Uemura

Note: Shiseido’s business relationship with ASKUL Corporation is as follows.1. The Shiseido Group purchases stationery and other items from ASKUL Corporation. Total purchases were less than 0.1 percent of the total of consolidated cost of sales and

selling, general and administrative expenses for the year ended March 31, 2008, and less than 0.1 percent of the net sales of ASKUL Corporation for the fiscal year ended March 31, 2008.

2. The Shiseido Group sells toiletries and other items for office use to ASKUL Corporation. The total of such sales for the fiscal year ended March 31, 2008 was less than 0.1 percent of consolidated net sales.

Executive officer of another company

Scholar


functions. Due to the nature of auditing, corporate

auditors receive fixed basic remuneration only, to elimi-

nate linkage with performance.

Shiseido sets remuneration amounts commensurate

with achievement of performance targets and by mak-

ing comparisons with companies in the same industry

and similar businesses with a high percentage of rev-

enues from overseas. Basic remuneration is within the

monthly remuneration limits decided by the General

Meeting of Shareholders; performance-linked remunera-

tion, including the bonus, medium-term cash incentive

and long-term incentive stock options, is also set by res-

olution at the General Meeting of Shareholders.

■ Remuneration to Directors and Corporate Auditors(Fiscal year ended March 2008) (Millions of yen)

Directors (9 people)External directors (2 of the 9)

Corporate auditors(5 people)External auditors (3 of the 5)

Total

Notes:1. Basic remuneration for directors was within the limit of ¥30 million per month as per resolution of the 89th Ordinary General Meeting of Shareholders (June 29, 1989). Basic remuneration for corporate auditors was within the limit of ¥10 million per month as per resolution of the 105th Ordinary General Meeting of Shareholders (June 29, 2005).

2. The above-noted amount for directors’ bonuses was based on a resolution of the 108th Ordinary General Meeting of Shareholders held on June 25, 2008.

■ Remuneration to Accounting Auditors(Fiscal year ended March 2008) (Millions of yen)

Item Amount

Remuneration paid for services rendered asaccounting auditors for the fiscal year under review 77

Total cash and other remuneration to be paid by the Company and its subsidiaries to their accounting auditors 120

Management System Unique to Shiseido

Guided by the idea that fulfilling corporate social

responsibility (CSR) is crucial to sustainable develop-

ment, we have established three CSR committees under the

jurisdiction of the Board of Directors as part of our corpo-

rate governance structure: the Compliance Committee,

the Corporate Value Creation Committee and the

Environmental Committee. All committees are headed by

the Vice President and comprise members elected com-

panywide. They make proposals for and report on plans and

results of activities to the Board of Directors.

The Compliance Committee works to ensure legiti-

mate and fair business practices in the Group, and pro-

motes activities including corporate ethics and risk

management.

The Corporate Value Creation Committee works to

increase the value of the corporate brand

by promoting corporate cultural activities as well as

gender equality, communication and social contribu-

tion activities.

In recognition of its responsibility as a global citizen,

Shiseido upgraded a panel of the Compliance Committee

that promoted environmental measures and established

the Environmental Committee in April 2008. In addition to

reducing environmental burden, the committee will

strengthen environmental measures on a global level

befitting Shiseido.

Compliance and Risk Management

We have enacted Group-wide Corporate Ideals, The

Shiseido Way (Corporate Behavior Declaration) and

The Shiseido Code (Corporate Ethics and Behavior

Standards), which outline the standards of behavior

that individual Group employees should apply in their

work, and are actively promoting legitimate and fair

business practices.

The Compliance Committee holds regular work-

shops on corporate ethics and human rights education,

and assigns a Code Leader to each office to ensure

observance of The Shiseido Code. Code Leaders

reports on the progress in promoting legitimate and

fair business practices at their respective offices. We

have also established multiple reporting and consulta-

tion help lines, which include advice from external

lawyers, to detect and correct at an early stage actions

that contravene the law, The Shiseido Code or other

regulations, and to identify distress in employees.

The Compliance Committee takes a cross-departmental

approach to dealing with risks. The committee identifies

and evaluates risk in management strategy operations

and administrative operations, and establishes panels

responsible for handling them. In the event of an emer-

gency, it responds by organizing a countermeasure head-

quarters, project, team, or other grouping as dictated by the

Basic

22226

85

33

308

Bonuses

120—

—

—

120

Stock options

38—

—

—

38

Total

38126

85

33

466

Comments from External Directors

As an independent director, I will fulfill my role in manage-

ment innovation from the perspective of the stakeholders so

that Shiseido will be loved and trusted by customers world-

wide.

Comment from Tatsuo Uemura, External Director

Two years have passed since I assumed the post of inde-

pendent director at Shiseido. Shiseido has a glamorous

image, but the Company’s management impresses me as

extremely serious. Shoichiro Iwata, the other independent

director, is also committed to maintaining an unwavering

management approach. I feel fortunate to work with such

sincere, dedicated business people.

Independent directors are not bound to directly affect the

judgment of management or to act in a set direction to that

effect. Rather, I believe our role is as a neutral third party

with no vested interest or management rights, to under-

stand, evaluate and give a vote of confidence in decision

making to increase its authority. On a daily basis, that means

providing an environment for company leaders to accelerate

their activities, or functioning as an effective brake when the

need arises. Although the last resort in applying the brake is

to log a protest in proceedings or resign, independent direc-

tors are close partners of management and generally give

them a vote of confidence. I look forward to a long-term part-

nership with Shiseido.

Comment from Shoichiro Iwata, External Director

Two years have passed since I was appointed to the posi-

tion of independent director. Shiseido must accelerate the

speed of reforms in order to evolve as a global company.

As chair of the Remuneration Committee, I have prepared

a remuneration system for the next Three-Year Plan to take

on the challenging goals of securing human resources to

support global operations and raising corporate value by

achieving the plan.

The pursuit of customer satisfaction is the basis of man-

agement and therefore of corporate growth. The amount of

discussion unrelated to customer value, however, tends to

increase with the size and complexity of an organization. I

carry out my responsibilities as an independent director by

checking for one-way thinking from an independent view-

point with the following in mind.

1. Is it good for the customer?

2. Is it good for society?

3. Will it raise shareholder value?

4. Does it fulfill accountability to all stakeholders?

The Board of Directors, comprising directors, independent

directors of varying backgrounds and corporate auditors with

broad perspectives, is highly committed to raising corporate

value, and conducts free and open-minded discussion and

decision making based on an awareness of corporate gover-

nance and other issues.


seriousness of the situation.

In accordance with the Corporate Law, Shiseido’s

Board of Directors has adopted and disclosed a basic policy

for internal control systems that outlines the necessary

systems to ensure that directors execute their duties in

conformance with laws and the articles of association and to

ensure the propriety of business with other companies.

We will work to further raise corporate value and

the quality of our corporate activities through ongoing

improvements to our governance structure.

Through the creation of products possessing true value and exceptional quality, westrive to help our customers realize their dreams of beauty, well-being and happiness.

With our customers

Joining forces with partners who share our goals, we act in a spirit of sincere cooperation and mutual assistance.

With ourbusiness partners

We strive to win the support and trust of our shareholders through transparent managementpractices and sound business results achieved by high-quality growth, enabling the retentionof earnings for future investments and payment of dividends.

With ourshareholders

The diversity and creativity of our employees make them our most valuable corporateasset. We strive to promote their professional development and we evaluate them fairly.We recognize the importance of our employees’ personal satisfaction and well-being, andseek to grow together with them.

With ouremployees

We respect and obey all laws in regions in which we do business. Safety and preservation ofthe natural environment are among our highest priorities. In cooperation with local communi-ties and in harmony with international society, we employ our cultural resources in creating abeautiful lifestyle.

With oursociety

Corporate Gover nance


(As of June 25, 2008)

Board of Directors, Corporate Auditors and Corporate Officers

Shinzo MaedaRepresentative Director,President & CEO

1970 Joined Shiseido2003 Director, Corporate Officer2005 Representative Director, President & CEO

Committees :Chair of CSR Committee

Kimie IwataRepresentative Director,Vice President

Responsibilities :Responsible for Consumer Information,Corporate Culture, Public Relations, CorporateCulture Reform and Committees under DirectControl of the Directors

1971 Entered Ministry of Labour2001 Director-General, Equal Employment, Children

and Families Bureau, Ministry of Health, Labour and Welfare

2003 Corporate Advisor of Shiseido2004 Director, Corporate Officer2007 Corporate Executive Officer2008 Representative Director, Vice President

Committees :Chair of Corporate Value Creation Committee,Compliance Committee and EnvironmentalCommittee

Yasuhiko HaradaDirector, Corporate SeniorExecutive Officer

Responsibilities :Chief Financial Officer, Responsible forFinance, Investor Relations, InformationSystem Planning, Logistics, OperationalReform and Internal Control

1971 Joined Shiseido2003 Corporate Officer2005 Director2006 Corporate Executive Officer2008 Corporate Senior Executive Officer

Toshimitsu KobayashiDirector, Corporate SeniorExecutive Officer

Responsibilities :Responsible for Domestic Cosmetics BusinessSales, President and Representative Director,Shiseido Sales Co., Ltd.

1971 Joined Shiseido2002 Corporate Officer2004 Director, Corporate Executive Officer2006 Corporate Senior Executive Officer

Carsten Fischer*Director, CorporateExecutive Officer

Responsibilities :Responsible for Global Business (InternationalBusiness, China Business and ProfessionalBusiness); Chief Officer of InternationalBusiness Division and Professional BusinessOperations Division

1979 Joined Hans Schwarzkopf GmbH2004 Corporate Officer, President, Professional

Care at Procter & Gamble Company 2006 Corporate Advisor of Shiseido2007 Corporate Executive Officer2008 Director Masaaki Komatsu

Director, CorporateExecutive Officer

Responsibilities :Responsible for Research & Development,Production and Technical Planning

1969 Joined Shiseido2003 Director, Corporate Officer2006 Corporate Executive Officer

Shoichiro IwataExternal Director

1997 President, ASKUL Corporation2000 CEO, ASKUL Corporation2006 External Director of Shiseido

Committees :Chair of Remuneration Committee

Tatsuo UemuraExternal Director

1997 Professor, School of Law, Waseda University2003 Professor, Graduate School of Law, Waseda

University2006 External Director of Shiseido

Dean of Faculty of Law and the School ofLaw, Professor of Waseda Law School andWaseda University

Committees :Chair of Nomination Advisory Committee

Directors


1973 Joined Shiseido2001 Corporate Officer2007 Corporate Auditor

1971 Joined Shiseido 2006 Corporate Auditor

2004 Attorney at Law2005 External Corporate Auditor of Shiseido

1992 Professor, Department of Chemistry, Collegeof Arts and Sciences, and Department ofBiological Science, Graduate School ofScience, The University of Tokyo

1996 Professor, Department of Life Sciences,Graduate School of Arts and Sciences, TheUniversity of Tokyo

2008 External Corporate Auditor of Shiseido

1988 President, Keiseikai Hospital2007 External Corporate Auditor of Shiseido

Representative director retired as of June 25, 2008 is as follows.Representative Director, Vice President: Seiji Nishimori

Corporate officers retired as of March 31, 2008 are as follows.Corporate Executive Officer: Kohei MoriCorporate Officers: Toshihide Ikeda, Kiyoshi Nakamura, Kazutoshi Satake,Takemasa Yamanaka, Yutaka Yamanouchi

Kiyoshi Kawasaki**Responsible for Domestic Non-Shiseido BrandBusiness, Boutique Business and AdvertisingCreation

Corporate Officers

Corporate Executive Officer

Kozo HanadaResponsible for Structured Retail Stores and DomesticCosmetics Business, General Manager of SalesDepartment and Structured Retail Stores President and Representative Director, FT Shiseido Co., Ltd. Vice President and Director, Shiseido Sales Co., Ltd.

Tamio InabaResponsible for Business Strategy and Marketing of Domestic Cosmetics Business

Tsunehiko Iwai*Responsible for Technical Planning and TechnicalAffairsGeneral Manager of Technical Department

Shoji Nishiyama*Responsible for Cosmetics Products Research &Development and Software Development

Hisayuki Suekawa*General Manager of Corporate Planning Department

Shoji Takahashi*Responsible for the Americas

Tatsuomi TakamoriChief Officer of China Business Division

Mitsuo TakashigeResponsible for PersonnelGeneral Manager of Personnel Department

Kazuo TokuboResponsible for Functional Food, Innovative ScienceResearch & Development and Patents

Takafumi UchidaResponsible for General Affairs, Legal Affairs andExecutive Affairs General Manager of General Affairs Department

Ryuichi Yabuki*Responsible for Specialty Stores, Domestic CosmeticsBusinessVice President and Director, Shiseido Sales Co., Ltd.

Toshio YoneyamaResponsible for Healthcare Business and FrontierSciences BusinessChief Officer of Healthcare Business DivisionPresident and Representative Director, Shiseido Beauty Foods Co., Ltd.

Corporate Auditors

Corporate Officers

* New appointment ** Director retired as of June 25, 2008

Kazuko OhyaCorporate Auditor

Kiyoharu IkomaCorporate Auditor

Akio HaradaExternal CorporateAuditor

Reiko Kuroda*External CorporateAuditor

Nobuo OtsukaExternal CorporateAuditor


Main Subsidiaries and Af filiates

Company Name

Shiseido Sales Co., Ltd.

Shiseido FITIT Co., Ltd.

Shiseido International Inc.

FT Shiseido Co., Ltd.

Shiseido Professional Co., Ltd.

Shiseido Beauty Salon Co., Ltd.

Shiseido Pharmaceutical Co., Ltd.

Shiseido International Corporation

Shiseido America, Inc.

Shiseido Cosmetics (America) Ltd.

Zotos International, Inc.

Shiseido International Europe S.A.

Shiseido International France S.A.S.

Shiseido Deutschland GmbH

Shiseido Cosmetici (Italia) S.p.A.

Shiseido Europe S.A.S.

Beauté Prestige International S.A.

Laboratoires Declér S.A.

Shiseido China Co., Ltd.

Shanghai Zotos Citic Cosmetics Co., Ltd.

Shiseido Liyuan Cosmetics Co., Ltd.

Shiseido Dah Chong Hong Cosmetics Ltd.

Taiwan Shiseido Co., Ltd.

The Ginza Co., Ltd.

Shiseido Parlour Co., Ltd.

Selan Anonymous Association2

Other: 65 companies

(Equity-method affiliates): 3 companies

Location

Minato-ku, Tokyo

Chuo-ku, Tokyo

Chuo-ku, Tokyo

Chuo-ku, Tokyo

Chuo-ku, Tokyo

Chuo-ku, Tokyo

Chuo-ku, Tokyo

Delaware, U.S.A.

New York, U.S.A.

New York, U.S.A.

Connecticut, U.S.A.

Paris, France

Paris, France

Dusseldorf, Germany

Milan, Italy

Paris, France

Paris, France

Paris, France

Shanghai, China

Shanghai, China

Beijing, China

Hong Kong, China

Taipei, Taiwan

Chuo-ku, Tokyo

Chuo-ku, Tokyo

Chiyoda-ku, Tokyo

—

—

Paid-in Capital

¥100 million

¥10 million

¥30 million

¥100 million

¥250 million

¥100 million

¥100 million

(Thousands of U.S. dollars)

$403,070(Thousands of U.S. dollars)



$25,000(Thousands of euro)

€247,473(Thousands of euro)






€19,374(Thousands of yuan)

CNY353,006(Thousands of yuan)

CNY418,271(Thousands of yuan)

CNY94,300(Thousands of HK dollars)

HKD123,000(Thousands of NT dollars)

NTD1,154,588

¥100 million

¥100 million

¥11,600 million

—

—

Main Business1

｠

Domestic cosmetics business

｠

｠

｠

Overseas cosmetics business

Others

—

—

Equity ownership percentage3

100.0

｠100.0

100.0

100.0

100.0

｠100.0

｠100.0

｠100.0

100.0（100.0）

100.0（100.0）

100.0（100.0）

100.0（100.0）

100.0（100.0）

100.0（100.0）

100.0（100.0）

100.0（100.0）

100.0（100.0）

100.0（100.0）

100.0

92.6（72.6）

65.0（33.0）

50.0

51.0

96.9

99.3

—［100.0］

—

—

Notes: 1. The segment name is noted in the Main Business column.2. A company of less than 50 percent equity ownership that is treated as a subsidiary because Shiseido is essentially in control.3. Numbers in parentheses include indirect equity ownership, and numbers in brackets represent ownership by parties with a close relationship or

those in agreement with Shiseido.

(As of March 31, 2008)


F i n a n c i a l S e c t i o n

Six-Year Summary of Selected Financial Data ··········42

Management’s Discussion and Analysis ···················43

Consolidated Financial Statements ···························54

Notes to the Consolidated Financial Statements ······59

Report of Independent Auditors ································76


Shiseido Company, Limited, and SubsidiariesFor the years ended March 31, 2003 to 2008

Thousands of dollarsMillions of yen (Note 1)

(Except per share data) (Except per share data)

2003 2004 2005 2006 2007 2008 2008

Operating Results:Net sales ·····························Cost of sales (Note 2) ············Selling, general and administrative

expenses (Note 2) ··················Operating income (Note 2) ·····EBITDA (Note 3) ···················Net income (loss)··················

Financial Position (At year-end):Total assets ·························Short-term liabilities (Note 4) ·······Long-term debt·····················Interest-bearing debt ·············Net assets ···························

Per Share Data (In yen and U.S. dollars):Net income (loss) (Note 5) ······Net assets (Note 5) ················Cash dividends ·····················Weighted average number of

shares outstanding during the period (thousands)··········

Financial Ratios:Operating profitability (%) (Note 2) ··Return on assets (%) ·············Operating ROA (%) (Notes 2 and 6)·····Return on equity (%) ··············Equity ratio (%)·····················Interest coverage ratio (times) (Note 7) ···Debt-equity ratio (times)·········Payout ratio (Consolidated)(%) ·······Total return ratio (%) (Note 8)······Number of employees at year-end ····Net sales per employee ··········

Notes: 1. U.S. dollar amounts are converted from yen, for convenience only, at the rate of ¥100.20 = US$1 prevailing on March 31, 2008.2. Cost of sales, selling, general and administrative expenses, operating income, operating profitability and operating ROA for years up to March

31, 2005 have been retrospectively restated to reflect changes in accounting policies for the year ended March 31, 2006.3. EBITDA (Earnings before interest, tax, depreciation and amortization) = Income (loss) before income taxes + Interest expense + Depreciation4. Short-term liabilities = Short-term debt + Current portion of long-term debt5. Net income (loss) per share (primary) is based on the average number of shares outstanding during the fiscal year. Net assets per share is

calculated using the number of shares outstanding as of the balance sheet date.6. Operating ROA = (Income from operations + Interest and dividend income) ÷ Total assets (Yearly average)7. Interest coverage ratio = Net cash provided by operating activities ÷ Interest paid* *As stated in the statements of cash flows8. Total return ratio = (Cash dividends + Share buybacks*) ÷ Net income *Excluding odd-lot purchases

¥621,250170,702

403,45947,08966,82724,496

¥663,40355,11744,29199,408

364,728

¥ 58.0844.720.0

419,580

7.63.77.37.0

53.330.00.2834.553.2

25,202¥24.7

¥624,248166,299

420,47137,47882,34127,541

¥626,73047,67818,48066,158

385,336

¥ 64.9903.722.0

414,723

6.04.36.07.6

59.818.20.1833.951.2

24,839¥25.1

¥639,828168,636

444,66326,52929,043(8,856)

¥701,09525,21369,11494,327

369,957

¥ (21.5)866.524.0

414,219

4.1(1.3)4.3

(2.4)51.222.10.26

——

24,184¥26.5

¥670,957176,884

455,19438,87958,96314,436

¥671,84212,78669,49282,278

387,613

¥ 34.4906.130.0

412,855

5.82.15.93.9

55.78.6

0.2287.2

105.1

25,781¥26.0

¥694,594185,533

459,05650,00578,03625,293

¥739,83366,14461,694

127,838403,797

¥ 60.9940.832.0

412,572

7.23.67.46.6

52.530.60.3252.652.6

27,460¥25.3

¥723,485186,466

473,55463,46594,96035,460

¥675,86438,65324,56663,219

399,739

¥ 86.1946.234.0

407,696

8.85.09.49.2

56.639.10.1639.5

108.8

28,793¥25.1

$7,220,4091,860,938

4,726,088633,383947,705353,892

$6,745,150385,758245,170630,928

3,989,411

$0.869.440.34

$0.25

Six-Year Summar y of Selected Financial Data


Operating ResultsOverview

During the fiscal year ended March 31, 2008, amid rising concern

around the world about an economic downturn linked to the sub-

prime crisis in the United States and rising crude oil prices, the

economies of China and other countries in Asia continued to

grow steadily. The Japanese economy maintained moderate

growth despite a slight weakening in consumer spending due to

uncertainty about the economic outlook and the high price of

raw materials such as crude oil, as well as sudden fluctuations in

exchange rates and stock prices in the second half of the year. In

the cosmetics industry, Ministry of Economy, Trade and Industry

statistics for cosmetics shipments showed that shipments of

cosmetics were at a similar level to the previous year.

Amid these conditions, Shiseido worked to achieve the

objectives of the Three-Year Plan during its final year aimed at

expanding growth and raising profitability through continued

emphasis on the three key strategies of “reforming domestic mar-

keting activities,” “further strengthening global development” and

“fundamental structural reforms.” As a result, for the fiscal

year under review, net sales increased 4.2 percent compared with

the previous fiscal year to ¥723,485 million, and operating

income increased 26.9 percent to ¥63,465 million. Operating

profitability was 8.8 percent. Shiseido therefore achieved the

objective of the Three-Year Plan of operating profitability of 8 per-

cent or higher. Gain on sale of shares in Shiseido Logistics Co.,

Ltd. and Shiseido Lease Co., Ltd. compensated for other

expenses including impairment loss and nonrecurring expense for

additional retirement benefits. As a result, net income

increased 40.2 percent to ¥35,460 million.

Changes in Accounting PoliciesPursuant to an amendment to the Corporation Tax Law

(Partial Revision of Income Tax Law, Law No. 6 of March 30,

2007; Partial Revision of Income Tax Law Enforcement

Ordinance, Cabinet Order No. 83 of March 30, 2007), the

Company and its domestic consolidated subsidiaries have

changed their treatment of depreciation on property, plant and

equipment acquired after April 1, 2007. In addition, the

Company and its domestic consolidated subsidiaries depreciate the

difference between 5 percent of the acquisition cost of assets

acquired on or before March 31, 2007 and the book value of

said assets uniformly over a five-year period, starting the year

following the fiscal year in which the depreciated value of said

assets reaches 5 percent of the acquisition price using the pre-

amendment depreciation method. Depreciated amounts are

included in depreciation expenses.

(Please refer to Notes to the Consolidated Financial

Statements, “2. Summary of Significant Accounting Policies,”

on page 59, for additional details regarding the changes in

accounting policies.)

Net SalesNet sales increased 4.2 percent on a yen basis to ¥723,485

million, and increased 1.9 percent on a local currency basis.

While domestic sales decreased year on year because con-

sumer sentiment cooled in the second half of the fiscal year,

overseas sales increased substantially, centered on China

Cost of Sales and Selling, General and Administrative Expenses[Cost of Sales]

Cost of sales increased 0.5 percent compared with the previ-

ous fiscal year to ¥186,466 million, but the ratio of cost of

sales to net sales decreased 0.9 percentage points to 25.8 per-

cent. Factors in the improvement included ongoing efforts to

reduce cost of sales, enhanced production efficiency because of

increased production due to higher overseas sales, and an

increase in the proportion of sales in China, where the cost of

sales ratio is low. Moreover, in Japan Shiseido withdrew from or

scaled back service businesses with high cost of sales ratios such

as the leasing business.

[Selling, General and Administrative Expenses]Selling, general and administrative (SG&A) expenses

increased 3.2 percent compared with the previous fiscal year to

¥473,554 million. The ratio of SG&A expenses to net sales

decreased 0.7 percentage points to 65.4 percent. Analysis of the

major components of SG&A expenses is included in the fol-

lowing sections.

Marketing CostsMarketing costs consist of advertising and promotional

expenses. The ratio of marketing costs to net sales

decreased 0.7 percentage points to 22.9 percent.

Overseas, Shiseido invested aggressively to support the

critical Chinese market, the new Zen and designer fra-

grances in Europe, and the travel retail business.

Concentration of brands/lines in Japan allowed Shiseido to

manage domestic marketing expenses more efficiently and

compensate for higher outlays overseas. Shiseido has kept

annual marketing costs at a constant percentage of net

sales, and plans to maintain that ratio in the future.

(Billions of yen)

Net SalesOverseas Sales Ratio

(%)

20082007200620052004

200

0

400

600

15

0

30

45

800 60

723.5694.6671.0639.8624.226.0 27.5 29.4 32.4 36.5

Domestic Sales 459.2469.8473.7464.1461.8Overseas Sales 162.4 175.7 197.2 224.8 264.3

Net Sales/Overseas Sales Ratio

Management’s Discussion and Analysis


Personnel ExpensesThe ratio of personnel expenses to net sales decreased

0.2 percentage points compared with the previous fiscal

year to 21.4 percent. Although the ratio of personnel

expenses to net sales rose slightly in Japan, Shiseido was able

to keep the rate of increase in overseas personnel expenses

within the rate of increase in overseas sales.

Other ExpensesThe ratio of other expenses to net sales increased 0.2 per-

centage points to 21.1 percent. Overseas, Shiseido was able to

keep the rate of increase of expenses within the rate of

increase in sales. In Japan, however, Shiseido incurred non-

recurring expenses in connection with issues such as the

development of new systems of internal control for reporting.

Operating IncomeOperating income increased 26.9 percent compared with

the previous fiscal year to ¥63,465 million due to marginal

gains resulting from growth in net sales, reduced cost of sales

and efficient management of SG&A expenses. Operating prof-

itability increased 1.6 percentage points to 8.8 percent, thus

meeting the Three-Year Plan goal of operating profitability of

8.0 percent or higher.

Other Income (Expenses)Net other income totaled ¥2,060 million, compared with net

other expenses of ¥2,239 million for the previous fiscal year.

Net interest income, calculated as interest and dividend

income less interest expense, totaled ¥1,095 million, compared

with net interest income of ¥288 million for the previous fiscal year.

However, changes in exchange rates resulted in a foreign

exchange loss of ¥1,649 million. Equity in earnings of affiliates

increased to ¥149 million, partly reflecting the contribution of

Pierre Fabre Japon, which sells the Avène brand of Laboratoires

Pierre Fabre in Japan. Moreover, the transfer of shares in

Shiseido Logistics Co., Ltd. and Shiseido Lease Co., Ltd. resulted

in gain on sales of shares in affiliates totaling ¥3,102 million.

However, Shiseido also incurred other expenses including

impairment loss, non-recurring expense for additional retirement

benefits due to restructuring of the domestic sales system and non-

recurring expenses for restructuring to improve profitability.

Income before Income TaxesIncome before income taxes increased 37.2 percent com-

pared with the previous fiscal year to ¥65,525 million.

Income TaxesIncome taxes, including deferred taxes, increased 33.4 percent

compared with the previous fiscal year to ¥25,570 million as a

result of the increase in income before income taxes. The

effective tax rate was 39.0 percent, a decrease of 1.1 percentage

points from 40.1 percent in the previous fiscal year, as a result of

the increase in the proportion of earnings from overseas con-

solidated subsidiaries with lower statutory and effective tax

rates than in Japan.

Minority Interests in Net Income of Consolidated Subsidiaries

Minority interests in net income of consolidated subsidiaries


¥4,495 million, due to improved performance of joint ventures in

Asia, primarily in China and Taiwan.

Net IncomeNet income increased 40.2 percent compared with the previ-

ous fiscal year to ¥35,460 million. Net income per share

increased to ¥86.1 from ¥60.9 for the previous fiscal year.

Improved profitability and management of capital resources as

a result of total returns exceeding net income supported an

increase of 2.6 percentage points in return on equity to 9.2

percent from 6.6 percent for the previous fiscal year.


Operating IncomeOperating Profitability

20082007200620052004

20

0

40

60

2.5

0

5

7.5

80 10

63.550.038.926.537.56.0 4.1 5.8 7.2 8.8

Operating Income/Operating Profitability

Cost of Sales Ratio (Left scale)

SG&A Expenses Ratio (Right scale)

2008200720062005200423 63

25.826.726.426.426.667.4 69.5 67.8 66.1 65.4

Cost of Sales Ratio/SG&A Expenses Ratio

28 68

26 66

25 65

24 64

27 67

29 69

(%) (%)30 70


Net Income (Loss) Return on Equity

20082007200620052004

0

(10)

10

30

0

(3)

3

9

40 12

35.525.314.4(8.9)27.57.6 (2.4) 3.9 6.6 9.2

20 6

Net Income (Loss)/Return on Equity


Review by Business SegmentResults by business segment follow below.

Domestic CosmeticsSales in the domestic cosmetics segment decreased 1.9

percent compared with the previous fiscal year to ¥439,021

million, due to factors including cooling consumer sentiment in the

second half.

[Cosmetics Division]Sales in the cosmetics division decreased 2.5 percent

compared with the previous fiscal year, with lower results

for counseling-based cosmetics, self-selection cosmetics

and toiletries. Factors such as cooling consumer sentiment in

the second half hampered continued efforts to build “broad and

strong” brands/lines and cultivate long-selling brands. As

outlined below, specific efforts included the addition of new

lines and items and innovation of existing core items.

In brands/lines through which we seek to expand customer

contacts, we worked to cultivate and strengthen each of our

mega lines aimed at attaining leading share in their respective

product categories, including makeup and skincare. Among

them, Tsubaki drove Shiseido’s mega line strategy with the

strong performance of new Tsubaki Golden Repair for dam-

aged hair launched in September 2007.

In brands/lines that deeply entrench customer contact points

and strengthen customer relationships, we innovated the highly

functional cream La Crème s in the Clé de Peau Beauté high-end

prestige brand and also Bénéfique anti-aging products exclu-

sively for voluntary chain stores.

[Professional Division]Sales in the professional division decreased 8.9 percent

compared with the previous fiscal year.

In beauty salon services, we primarily focused on activities to

increase the technical capability of stylists, and on proposing

new lineups. In hair and beauty salon product sales, we shifted to

a new marketing style that emphasizes the quality of our pro-

posals. However, this business is in a transitional period as it

undergoes sales reforms, which was one factor that caused

sales to decrease.

[Healthcare Division]Healthcare division sales increased 15.8 percent compared

with the previous fiscal year. In particular, we concentrated mar-

keting resources to develop Collagen EX and Collagen Update in

the Collagen series in order to address expected growth in the mar-

ket for beauty supplements. As a result, strong sales of the

Collagen series contributed to the increase in division sales.

Operating income for the domestic cosmetics segment


¥43,130 million, and segment operating profitability was 9.7 per-

cent. Despite the decrease in sales, operating income increased

because of efforts to reduce cost of sales and further improvement

in the efficiency of SG&A expenses.

Overseas CosmeticsSales in the overseas cosmetics segment increased 10.7

percent compared with the previous fiscal year on a local currency

basis and 17.6 percent on a yen basis to ¥263,703 million.

Ongoing aggressive efforts to develop markets and establish a

business base overseas, aided by the effects of a weaker yen,

resulted in steady sales increases in all regions, led by China.

[Cosmetics Division]Division sales increased 10.8 percent on a local currency

basis and 18.0 percent on a yen basis compared with the previ-

ous fiscal year.

In the prestige market, Shiseido generated steady sales

growth by concentrating on the strength of the global brand

in anti-aging and skin-brightening products and

enhancing the structure of the travel retail business. In addi-

tion, the high-end prestige brand Clé de Peau BEAUTÉ, the

designer fragrances of Beauté Prestige International S.A., and the

NARS makeup artist brand also performed well.

In the middle mass market, sales of the Za brand increased

throughout Southeast Asia.

In China, our key overseas market, we continued to proactively

advance our channel-specific brand strategy. In the department

store channel, we worked to cultivate the China-only AUPRES

brand and the higher-grade line of SUPREME AUPRES. In the cos-

metics specialty store channel, we continued to increase the num-

ber of contracts for Shiseido Chain Stores while raising per-

store sales at existing outlets by focusing on the URARA brand of

products sold exclusively in this channel.

[Professional Division]Division sales increased 9.6 percent on a local currency

basis and 14.8 percent on a yen basis compared with the previ-

ous fiscal year. Sales of Zotos International, Inc., which manu-

factures and sells products for salons globally with a focus on

North America, were strong, primarily for the haircare line from

JOICO. Sales of the esthetic beauty and spa treatment brands

Decléor, CARITA and Qi were also firm.

Operating income of the overseas cosmetics segment

increased 71.1 percent to ¥17,874 million, and segment operat-

ing profitability was 6.7 percent. Factors included strong sales

growth in highly profitable regions and efficient management of

expenses.

OthersSales in other businesses decreased 8.6 percent compared

with the previous fiscal year to ¥20,761 million. The decrease was

primarily the result of the divestiture of the lease company

Shiseido Lease Co., Ltd. during the fiscal year.

[Frontier Sciences Division]The frontier sciences division handles items such as medical-

use drugs, cosmetics raw materials, chromatography, and

cosmetic dermatology treatments. Sales rose with the continued

increase in sales for bio-hyaluronic acid, a raw material used in

cosmetics, pharmaceuticals and foods.



Moreover, the Michelin Guide 2008 Tokyo, published by

French tire maker Michelin, awarded the L’osier restaurant

managed by Shiseido Co., Ltd. its highest rating of three stars.

Operating income from other businesses decreased 11.1 percent

compared with the previous fiscal year to ¥1,995 million and

segment operating profitability was 5.0 percent. The divestiture of

Shiseido Lease Co., Ltd. was a primary factor in the decrease.

Review by Geographic SegmentResults by geographic segment (by location) follow below.

JapanSales in Japan decreased 2.2 percent compared with the pre-

vious fiscal year to ¥460,714 million despite higher sales in the

healthcare division and the frontier science division due to a

decline in sales of the core domestic cosmetics business.

Operating income in Japan increased 16.3 percent compared

with the previous fiscal year to ¥31,785 million as a result of

reduced cost of sales and more efficient management of marketing

costs due to the concentration of brands/lines.

AmericasSales in the Americas increased 7.7 percent compared with the

previous fiscal year on a local currency basis. Sales increased 9.3

percent on a yen basis to ¥56,559 million due to depreciation of

the yen versus the U.S. dollar.

In the cosmetics division, Shiseido generated strong growth for

the global brand and the NARS brand in the United

States. Sales of subsidiaries in Canada and Brazil were also

solid.

In the professional division, sales of Zotos International, Inc.

were firm.

Operating income in the Americas increased 42.2 percent

compared with the previous fiscal year to ¥3,994 million, due to

marginal gains through growth in sales and the effects of

structural reform in North America.

EuropeSales in Europe increased 6.6 percent compared with the

previous fiscal year on a local currency basis. Sales increased 17.4

percent on a yen basis to ¥103,775 million due to depreciation of

the yen versus the euro.

In the cosmetics division, sales of the global brand

were solid at subsidiaries in Italy and France.

Sales also continued to increase in the growth markets of Spain

and the travel retail business. However, the impact of an

increase in the Value Added Tax rate caused sales in Germany to

decrease slightly compared with the previous fiscal year. Sales of

the designer fragrances of Beauté Prestige International S.A.

increased substantially throughout Europe.

In the professional division, sales of the esthetic beauty and spa

treatment brands CARITA and DECLÉOR were robust.

Operating income in Europe increased 42.4 percent com-

pared with the previous fiscal year to ¥8,986 million. Marginal gains

through growth in sales compensated for aggressive marketing

outlays for designer fragrances and the travel retail business

and strategic investment in the new Zen that was prelaunched in

Europe in the fall of 2007.

Asia/OceaniaSales in Asia/Oceania increased 16.9 percent on a local cur-

rency basis. Sales increased 23.0 percent on a yen basis to

¥102,437 million due to depreciation of the yen versus major cur-

rencies. Sales were steady in the cosmetics division, centered on

the key market of China.

In the cosmetics division, high growth continued in China,

including Hong Kong, as Shiseido achieved year-on-year growth of

30 percent for the fourth consecutive year. Sales were also

solid in countries other than China, particularly Korea and

Thailand. Sales growth was also strong in the travel retail business.

In the professional division, a subsidiary in Thailand

increased sales by significantly expanding its directly managed spa

and salon business.

Operating income in Asia/Oceania increased 41.6 percent

compared with the previous fiscal year to ¥15,880 million, as high-

er marginal gains resulting from sales growth and reduced cost of

sales compensated for an increase in strategic marketing

expenditures and higher personnel expenses in China.

Operating Profitability by Business Segment

Domestic Cosmetics

20082007200620052004(%)

9.78.17.55.78.7Overseas Cosmetics (0.8) 0.4 1.4 4.6 6.7Others (2.4) (0.2) 2.4 4.9 5.0

Note: Operating profitability is calculated against sales for the segment,including intersegment sales.

(Billions of yen)

Domestic Cosmetics

20082007200620052004

250

0

500

750

439.0447.6453.4445.3444.3

Net Sales by Business Segment

Overseas Cosmetics 161.1 174.5 196.3 224.3 263.7Others 18.8 20.0 21.3 22.7 20.8

Total 624.2 639.8 671.0 694.6 723.5

Operating Income by Business Segment

Domestic Cosmetics

20082007200620052004(Billions of yen)

43.136.934.325.538.9Overseas Cosmetics (1.2) 0.7 2.8 10.4 17.9Others (0.9) (0.1) 1.0 2.2 2.0


Liquidity and Capital ResourcesFinancing and Liquidity Management

Shiseido seeks to generate stable operating cash flow and

ensure a wide range of funding methods, with the aims of

securing sufficient capital for operating activities and maintaining

sufficient liquidity and a sound financial position. We fund

working capital, capital expenditures, and investments and

loans needed for sustainable growth by supplementing cash

on hand and operating cash flow with bank borrowings and

bond issues.

As of March 31, 2008, Shiseido maintained a sufficient level of

liquidity. The use of diverse funding methods provided a high level

of financial flexibility. One of our targets for short-term liquidity is

to maintain cash on hand at a level of approximately 1.5

months of consolidated net sales. As of March 31, 2008, cash and

time deposits together with short-term investments in securities

totaled ¥132,488 million, which represented 2.2 months of

consolidated net sales.

As of March 31, 2008, interest-bearing debt totaled ¥63,219

million. Shiseido has diversified funding methods. These

include an unused shelf registration in Japan for ¥50 billion of

straight bonds. Shiseido Co., Ltd. and two financial sub-

sidiaries, in the United States and Europe, respectively, have

established a syndicated loan program with unused commit-

ments totaling $260 million. A financial subsidiary in the United

States has also established an unused commercial paper program

totaling $100 million.

Credit RatingsShiseido recognizes that it needs to maintain a certain credit rat-

ing level to secure financial flexibility that suits its capital/liquidity

policies and to secure access to sufficient capital resources

through capital markets. Shiseido has acquired ratings from

Moody’s Investors Service Inc. (Moody’s) and Standard &

Poor’s (S&P) to facilitate fund procurement in global capital markets.

[Moody’s]On July 18, 2007, Moody’s raised its outlook for Shiseido’s long-

term A1 credit rating from “Stable” to “Positive.” Moody’s

based its revision on its conclusion that Shiseido’s strong balance

sheet structure, continued improvement in profitability, current

brand promotion strategy, aggressive measures to control

costs, and steady expansion of business outside Japan will

support continued improvement in Shiseido’s creditworthiness.

On May 20, 2008, Moody’s announced a review of Shiseido’s A1

long-term credit rating for possible upgrade. The credit rating

review reflects Moody’s opinion that Shiseido’s strategies of

maintaining a strong balance sheet, implementing measures to fur-

ther reduce costs, efficiently managing brands, and steadily

expanding its cosmetics business outside Japan will support

stable overall creditworthiness at a higher level than in the past.

[S&P]On June 29, 2007, S&P raised its outlook for Shiseido’s long-

term credit rating one ranking, from “A (Outlook: Positive)” to “A+

(Outlook: Stable).” S&P based this revision on its projection

that Shiseido’s ongoing expansion in the cosmetics market of

China will drive continued growth of Shiseido’s operations outside

Japan. In addition, S&P concluded that progress in consolidating

brands/lines has resulted in solid performance in the domestic cos-

metics market as well, which points to increased profitability

and cash flow coverage over the next several years and the

ability to maintain a stable financial structure.


(Billions of yen)

Americas

20082007200620052004

56.651.746.043.143.5Japan 460.7471.2475.7467.0465.3

Net Sales by Geographic Segment

Europe 72.4 79.8 85.6 88.4 103.8Asia/Oceania 43.0 49.9 63.7 83.3 102.4

Outside Japan 158.9 172.8 195.3 223.4 262.8

Operating Income by Geographic Segment

Americas

20082007200620052004(Billions of yen)

4.02.80.9(0.2)(0.4)Japan 31.827.324.012.526.2


Outside Japan 7.9 11.3 14.0 20.3 28.9

Operating Profitability by Geographic Segment

Americas

20082007200620052004(%)

6.14.71.7(0.3)(0.8)Japan 6.55.54.82.65.4


Outside Japan 4.6 6.2 6.7 8.6 10.4

Overseas Sales(by Destination)

Americas 59.354.047.544.345.8Europe 68.1 74.9 80.4 79.3 92.8Asia/Oceania 48.5 56.5 69.3 91.5 112.1

Total 162.4 175.7 197.2 224.8 264.3

(Billions of yen)

200820072006200520040

200

100

300

Note: Operating profitability is calculated against sales for the segment, including intersegment sales.

Moody’s

A1 (Outlook: Positive) A+ (Outlook: Stable)

P-1 A-1

Long-term

S&P

Short-term

(As of May 31, 2008)


Assets, Liabilities and Net AssetsAssets

As of March 31, 2008, total assets decreased 8.6 percent

from a year earlier to ¥675,864 million.

Current assets decreased 4.2 percent from a year earlier to

¥357,707 million. Notes and accounts receivable increased

due to initial shipments of the new Tsubaki launched in March

2008, but the May 2007 redemption of unsecured yen bonds

totaling ¥50.0 billion reduced cash and time deposits.

Investments and other assets decreased 15.4 percent from a

year earlier to ¥122,861 million, mainly due to sale of investments

in securities and a decrease in valuation gains as a result of

lower market prices.

Property, plant and equipment, net of accumulated deprecia-

tion, decreased 15.9 percent from a year earlier to ¥144,358

million. Factors for this decrease included the sale of logistics and

product center facilities (¥17,274 million) to reform logistics

and the exclusion of Shiseido Lease Co., Ltd., which was sold dur-

ing the fiscal year, from the scope of consolidation.

Intangible assets increased 2.4 percent from a year earlier to

¥50,938 million. Factors included the introduction of a new

backbone SAP system.

LiabilitiesTotal liabilities as of March 31, 2008 decreased 17.8 percent

from a year earlier to ¥276,125 million. Primary factors included

an increase in accrued amounts payable included in “other”

under notes and accounts payable due to an increase in media

outlays to cultivate and strengthen domestic mega lines, and a

decrease in interest-bearing debt including long- and short-

term debt.

As of March 31, 2008, interest-bearing debt decreased 50.5

percent from a year earlier to ¥63,219 million. Primary factors in

the decrease were the redemption of the ¥50 billion in unsecured

yen bonds and the ¥7,868 million in MTN issued by sub-

sidiaries in Europe and the Americas, as well as the exclusion of

Shiseido Lease Co., Ltd. from the scope of consolidation. As of

March 31, 2008, bonds on Shiseido’s balance sheet consisted of

1.12 percent unsecured yen bonds due in March 2010 and

MTN issued by a financial subsidiary in the United States.

Net AssetsTotal net assets decreased 1.0 percent from a year earlier to

¥399,739 million.

Net income increased net assets by ¥35,460 million. The

payment of cash dividends from retained earnings reduced net

assets by ¥13,464 million, and buyback of shares reduced net

assets by ¥24,450 million (excluding purchases of odd lots).

As a result, net assets per share increased ¥5.4 from a year ear-

lier to ¥946.2. The equity ratio increased 4.1 percentage points to

56.6 percent from 52.5 percent a year earlier.

Cash FlowsCash and cash equivalents (net cash) as of March 31, 2008

totaled ¥120,394 million, a decrease of ¥24,866 million from a

year earlier.

Cash Flows from Operating ActivitiesNet cash provided by operating activities increased ¥5,876

million from the previous fiscal year to ¥75,308 million.

200 2.5

400 5

600 7.5

800 10

0

(Billions of yen)

Total AssetsOperating ROA

(%)

200820072006200520040

675.9739.8671.8701.1626.76.0 4.3 5.9 7.4 9.4

Total Assets/Operating ROA

100

200

300

400

0

(Billions of yen)

Net AssetsInterest-bearing Debt

20082007200620052004

399.7403.8387.6370.0385.366.2 94.3 82.3 127.8 63.2

Net Assets/Interest-bearing Debt

Equity Ratio/Debt-Equity Ratio

Equity RatioDebt-Equity Ratio

25 0.25

50 0.50

75

100

0.75

1.00

0

(%) (Times)

020082007200620052004

59.8 51.2 55.7 52.5 56.60.18 0.26 0.22 0.32 0.16

2006

21.8

(12.6)

(30.0)

89.0

2008

75.3

(5.8)

(95.9)

120.4

Cash flows from operating activities

Cash flows from investing activities

Cash flows from financing activities

Cash and cash equivalents at end of year

2007

69.4

(18.5)

1.8

145.3

Cash Flow Summary (Billions of yen)


Shiseido used net cash provided by operating activities to fund the

following investing and financing activities.

Cash Flows from Investing ActivitiesNet cash used in investing activities decreased ¥12,680 million

from the previous fiscal year to ¥5,803 million. This change

resulted from the sale of a majority of the logistics and product

center facilities owned by Shiseido Co., Ltd. as part of

Shiseido’s fundamental structural reforms.

Acquisition of fixed assets, calculated as the sum of acquisition

of property, plant and equipment, intangible assets and long-term

prepaid expenses, totaled ¥27,747 million, which was about

the same level as depreciation. Capital expenditures included

upgrade and renovation of existing domestic facilities, as well as

projects such as the third phase of the expansion of the

Shanghai Plant, which increased production capacity in the

growing Chinese market.

Cash Flows from Financing ActivitiesNet cash used in financing activities totaled ¥95,883 million. In

the previous fiscal year, financing activities provided net cash total-

ing ¥1,837 million. Primary factors included the redemption of the

unsecured yen bonds and the MTN issued by subsidiaries in

Europe and the Americas, totaling ¥57,837 million, and the use of

¥24,450 million to buy back shares (excluding purchases of

odd lots).

Research and DevelopmentTo develop superior products and offer services that support

customers’ beauty and health, Shiseido conducts R&D activities

in five regions worldwide, with two research centers in

Yokohama, Kanagawa Prefecture, Japan, the Beauty Solution

Development Center in Shinagawa Ward, Tokyo, Japan, and

research facilities in the United States, France, China and

Thailand.

In the fiscal year under review, R&D expenses for the

Shiseido Group decreased 9.7 percent compared with the previ-

ous fiscal year to ¥14,566 million. R&D expenses represented 2.0

percent of net sales, a decrease of 0.3 percentage points from the

previous fiscal year. R&D objectives, primary initiatives, results and

expenses by business segment were as follows. R&D expenses

include basic research costs and other expenses totaling

¥4,059 million that cannot be allocated to specific businesses.

Domestic CosmeticsWith the goal of contributing to beautiful skin and beautiful

lifestyles, Shiseido conducts research in basic dermatology

and interface science. Other R&D activities include developing

cosmetic ingredients, developing and evaluating products, and

developing beauty methods.

R&D expenses for the fiscal year under review in the domestic

cosmetics business totaled ¥8,465 million

[Cosmetics Division]The cosmetics division began using a newly produced skin

moisturizing ingredient, glycylglycine, in the skincare brand

Aqua Label, and developed a serum that reduces pore size in

adults and makes skin smooth.

In addition, Shiseido launched Tsubaki Golden Repair with

the new ingredient “camellia amino.” Beautiful hair symbolizes

beauty for Japanese women. This new products keeps hair

beautiful by repairing damaged hair all the way to the tip and mak-

ing it smooth to the touch. In addition, Shiseido developed a

new ingredient to repair and beautify hair, “beauty luster

camellia lipid,” from a natural beauty component of the camellia

flower, and made progress toward a new Tsubaki that further

enhances the luster of hair by bringing out its deep shine.

Cosmetics-related CSR activities included the development

of Perfect Foundation BM for skin irregularities that conventional

foundations have difficulty covering such as scars from burns,

injuries and acne. This product supports a higher quality of life for

customers by providing a solution for a wider range of skin

blemishes.

[Healthcare Division]The healthcare division focused on the connection between

stress and lack of sleep and collagen production in order to

develop Collagen EX and Collagen Update with an ingredient

that supports the creation of collagen.

Overseas CosmeticsAiming for “high quality, high image and high service” in

overseas cosmetics brands, Shiseido develops products that

fully capitalize on high-quality, high-performance ingredients.

R&D expenses for the fiscal year under review in the overseas

cosmetics business totaled ¥1,676 million.

[Cosmetics Division]In the cosmetics division, scientific research into the skin

uncovered the ability of the biogenic substance carnosine to

ameliorate wrinkles due to aging, dryness, ultraviolet rays and

other causes. Shiseido put this discovery to use in Benefiance

NutriPerfect Day Cream/Night Cream to hydrate skin and

restore and preserve its firmness to make skin youthful.

Moreover, Shiseido created a new formulation of the global


20

40

60

80

0

(Billions of yen)

Cash Flows from Operating ActivitiesAcquisition of Fixed Assets

20082007200620052004

75.369.421.852.447.133.7 30.0 27.5 28.6 27.7

Cash Flows from Operating Activities/Acquisition of Fixed Assets(Property, Plant and Equipment + Intangible Assets + Long-term Prepaid Expenses)

makeup line The Makeup that balances the skin’s moisture and

sebum, and developed Dual Balancing Foundation, a foundation

with skincare benefits.

OthersR&D expenses for the fiscal year under review in other busi-

nesses totaled ¥366 million.

[Frontier Science Division]The frontier science division conducts R&D in areas such as

medical-use drugs, cosmetics raw materials, chromatography

and cosmetic dermatology treatments. For medical-use drugs, the

division developed the hormone supplement l’estrogel®, which

addresses the typical symptoms of female menopause. This

product is the first gel formulation of this drug in Japan, and

Bayer Yakuhin Ltd. has begun sales.

In chromatography, Shiseido has applied the technology for

developing makeup powders to develop high-performance

columns used for analysis. Other products developed in the

chromatography business include a variety of instruments for

analysis and purification.

Outlook for the Year Ending March 31, 2009The market environment in which Shiseido operates will

remain challenging, both domestically and overseas. The

Shiseido Group will work in concert to implement the new

Three-Year Plan ending March 2011, and build a foundation for

sustained growth over the medium-to-long term.

In the fiscal year ending March 2009, the first year of the

new Three-Year Plan, Shiseido aims to increase sales in Japan at

a rate that is faster than the growth rate of the overall market.

Overseas, we will undertake new initiatives and further expand

our business in China with the aim of maintaining a high

growth rate.

Shiseido will work to achieve double-digit sales growth over-

seas on a local currency basis, but expects little year-on-year sales

growth on a yen basis because the yen is expected to remain

strong. However, Shiseido expects an increase in domestic

sales to support overall growth in net sales. Income will benefit

from growth in net sales and initiatives such as efforts to

reduce cost of sales and operating expenses. This will com-

pensate for the cost of introducing a new SAP core business pro-

cessing system, aggressive marketing expenditures and other fac-

tors that will reduce earnings. Shiseido therefore expects

income to increase slightly.

For the fiscal year ending March 31, 2009, Shiseido fore-

casts a 1 percent increase in consolidated net sales to ¥730

billion, a 2 percent increase in operating income to ¥65 billion, and

a 2 percent increase in net income to ¥36 billion.

The above outlook is based on the assumption that domestic

real GDP will grow approximately 1 percent in the fiscal year.

Based on Ministry of Economy, Trade and Industry statistics

for cosmetics shipments, we estimate that demand for cos-

metics products will be essentially unchanged. Our forecasts are

based on exchange rates of ¥100 per U.S. dollar, ¥155 per

euro and ¥14.5 per Chinese yuan.

Income Distribution PolicyThe shareholder return policy of Shiseido Co., Ltd. aims to max-

imize returns to shareholders through direct means, in addition to

generating medium- and long-term share price gains. To this

end, in allocating internal capital resources, we prioritize (a)

strategic investments linked to renewed growth, and (b) stable

dividends and flexible implementation of share buybacks.

We have established a “total return ratio,” which represents

the amount of profits returned to shareholders - the sum of

dividends paid and share buybacks - as a proportion of consoli-

dated net income. We hope to achieve a 60 percent total

return ratio in the medium term while increasing the percentage

of dividends and flexibly buying back and retiring shares.

For the fiscal year ended March 31, 2008, Shiseido Co., Ltd.

increased cash dividends per share by ¥2 to ¥34, consisting of an

interim cash dividend of ¥17 per share and a year-end cash divi-

dend of ¥17 per share. In addition, Shiseido bought back 10

million shares at a cost of ¥24,450 million, which raised the

total return ratio to 108.8 percent from 52.6 percent for the

previous fiscal year. The total return ratio for the previous

Three-Year Plan from the fiscal year ended March 2006 to the fis-

cal year ended March 2008 was about 90 percent.

For the year ending March 31, 2009, Shiseido plans to

increase the interim and the year-end dividend to ¥25 each,

which will increase annual cash dividends to ¥50 per share.

Business and Other RisksThe various risks that could potentially affect the business

performance and financial position of Shiseido are summarized

below. We feel that these risks could have a major impact on

investors’ decisions. Items that deal with future events are

based on our judgment as of June 25, 2008, the date of issue for

this annual report. Please note that the potential risks are not lim-

ited to those listed below.

1. Decrease in Value of theCorporate Brand

The corporate brand is shared by all Group com-

5 1

10 2

15 3

20 4

0

(Billions of yen)

R&D ExpensesRatio of R&D Expenses to Net Sales

(%)

200820072006200520040

14.616.116.516.817.62.8 2.6 2.5 2.3 2.0

R&D Expenses/Ratio of R&D Expenses to Net Sales



panies in Shiseido’s domestic and overseas business activities.

We will continue working to enhance the value of this brand, but

a decline in the brand’s value from an unforeseen event could

potentially affect Shiseido’s business performance and finan-

cial position.

2. Customer ServicesShiseido places high priority on its relationships with cus-

tomers. Chapter 1 of The Shiseido Code (Corporate Ethics

and Behavior Standards) clearly states that we shall act in a man-

ner that earns the satisfaction and trust of customers, and

we will continue working to ensure that all employees are

aware of these standards. However, an unforeseen event

could cause loss of such satisfaction and trust, leading to a

decline in the value of Shiseido Group brands. Shiseido’s

business performance and financial position could potentially be

affected as a result.

3. Strategic Investment ActivitiesWhen making decisions about investments in strategic markets

such as China and Russia, and strategic investments in mergers

and acquisitions, new businesses and new markets, Shiseido

endeavors to collect sufficient information and undertake due dili-

gence prior to making rational judgments. Due to various

unforeseeable factors that may cause the operating environ-

ment to deteriorate, however, we may not achieve the results

originally anticipated. This could potentially affect Shiseido’s

business performance and financial position.

4. The Competitive Environment of the CosmeticsIndustryShiseido operates in the cosmetics industry, in which com-

petition is intensifying on a global scale. Zero sum competition for

share among Japanese cosmetic companies in the mature

domestic market is intensifying because of factors including

the expanding influence of global U.S. and European corporations

in the prestige market, and the entry of new competitors from

other industries. In addition, in overseas markets such as

China, which Shiseido has positioned as a pillar of its growth strat-

egy, and Russia, the competitive environment is becoming

increasingly challenging as well-capitalized U.S. and European cor-

porations are aggressively conducting mergers and acquisi-

tions and expanding market share by executing marketing

activities to raise consumer awareness of their brands. Inability to

respond to this competitive environment as effectively as global

competitors could potentially affect Shiseido’s business per-

formance and financial position.

5. Overseas Business ActivitiesShiseido conducts business in 70 countries overseas, and

overseas sales account for a growing percentage of consolidated

net sales each year, totaling 36.5 percent in the fiscal year

under review. Shiseido plans to raise that ratio to 40 percent by

the end of the final year of the new Three-Year Plan ending

March 2011. In the course of conducting overseas business,

Shiseido’s business performance and financial position could

potentially be affected by various factors. These include the

occurrence of sudden and unpredictable economic, political

and social crises; terrorism, war and civil war; economic and

civil upheaval resulting from the spread of contagious diseases

such as avian influenza; and severe or abnormal weather.

6. Market Risk[Raw material prices]

International market conditions affect the price of raw materials

used in Shiseido products. Factors affecting market conditions

include geopolitical risk, the impact on supply and demand from

increasing demand in developing countries and speculative capital

flows, weather abnormalities and changes in exchange rates.

Shiseido constantly works to limit the impact of rising raw material

prices by reducing cost of sales and other means. However,

changes in market conditions and prices that exceed projections

could affect Shiseido’s business performance and financial position.

[Exchange rates]

Export, import and other transactions denominated in for-

eign currencies expose Shiseido to foreign exchange rate risk.

Although we hedge foreign exchange rate risk through means

such as limiting export and import transactions by establishing pro-

duction bases to serve local markets, we are unable to completely

eliminate risk. Moreover, the financial statements of consoli-

dated subsidiaries and equity affiliates domiciled overseas are

denominated in local currencies that are translated into yen

upon inclusion in the consolidated financial statements. This

has the potential to exert a negative impact on operating per-

formance if the yen appreciates versus foreign currencies

when revenues exceed expenses. Foreign exchange fluctua-

tions that exceed assumptions could affect Shiseido’s busi-

ness performance and financial position.

[Stock prices]

As of March 31, 2008, Shiseido held shares with a market value

of ¥18,976 million, and is therefore exposed to the risk of

changes in share prices. Unrealized gain on these sharehold-

ings as of March 31, 2008, totaled ¥9,470 million. However,

these unrealized gains are exposed to the risk that changes in

share prices could reduce or eliminate them, or cause an unre-

alized loss. In addition, a portion of the pension plan assets of

Shiseido Co., Ltd.’s retirement benefit plan is invested in

shares with a market price. Lower share prices could therefore

reduce pension plan assets and negatively affect operating

performance by increasing retirement benefit expenses.

Unforeseen situations such as this could affect Shiseido’s

business performance and financial position.

7. Responding Appropriately to Market NeedsShiseido’s ability to develop and cultivate products and

brands/lines and to conduct marketing activities that respond



appropriately to market needs exerts a significant impact on its sales

and earnings. To respond to market needs, we continuously

develop appealing new products and brands/lines; reinforce and cul-

tivate new and existing products and brands/lines through marketing

activities; and withdraw existing products and brands/lines that

no longer meet market needs. However, by nature these activities

entail uncertainties that may prevent Shiseido from achieving its

intended results, which could negatively affect Shiseido’s busi-

ness performance and financial position.

8. Specific Business PartnersSignificant changes are taking place in retail and wholesale dis-

tribution channels in Shiseido’s core domestic cosmetics busi-

ness. Failure to respond effectively to these changes could

negatively affect Shiseido’s business performance and finan-

cial position.

9. Regulatory RiskShiseido is subject to a range of domestic and overseas

legal provisions in the course of conducting its business.

These include the Pharmaceuticals Law, as well as quality-

related standards, environmental standards, accounting stan-

dards and tax regulations. We aspire to be completely ethical

based on legal compliance and corporate social responsibility.

However, future regulatory changes or the establishment of

unanticipated new regulations may limit Shiseido’s activities,

which could negatively affect Shiseido’s business performance

and financial position.

10. Material LitigationIn the fiscal year ended March 31, 2008, Shiseido was not

involved in material litigation. In the future, unfavorable judg-

ments resulting from material litigation could negatively affect

Shiseido’s business performance and financial position.

11. Information Security RiskShiseido takes various measures aimed at protecting its

information assets, which include customers’ personal infor-

mation and industrial secrets. For example, in April 2005, the

Personal Information Protection Law was fully enacted. In

anticipation of this, Shiseido Co., Ltd. in March 2004 obtained

Privacy Mark certification, a Japanese Industrial Standard that rec-

ognizes the appropriateness of a company’s systems for pro-

tecting personal information. However, due to unforeseeable

events, such as leakage of information due to unauthorized

access, Shiseido’s business performance and financial position

could potentially be affected.

12. Natural Disasters and AccidentsShiseido has developed a business continuation plan covering

issues critical to the continued operation of production bases, dis-

tribution bases, information systems and the head office to

minimize loss due to interruption of production, distribution or

sales resulting from the occurrence of a natural disaster or

accident, such as a major earthquake. However, a natural disas-

ter or accident that exceeds the assumptions of this plan and dis-

rupts production, distribution or sales could negatively affect

Shiseido’s business performance and financial position.

Fundamental Policy on Control of the Company

Non-Continuation of Takeover Defense Measures

At its Board of Directors meeting held on April 27, 2006,the Company established a basic policy regarding controlover the Company (the “Basic Policy”). Based on theapproval of its shareholders obtained at the 106th OrdinaryGeneral Meeting of Shareholders held on June 25, 2006,the Company adopted a plan for countermeasures againstlarge-scale acquisitions of its shares (known as an advance-warning rights plan; hereinafter, the “Plan”) as a measure toprevent decisions on the Company’s financial and businesspolicies from being controlled by persons viewed as inap-propriate under the Basic Policy.

The Plan is effective until the conclusion of the 108thOrdinary General Meeting of Shareholders, which is scheduledfor June 25, 2008. However, at its Board of Directorsmeeting held on April 30, 2008, the Company decided toabolish the Basic Policy as of the conclusion of the 108thOrdinary General Meeting of Shareholders and thereafternot to continue the Plan.

Beginning in April 2005, the Company promoted its Three-

Year Plan with the goal of increasing growth potential and

profitability (the “previous Three-Year Plan”). The previous

Three-Year Plan contained three central pillars: (a) “domestic mar-

keting reforms;” (b) “further strengthening global develop-

ment,” under which China is the market of primary impor-

tance; and (c) “fundamental structural reforms.” Based on

these pillars, Shiseido Co., Ltd. has been making efforts to

enhance its brand value and maximize its corporate value, aiming

to be considered a company of value by all of its stakeholders —

namely, its shareholders, customers, business partners, ven-

dors, employees, and society as a whole. As a result, we have

received strong support from our stakeholders, and were able to

achieve our outcomes as originally planned. In anticipation of mak-

ing a further leap forward, the Company started a new three-year

medium-term business plan for the period from April 2008

through March 2011 (the “New Three-Year Plan”). Under the

New Three-Year Plan, the Company will aim to become a

“global player representing Asia with its origins in Japan.” It will

create “a brand loved by customers throughout the world”

and establish an “unsurpassed, world-class quality of business

management” in order to continue increasing growth potential

and profitability. Accordingly, the Company aims to achieve


consolidated average annual sales growth of 4 to 5 percent,

an overseas sales ratio of 40 percent or higher, consolidated oper-

ating profitability of 10 percent or higher, and a consolidated

return on equity that is 1 to 2 points higher than operating

profitability. Under these circumstances, the Company dili-

gently discussed how to deal with the Plan, which is set to

expire at the conclusion of the 108th Ordinary General

Meeting of Shareholders, taking into account the advice of an

independent committee composed of two external directors

and one external corporate auditor. After the discussion, the

Company concluded, in light of circumstances such as the

amendments to laws and ordinances regarding large-scale

acquisitions, that the Company should implement the New

Three-Year Plan steadily, rather than ask shareholders to vote in

favor of continuation of the Plan, in order to increase its com-

petitiveness and maintain sustained growth in global markets and

to assure and increase its corporate value and the common

interests of its shareholders. The Company therefore passed a

resolution at its Board of Directors meeting held on April 30, 2008

to abolish the Basic Policy upon the conclusion of the 108th

Ordinary General Meeting of Shareholders and thereafter not to

continue the Plan.

Significant Accounting EstimatesShiseido prepares its consolidated financial statements in

accordance with accounting principles generally accepted in

Japan. In preparing these statements, we select and apply

accounting policies and necessarily make estimates that affect the

presentation of reported amounts for assets, liabilities, income

and expenses. We consider information including historical

data in making rational estimates. However, due to the unpre-

dictable nature of these estimates, actual results may vary.

Shiseido considers the following significant accounting policies

to exert a large effect on key decisions regarding the esti-

mates used in the consolidated financial statements.

Property, Plant and EquipmentShiseido reviews fixed assets, primarily property, plant and

equipment, for impairment whenever circumstances indicate

that their carrying value may not be recoverable. Business-use

assets are pooled by business division to estimate future cash

flow, and the net sale value of idle assets is estimated for each

separate property. Based on these estimates, assets are devalued

from book value to recoverable value.

Goodwill and Intangible Assets with IndefiniteUseful Lives

In general, goodwill and intangible assets determined to

have indefinite useful lives at overseas consolidated sub-

sidiaries are not amortized, but instead are tested for impair-

ment at least once annually. Certain overseas subsidiaries

employ the opinions of experts and other data in estimating

fair value and determining impairment. The discounted cash

flow method primarily used to estimate fair value relies exten-

sively on estimates and assumptions regarding future cash

flow and discount rate.

Investments in SecuritiesShiseido recognizes impairment for securities reported in

available-for-sale securities for which fair value or market price has

fallen substantially below acquisition cost. Securities deemed

recoverable are excluded. Securities with a fair value that is

more than 50 percent below acquisition cost as of the balance

sheet date are deemed unrecoverable. The recoverability of

securities with a fair value from 30 to 50 percent below acquisi-

tion cost is evaluated according to the performance and financial

condition of the issuing entity. Impairment is recognized for

securities for which fair value is not available if current net

asset value per share according to the financial condition of the

issuing entity is more than 50 percent below net asset value per

share at the time of acquisition. Securities deemed recover-

able are excluded.

Deferred Tax AssetsShiseido has established an allowance for deferred tax

assets deemed unrecoverable using appropriate deferred tax

asset accounting. Historical data and future projections are

used to evaluate the recoverability of deferred tax assets to

sufficiently determine taxable status.

Retirement Benefits and ObligationsShiseido’s domestic retirement benefit plan consists primarily

of a corporate pension plan and a termination allowance plan.

Employee benefits and obligations are calculated based on

assumptions including discount rate, turnover rate, mortality

rate and projected rate of return on pension plan assets. These

assumptions are revised annually. Discount rate and expected

return on plan assets are two critical assumptions in determining

benefits and obligations. The discount rate is determined with ref-

erence to the market rate for long-term fixed-rate bonds that carry

little or no risk. Expected return on pension plan assets is

determined based on an expected weighted-average return for

the various types of assets held within the plan.



Thousands ofMillions of yen U.S. dollars (Note 1)

2007 2008 2008

ASSETS

Current Assets:

Cash and time deposits (Notes 3 and 6) ·····························Short-term investments in securities (Notes 3 and 4) ···········

Notes and accounts receivable:Trade ········································································Unconsolidated subsidiaries and affiliates ·······················

·························································································

Less: allowance for doubtful accounts·····················································································································

Inventories (Note 5)························································Deferred tax assets (Note 8) ············································Other current assets·······················································

Total current assets ·················································

Investments and Other Assets (Note 16):Investments in securities (Notes 4 and 6)···························Investments in and advances to

unconsolidated subsidiaries and affiliates ····················Prepaid pension expenses (Note 7) ···································Long-term prepaid expenses············································Deferred tax assets (Note 8) ············································Other investments (Note 6) ·············································

Total investments and other assets ····························

Property, Plant and Equipment, at Cost (Note 16):

Buildings and structures (Note 6) ······································Machinery and equipment ···············································

·························································································

Less: accumulated depreciation ································································································································

Land ············································································Construction in progress ·················································

Total property, plant and equipment····························

Intangible Assets (Note 16):Goodwill ·······································································Other intangible assets ···················································

Total intangible assets··················································

Total Assets··········································································

The accompanying notes are an integral part of the financial statements.

¥ 65,45385,544

104,57825

104,603

(1,304)103,299

73,89132,34412,677

373,208

62,173

1,42832,63010,24111,83726,938

145,247

186,342174,853361,195

(244,498)116,697

52,3702,569

171,636

23,10326,639

49,742

¥ 739,833

¥ 67,41365,075

111,07244

111,116

(1,495)109,621

68,48629,45517,657

357,707

38,377

1,40435,15910,41910,94426,558

122,861

168,343135,975304,318

(201,624)102,694

40,2901,374

144,358

22,19428,744

50,938

¥ 675,864

$ 672,784649,451

1,108,503439

1,108,942

(14,920)1,094,022

683,493293,962176,218

3,569,930

383,004

14,012350,888103,982109,222265,050

1,226,158

1,680,0701,357,0363,037,106

(2,012,216)1,024,890

402,09613,713

1,440,699

221,497286,866

508,363

$ 6,745,150

Consolidated Financial Statements

Shiseido Company, Limited, and SubsidiariesMarch 31, 2007 and 2008

CONSOLIDATED BALANCE SHEETS



2007 2008 2008LIABILITIES AND NET ASSETSCurrent Liabilities:

Short-term debt (Note 6) ·················································Current portion of long-term debt (Note 6)··························Notes and accounts payable:

Trade ········································································Unconsolidated subsidiaries and affiliates ·······················

·························································································

Other payables ······························································Accrued income taxes ····················································Reserve for sales returns ················································Accrued bonuses for employees ······································Accrued bonuses for directors and corporate auditors ··········Provision for liabilities and charges····································Deferred tax liabilities (Note 8) ·········································Other current liabilities ····················································

Total current liabilities···············································Long-Term Liabilities:

Long-term debt (Note 6)··················································Accrued retirement benefits (Note 7) ································Allowance for losses on guarantees ··································Deferred tax liabilities (Note 8) ·········································Other long-term liabilities ················································

Total long-term liabilities ···········································Total Liabilities ······················································

CONTINGENT LIABILITIES (Note 9)

NET ASSETS (Note 10)Shareholders’ Equity:

Common stock···························································Authorized: 1,200,000,000 shares as of March 31, 2007 and 2008 Issued: 424,562,353 shares as of March 31, 2007 and

410,000,000 shares as of March 31, 2008Capital surplus····························································Retained earnings ·······················································Less: treasury stock, at cost ·········································Treasury stock:11,730,235 shares as of March 31, 2007 and

5,794,022 shares as of March 31, 2008Total shareholders’ equity················································

Valuation, Translation Adjustments and Others:Unrealized gains (losses) on available-for-sale securities, net of taxes·····Deferred losses on hedges···········································Foreign currency translation adjustments························

Total valuation, translation adjustments and others ··············Stock Acquisition Rights ···············································Minority Interests in Consolidated Subsidiaries···············

Total Net Assets·····················································Total Liabilities and Net Assets ············································

¥ 4,45661,688

56,5251,173

57,698

53,01610,026

8,68611,703

1221,377

—19,069

227,841

61,69438,643

3504,1453,363

108,195336,036

64,507

70,294255,410(16,896)

373,315

13,744(233)

1,56115,072

5215,358

403,797¥739,833

¥ 4,70433,949

57,2941,040

58,334

56,1089,0307,945

12,417110888

422,500

205,989

24,56638,302

3503,7973,121

70,136276,125

64,507

70,258248,921(11,197)

372,489

5,274(57)

4,7649,981

15417,115

399,739¥675,864

$ 46,946338,812

571,79710,379

582,176

559,96090,12079,292

123,9221,0988,862

40224,551

2,055,779

245,170382,255

3,49337,89431,148

699,9602,755,739

643,782

701,1782,484,241(111,746)

3,717,455

52,635(569)

47,54599,611

1,537170,808

3,989,411$6,745,150



2006 2007 2008 2008

Net Sales (Note 17)···················································

Cost of Sales ························································Gross profit ····················································

Selling, General and Administrative Expenses (Note 12)·······Operating Income (Note 17) ······························

Other Income (Expenses):Interest and dividend income ································Interest expense·················································Foreign exchange gain (loss) ·································Equity in earnings of affiliates ·······························Gain (loss) on sales of securities (Note 4) ··················Gain (loss) on sales of shares in affiliates··················Write-down of investments in

securities and other investments ····················Gain on sales of property, plant and equipment········Loss on disposal of property, plant and equipment·······Impairment loss (Notes 16 and 17) ························Restructuring expenses ·······································Additional retirement benefits (Note 7)······················Others, net ························································

············································································Income before income taxes ·····························

Income Taxes (Note 8)Current ·····························································Deferred····························································

············································································Income before minority interests····························

Minority Interests in Net Income of Consolidated Subsidiaries ···························

Net income ··············································

Yen U.S. dollars (Note 1)

Per ShareNet income — basic ···············································

— fully diluted···································Cash dividends ···················································

Weighted Average Number of Shares (thousands) ····


¥670,957

176,884494,073

455,19438,879

1,878(1,413)

49461

519—

(93)3,408(1,601)

(12,404)(2,703)

—2,513(9,341)29,538

12,274(27)

12,24717,291

(2,855)

¥ 14,436

¥34.434.430.0

412,855

¥694,594

185,533509,061

459,05650,005

2,169(1,881)

8658

143(20)

(28)1,987(1,253)(4,598)(1,102)

—2,200(2,239)47,766

13,6605,515

19,17528,591

(3,298)

¥ 25,293

¥60.960.732.0

412,572

¥723,485

186,466537,019

473,55463,465

2,977(1,882)(1,649)

149422

3,097

(96)948

(1,102)(1,151)

(598)(1,083)2,0282,060

65,525

16,5079,063

25,57039,955

(4,495)

¥ 35,460

¥86.185.734.0

407,696

$7,220,409

1,860,9385,359,471

4,726,088633,383

29,710(18,782)(16,457)

1,4874,211

30,908

(958)9,461

(10,998)(11,487)

(5,968)(10,808)20,24020,559

653,942

164,74190,449

255,190398,752

(44,860)

$ 353,892

$0.860.860.34

Shiseido Company, Limited, and Subsidiaries For the years ended March 31, 2006, 2007 and 2008

CONSOLIDATED STATEMENTS OF INCOME


Thousands Millions of yen

Number Unrealized gainsDeferred Foreign currency Stock

Minorityof shares Common Capital Retained Treasury stock, (losses) on available-

losses translation acquisitioninterests in

of common stock surplus earnings at cost for-sale securities,on hedges adjustments rights

consolidatedstock net of taxes subsidiaries

Balance as of March 31, 2005 ········ 424,562 ¥64,507 ¥70,258 ¥242,342 ¥(14,434) ¥ 8,003 — ¥(11,672) — ¥10,953Net income for the year ended March 31, 2006··· — — — 14,436 — — — — — —Cash dividends from retained earnings as

appropriation of earnings ·················· — — — (11,571) — — — — — —Directors’ and corporate auditors’

bonuses as appropriation of earnings ···· — — — (15) — — — — — —Other decreases in retained earnings ·· — — — (417) — — — — — —Disposal (purchase) of treasury stock ·· — — — (7) (2,725) — — — — —Change in unrealized gains (losses) on

available-for-sale securities, net of taxes ·· — — — — — 10,276 — — — —Change in foreign currency

translation adjustments················ — — — — — — — 4,918 — —Increase in minority interests·········· — — — — — — — — — 2,761

Balance as of March 31, 2006 ········ 424,562 64,507 70,258 244,768 (17,159) 18,279 — (6,754) — 13,714Net income for the year ended March 31, 2007··· — — — 25,293 — — — — — —Cash dividends from retained earnings as

appropriation of earnings ·················· — — — (6,186) — — — — — —Directors’ and corporate auditors’

bonuses as appropriation of earnings······ — — — (133) — — — — — —Interim cash dividends from retained earnings ···· — — — (6,601) — — — — — —Other decreases in retained earnings ·· — — — (174) — — — — — —Disposal (purchase) of treasury stock ·· — — 36 — 263 — — — — —Change in scope of consolidation ···· — — — (1,557) — — — — — —Change in unrealized gains (losses) on

available-for-sale securities, net of taxes·· — — — — — (4,535) — — — —Change in fair market value of

derivatives·································· — — — — — — (233) — — —Change in foreign currency

translation adjustments················ — — — — — — — 8,315 — —Issuance of stock acquisition rights ··· — — — — — — — — 52 —Increase in minority interests·········· — — — — — — — — — 1,644

Balance as of March 31, 2007 ········ 424,562 64,507 70,294 255,410 (16,896) 13,744 (233) 1,561 52 15,358Net income for the year ended March 31, 2008··· — — — 35,460 — — — — — —Cash dividends from retained earnings ··· — — — (13,464) — — — — — —Other decreases in retained earnings ·· — — — (491) — — — — — —Disposal (purchase) of treasury stock ····· — — 90 — (22,307) — — — — —Retirement of treasury stock ··········· (14,562) — (126) (27,880) 28,006 — — — — —Change in scope of consolidation ········ — — — (114) — — — — — —Change in unrealized gains (losses) on

available-for-sale securities, net of taxes ·· — — — — — (8,470) — — — —Change in fair market value of derivatives ···· — — — — — — 176 — — —Change in foreign currency translation

adjustments································· — — — — — — — 3,203 — —Issuance of stock acquisition rights ··· — — — — — — — — 102 —Increase in minority interests·········· — — — — — — — — — 1,757

Balance as of March 31, 2008 ········ 410,000 ¥64,507 ¥70,258 ¥248,921 ¥(11,197) ¥ 5,274 ¥ (57) ¥ 4,764 ¥154 ¥17,115

Thousands Thousands of U.S. dollars (Note 1)

Number Unrealized gainsDeferred Foreign currency Stock

Minorityof shares Common Capital Retained Treasury stock, (losses) on available-

losses translation acquisitioninterests in

of common stock surplus earnings at cost for-sale securities,on hedges adjustments rights

consolidatedstock net of taxes subsidiaries

Balance as of March 31, 2007 ········ 424,562 $643,782 $701,537 $2,549,002 $(168,623) $137,166 $(2,325) $15,579 $ 519 $153,273Net income for the year ended March 31, 2008 · — — — 353,892 — — — — — —Cash dividends from retained earnings ··· — — — (134,371) — — — — — —Other decreases in retained earnings ·· — — — (4,900) — — — — — —Disposal (purchase) of treasury stock ·· — — 898 — (222,624) — — — — —Retirement of treasury stock ············· (14,562) — (1,257) (278,244) 279,501 — — — — —Change in scope of consolidation ······· — — — (1,138) — — — — — —Change in unrealized gains (losses) on

available-for-sale securities, net of taxes ·· — — — — — (84,531) — — — —Change in fair market value of

derivatives·································· — — — — — — 1,756 — — —Change in foreign currency

translation adjustments················ — — — — — — — 31,966 — —Issuance of stock acquisition rights ··· — — — — — — — — 1,018 —Increase in minority interests·········· — — — — — — — — — 17,535

Balance as of March 31, 2008 ········ 410,000 $643,782 $701,178 $2,484,241 $(111,746) $52,635 $ (569) $47,545 $1,537 $170,808


Shiseido Company, Limited, and SubsidiariesFor the years ended March 31, 2006, 2007 and 2008

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS




2006 2007 2008 2008Cash Flows from Operating Activities:

Income before income taxes ·························································Depreciation···················································································Amortization of goodwill ································································Impairment loss ·············································································Increase (decrease) in liabilities for additional retirement benefits ·····Additional retirement benefits ·······················································Restructuring expenses·································································(Increase) decrease in prepaid pension expenses ·························Increase (decrease) in allowance for doubtful accounts················Increase (decrease) in reserve for sales returns····························Increase (decrease) in accrued bonuses for employees················Increase (decrease) in accrued bonuses for directors and corporate auditors ·······Increase (decrease) in provision for liabilities and charges··············Increase (decrease) in accrued retirement benefits ······················Interest and dividend income ························································Interest expense············································································Equity in earnings of affiliates························································(Gain) loss on sales of securities ···················································Write-down of investments in securities and other investments ·······(Gain) loss on sales and disposal of property, plant and equipment, net ····Gain (loss) on sales of shares in affiliate········································Increase (decrease) in notes and accounts receivable ··················(Increase) decrease in inventories ·················································Increase (decrease) in notes and accounts payable ······················Payments of accumulated benefits to defined contribution pension ·······Other ················································································

Subtotal ·····················································································Interest and dividends received·····················································Interest paid···················································································Income tax paid ·············································································

Net cash provided by operating activities ·································Cash Flows from Investing Activities:

Transfers to time deposits ····················································Proceeds from maturity of time deposits·································Acquisition of short-term investments in securities ···················Proceeds from sales of short-term investments in securities ······Acquisition of investments in securities ··································Proceeds from sales of investments in securities ·····················Acquisition of property, plant and equipment ···························Proceeds from sales of property, plant and equipment ··············Acquisition of intangible assets··············································Payments of long-term prepaid expenses································Net proceeds from acquisition of shares in subsidiaries

resulting in change in consolidation scope ···························Net proceeds from sales of shares in subsidiaries

resulting in change in consolidation scope (Note 3) ···············Acquisition of shares of consolidated subsidiaries·····················Other ················································································

Net cash used in investing activities ···································Cash Flows from Financing Activities:

Net increase (decrease) in short-term debt ······························Proceeds from long-term debt···············································Repayment of long-term debt················································Sales (acquisition) of treasury stock········································Cash dividends paid ·····························································Cash dividends paid to minority shareholders···························Other·······················································································

Net cash provided by (used in) financing activities ··················Effect of Exchange Rate Changes on Cash and Cash Equivalents ···Net Change in Cash and Cash Equivalents··································Cash and Cash Equivalents at Beginning of Year (Note 3) ··········Increase (Decrease) in Cash and Cash Equivalents due to

the Change in Consolidation Scope of Subsidiaries ···················Cash and Cash Equivalents at End of Year (Note 3) ·····················


Shiseido Company, Limited, and SubsidiariesFor the years ended March 31, 2006, 2007 and 2008

CONSOLIDATED STATEMENTS OF CASH FLOWS


¥ 29,53826,415

73112,404

(43,879)—

2,7031,118(206)587

——

(123)1,166

(1,878)1,413

(61)(519)

93(1,807)

—2,223

(4,319)663

(6,176)7,921

28,0071,873

(2,540)(5,528)

21,812

(1,468)3,912(383)

3,052(4,767)

11,183(20,096)

4,159(2,504)(4,871)

—

—(1,690)

833 (12,640)

(10,049)8,612

(12,890)(2,731)

(11,560)(1,208)

(133)(29,959)

1,768 (19,019)

108,281

(247)¥ 89,015

¥ 47,76627,876

7414,598

——

1,102(2,018)

(501)3,734

—122(31)

2,506(2,169)1,881

(58)(143)

28(734)

201,542

216(3,756)(2,362)3,147

83,5072,151

(2,269)(13,958)69,431

(4,519)1,668

(1,354)370

(1,725)9,842

(20,558)4,161

(2,878)(5,122)

—

132—

1,500(18,483)

85425,927

(10,977)298

(12,794)(1,672)

2011,8371,930

54,71589,015

1,530¥145,260

¥ 65,52527,068

7851,151

—1,083

598(2,940)

245(779)947(12)

(559)284

(2,977)1,882(149)(422)

96154

(3,097)(7,589)3,9546,179

(1,841)1,736

91,3222,897

(1,925)(16,986)75,308

(7,093)1,515

(1,525)896

(3,349)9,741

(17,449)18,711(5,399)(4,899)

92

2,411—

545(5,803)

2602,657

(61,219)(22,216)(13,462)(1,982)

79(95,883)

1,536(24,842)145,260

(24)¥120,394

$ 653,942270,140

7,83411,487

—10,8085,968

(29,341)2,445

(7,774)9,451(120)

(5,579)2,834

(29,710)18,782(1,487)(4,211)

9581,537

(30,908)(75,739)39,46161,667

(18,373)17,325

911,39728,912

(19,211)(169,521)751,577

(70,788)15,120

(15,220)8,942

(33,423)97,216

(174,142)186,736(53,882)(48,892)

918

24,062—

5,439(57,914)

2,59526,517

(610,968)(221,717)(134,351)(19,780)

788(956,916)

15,329(247,924)

1,449,701

(240)$1,201,537


1. BASIS OF PRESENTING CONSOLIDATED FINANCIAL STATEMENTSAccounting Principles and Presentation The financial statements of Shiseido Company, Limited (the “Company”) and its domestic consolidated subsidiarieshave been prepared in accordance with the provisions set forth in the Financial Instruments and Exchange Law andCorporate Law and in conformity with accounting principles generally accepted in Japan. The financial statementsof the Company’s overseas subsidiaries have been prepared in conformity with generally accepted accounting prin-ciples prevailing in the respective countries of domicile. The accompanying consolidated financial statements havebeen prepared from the accounts maintained by the Company and its consolidated subsidiaries in conformity withaccounting principles generally accepted in Japan, which are different from International Financial ReportingStandards in certain respects as to the application and disclosure requirements.

Certain items presented in the consolidated financial statements filed with the Director of the Kanto Finance Bureauin Japan have been reclassified for the convenience of the reader.

Certain reclassifications have been made in the consolidated financial statements for the years ended March 31,2006 and 2007 to conform to presentation for the year ended March 31, 2008.

Amounts in U.S. dollars are included solely for the convenience of the reader. The rate of ¥100.20 = US$1 pre-vailing on March 31, 2008 has been used in translating the consolidated financial statements expressed inJapanese yen into U.S. dollars. Such translations should not be construed as representations that the Japanese yenamounts could be readily converted, realized or settled in U.S. dollars at this rate.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(1) Scope of Consolidation The Company has 96 subsidiaries (companies over which the Company exercises control over operations) as ofMarch 31, 2008 (97 and 100 as of March 31, 2006 and 2007, respectively). The accompanying consolidated finan-cial statements as of March 31, 2008 include the accounts of the Company and its 91 (93 and 92 as of March 31,2006 and 2007, respectively) significant subsidiaries (the “Companies”).

The Company has 22 affiliates (companies that are not subsidiaries but over which the Company exercises sig-nificant influence) as of March 31, 2008 (5 and 28 as of March 31, 2006 and 2007, respectively). Investments in3 affiliates (5 as of March 31, 2006 and 2007) are accounted for by the equity method as of March 31, 2008.

Shiseido (RUS), LLC was included in the scope of consolidation from the current fiscal year. Two other compa-nies —Tai Tsu Holding Limited and Shanghai Huani Transparent Beauty Soap Co., Ltd. — became consolidated sub-sidiaries from equity-method affiliates in the current fiscal year, and thus are included in the scope of consolidation.

Excluded from the scope of consolidation in the current fiscal year are two companies — Shiseido Logistics Co.,Ltd. and Shiseido Lease Co., Ltd. — due to the sale of shares in those companies.

The Company sold its shares in Shiseido Lease Co., Ltd. on January 31, 2008 and excluded it from the scope ofconsolidation. The statements of income and cash flows of Shiseido Lease Co., Ltd. are consolidated for the 10-month period from April 1, 2007 to January 31, 2008.

Also excluded from the scope of consolidation in the current fiscal year is Full Cast Co., Ltd., which is in the processof liquidation and is immaterial.

Shiseido of Hawaii, Inc. was merged into Shiseido Cosmetics (America) Ltd. and thus was excluded from the scopeof consolidation in the current fiscal year.

The major consolidated subsidiaries are listed in the “Main Subsidiaries and Affiliates” section on page 40.Since the fiscal year-end for certain consolidated subsidiaries is December 31, their financial statements as of that

date are used in the preparation of the Company’s consolidated financial statements. When significant transactionsoccur at those subsidiaries between their fiscal year end and the Company’s fiscal year end, these transactions areincluded in consolidation.

Investments in 5 unconsolidated subsidiaries and 19 affiliates not accounted for under the equity method are stat-ed at cost as they are immaterial to the consolidated financial statements.

The Company has adopted the “full fair value method” so that all of the assets and liabilities of the subsidiariesare marked to fair value as of the date of acquisition of control.

All significant intercompany balances and transactions have been eliminated in consolidation. All materialunrealized profits included in assets resulting from intercompany transactions are eliminated.

(2) InventoriesInventories held by the Company are valued at cost, determined by the average method.

Inventories held by consolidated subsidiaries are valued at cost, determined principally by the last purchase pricemethod.

(3) Property, Plant and EquipmentBuildings (excluding leasehold improvements) are depreciated using the straight-line method. Other tangible fixedassets are, in principle, depreciated using the declining-balance method at the Company and its domestic con-

Shiseido Company, Limited, and Subsidiaries

Notes to the Consolidated Financial Statements


solidated subsidiaries and the straight-line method at overseas consolidated subsidiaries. Major fixed assets in Japanare depreciated over specific useful lives based on durability, level of deterioration, and special characteristics whichrepresent approximately 20-30% reduction from useful lives for tax purposes.

Effective from the year ended March 31, 2008, the Company and its domestic consolidated subsidiarieschanged their depreciation method for tangible fixed assets acquired on or after April 1, 2007 in accordance withthe revision of Japanese Corporate Tax Law (Partial Revision of Income Tax Law, Law No. 6 of March 30,2007; Partial Revision of Income Tax Law Enforcement Ordinance, Cabinet Order No. 83 of March 30, 2007). Theeffect of this change on the consolidated operating income and income before income taxes for the yearended March 31, 2008 was immaterial.

Pursuant to an amendment to the Japanese Corporate Tax Law, effective from the year ended March 31, 2008,the Company and its domestic consolidated subsidiaries depreciate the difference between the original residualvalue of 5% of acquisition cost of assets acquired before April 1, 2007 and the new residual value of 1 Yen (mem-orandum value) by the straight-line method over 5 years commencing from the fiscal year following the year in whichthe asset becomes fully depreciated to the original residual value. Depreciated amounts are included in depreci-ation expenses. As a result of this change, operating income and income before income taxes each declined ¥687million ($6,856 thousand), and net income declined ¥405 million ($4,042 thousand) for the year ended March 31,2008. The effects of this change in specific segments are described in the Segment Information section (Note 17).

(4) Intangible AssetsIntangible assets are, in principle, amortized using the straight-line method over the following estimated useful lives:

Trademark rights: 10 years, in principleSoftware: 5 years, in principle

(5) Long-Term Prepaid ExpensesLong-term prepaid expenses are primarily amortized using the straight-line method.

(6) GoodwillAmortization of goodwill is determined on a case by case basis and is generally amortized over a period not exceed-ing 20 years.

Goodwill in certain overseas subsidiaries is not amortized, pursuant to U.S. generally accepted accounting prin-ciples and accounting principles in other countries. Instead, impairment is assessed either annually or if certain indi-cators arise, and any impairment loss is accounted for at that time.

(7) SecuritiesThe Company and its domestic consolidated subsidiaries categorize their existing securities as available-for-sale securities. Those securities with market prices are carried at fair values prevailing at the balance sheet date,with net unrealized gains and losses, net of related taxes, reported separately in net assets. The cost of securitiessold is mainly calculated using the moving average method. If fair value is not available, securities are carried at cost,which is determined mainly by the moving average method. Investments in limited partnerships are recorded atthe amount of interest in such partnerships calculated based on ownership percentage. Investment gain orloss is included in net income or loss in proportion to the ownership interests in the net asset value of the part-nership.

Securities with remaining maturities of one year or less and securities that are recognized as cash equivalentsare classified as short-term investments in securities and others are included in investments in securities as non-current assets.

(8) Accounting for LeasesFinance leases of the Company and its domestic consolidated subsidiaries, other than those deemed to transferthe ownership of the leased assets to lessees, are accounted for as operating lease transactions. Financialleases of overseas consolidated subsidiaries are principally capitalized.

(9) Net Income and Cash Dividends per ShareNet income per share of common stock is based on the weighted average number of shares of common stock out-standing during each year. The computation of diluted net income per common stock reflects the maximum pos-sible dilution that could occur if securities or other contracts to issue common stock were exercised orconverted into common stock or resulted in the issuance of common stock.

Cash dividends per share shown for each year in the consolidated statements of income represent dividendsdeclared as applicable to the respective year, rather than those paid in each year.

(10) Accounting for Consumption TaxIn Japan, consumption tax is imposed at a flat rate on all domestic consumption of goods, assets and services (withcertain exemptions). The consumption tax withheld upon sales is recorded as a liability. Consumption tax,which is paid by the Company and its domestic consolidated subsidiaries on purchases of goods, assets and serv-ices, is offset against the balance withheld, and the net amount is subsequently paid to the national government.

Transactions subject to consumption taxes are recorded at amounts exclusive of consumption taxes.


(11) Allowance for Doubtful AccountsThe Company and its domestic consolidated subsidiaries provide the allowance for doubtful accounts based on thepercentage of actual bad debt losses against the balance of total receivables and the amount of uncollectible receiv-ables estimated on an individual basis. Overseas consolidated subsidiaries record the allowance based primarilyon the amount of uncollectible receivables estimated on an individual basis.

(12) Reserve for Sales ReturnsThe Companies provide reserve for sales returns considering the market distribution status, product resale statusand past return ratios.

Prior to the year ended March 31, 2007, the Companies provided a reserve for sales returns based on historicalreturn ratios. As a result of accumulation of past data and improvements in analytical precision, effective for theyear ended March 31, 2007, the Company and its domestic consolidated subsidiaries adopted a new methodologyto more accurately estimate sales returns that considers the market distribution status and product resale status.Accordingly, as a result of this change, operating income and income before income taxes decreased ¥3,636 mil-lion and net income decreased ¥2,145 million for the year ended March 31, 2007.

(13) Accrued Bonuses for EmployeesThe Companies provide accrued bonuses for employees based on the estimated amounts to be paid in respect ofthe fiscal year. This reserve includes bonuses for corporate officers who are non-Board members, and the cal-culations are the same as those for the reserve for bonuses for directors and corporate auditors.

Previously, the Company included accrued bonuses for employees in other current liabilities. Due to the introductionof a performance-based bonus system, the accrued amount represents an estimate, and, therefore, theCompany recategorized this item as a separate line item; accrued bonuses for employees from the year endedMarch 31, 2007.

(14) Accrued Bonuses for Directors and Corporate AuditorsThe Company and its domestic consolidated subsidiaries provide accrued bonuses for board directors (except forexternal directors) based on the estimated amounts to be paid in respect of the fiscal year.

Effective from the year ended March 31, 2007, the Company and its domestic consolidated subsidiariesapplied Accounting Standard for Directors’ Bonuses (Accounting Standards Board of Japan, Statement No. 4,November 29, 2005). As a result, for the year ended March 31, 2007, selling, general and administrativeexpenses increased ¥122 million and operating income, income before income taxes, and net incomedecreased by the same amount.

(15) Provision for Liabilities and ChargesTo provide for losses due to legal risks, product guarantee risks, currency risks, tax risks, and other factors, certainoverseas consolidated subsidiaries make provision, the amount of which is based on estimated losses to be incurredconsidering the likelihood of such losses in the future.

Previously, certain overseas consolidated subsidiaries included provision for liabilities and charges in other cur-rent liabilities. In order to appropriately present its state, this item is presented separately on the balance sheet fromthe year ended March 31, 2007.

(16) Accrued Retirement BenefitsThe Companies have obligations to pay retirement benefits to their employees and, therefore, the Company, itsdomestic consolidated subsidiaries and certain overseas consolidated subsidiaries provide accrued retirement ben-efits based on the estimated amount of projected benefit obligation and the fair value of plan assets.

Unrecognized prior service cost is primarily amortized by the straight-line method over a 10-year period, which isshorter than the average remaining years of service of the eligible employees. Unrecognized net actuarial gain orloss is primarily amortized from the following year on a straight-line basis over a 10-year period, which is shorterthan the average remaining years of service of the eligible employees.

Until the previous fiscal year, accrued retirement benefits for corporate officers were included in accruedretirement benefits. However, in accordance with the public announcement of the “Auditing TreatmentRelating to Reserve Defined under the Special Tax Measurement Law, Reserve Defined under the SpecialLaw, and Reserve for Director and Corporate Auditor Retirement Benefits” (Japanese Institute of CertifiedPublic Accountants, Auditing and Assurance Practice Committee, Report No. 42, April 13, 2007) and because theyare definitely payable within one year, accrued benefits for corporate officers are included in “Other payables” effec-tive for the year ended March 31, 2008.

(17) Accrued Retirement Benefits for Directors and Corporate AuditorsIn the year ended March 31, 2004, the Board of Directors of the Company resolved to abolish the unfunded retire-ment benefit plans for directors, corporate auditors and corporate officers, effective on the date of the OrdinaryGeneral Meeting of Shareholders for the year ended March 31, 2004. Until the previous fiscal year, theCompany provided the amount equivalent to the unfunded lump-sum payments for their duties up to March 31, 2004as accrued retirement benefits for directors and corporate auditors, as determined by the Board of Directors.



Until the previous fiscal year, the Company provided the amount equivalent to the unfunded lump-sum paymentsfor their services as accrued retirement benefits for directors and corporate auditors. However, in accordance withthe public announcement of the “Auditing Treatment Relating to Reserve Defined under the Special TaxMeasurement Law, Reserve Defined under the Special Law, and Reserve for Director and Corporate AuditorRetirement Benefits” (Japanese Institute of Certified Public Accountants, Auditing and Assurance PracticeCommittee, Report No. 42, April 13, 2007), these benefits are included in “Other Long-Term Liabilities” effectivefor the year ended March 31, 2008.

(18) Allowance for Losses on GuaranteesThe Company provides an allowance for estimated probable losses on guarantees based on the financial status ofthe guaranteed parties.

(19) Foreign Currency TranslationReceivables and payables denominated in foreign currencies are translated into Japanese yen at the exchange rateprevailing on the respective balance sheet dates, and resulting exchange gains or losses are included in net incomeor loss for the period.

Investments in unconsolidated subsidiaries and affiliates denominated in foreign currencies are translated at thehistorical exchange rates prevailing at the time of the transaction.

(20) Derivatives and Hedging ActivitiesThe Companies use foreign currency exchange agreements, currency swap agreements and interest rateswap agreements to reduce market risk. The Companies limit their use of foreign currency related transactions tothe amounts of foreign currency denominated receivables and payables, and do not use derivatives for specula-tive trading. The Companies’ basic policies regarding derivatives are determined by the Board of Directors, and con-tracts are entered into and controlled by the Financial Department. Transactions involving derivative contracts areexposed to market risks, but the counter-parties are limited to highly rated banking institutions and theCompanies consider there are no material credit risks associated with them.Derivatives are carried at fair value with gains or losses recognized in the consolidated statements of income. For

derivatives used for hedging purposes, gains or losses on derivatives are deferred until maturity of the hedged trans-actions. The Companies’ policy is to evaluate on a semiannual basis the effectiveness of derivatives based on eitherthe difference between the accumulated amount of cash flows from the hedging instrument and from the corre-sponding hedged item or variance between the market value of the hedging instrument and the hedged item.

(21) Foreign Currency Financial StatementsForeign currency financial statement amounts of overseas consolidated subsidiaries and affiliates are translated intoJapanese yen at the exchange rate prevailing at the respective balance sheet dates of those subsidiaries for assetsand liabilities, and at the historical exchange rate for shareholders’ equity. All income and expense amounts are trans-lated at the average rate of exchange during the fiscal year of those subsidiaries and affiliates.

The resulting translation adjustments are included in net assets as foreign currency translation adjustments.

(22) Definition of “Cash and Cash Equivalents” in Statements of Cash FlowsCash and cash equivalents as shown in the consolidated statements of cash flows are composed of cash in hand,readily available time deposits, and short-term investments with maturities of 3 months or less at the time of pur-chase that are exposed to insignificant risk of change in value.

(23) Accounting Standard for Impairment of Fixed AssetsOn August 9, 2002, the Business Accounting Council of Japan issued the Accounting Standard for Impairment ofFixed Assets. The standard requires that fixed assets be reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is rec-ognized in the consolidated statement of income by reducing the carrying amount of impaired assets or agroup of assets to the recoverable amount to be measured as the higher of net realizable value and value in use.

The Company and its domestic consolidated subsidiaries applied this standard effective for the year beginning April1, 2005. As a result, cost of sales decreased by ¥124 million, gross profit increased by ¥124 million, selling, gen-eral and administrative expenses increased by ¥261 million, operating income decreased by ¥137 million and incomebefore income taxes decreased by ¥6,223 million for the year ended March 31, 2006, as compared with theamounts which would have been reported if the previous standards had been applied consistently.

(24) Accounting Standard for Presentation of Net Assets in the Balance SheetEffective from the year ended March 31, 2007, the Company applied Accounting Standard for Presentation of NetAssets in the Balance Sheet (Accounting Standards Board of Japan, Statement No. 5, December 9, 2005) andImplementation Guidance on Accounting Standard for Presentation of Net Assets in the Balance Sheet(Accounting Standards Board of Japan, Guidance No. 8, December 9, 2005).


(25) Accounting Standards for Business Combinations and DivestituresEffective from the year ended March 31, 2007, the Company and its domestic consolidated subsidiariesapplied Accounting Standard for Business Combinations (Business Accounting Council, October 31, 2003) andAccounting Standard for Business Divestitures (Accounting Standards Board of Japan, Statement No. 7,December 27, 2005) and Guidance on Accounting Standard for Business Combinations and AccountingStandard for Business Divestitures (Accounting Standards Board of Japan, Guidance No. 10, final revision onDecember 22, 2006).

(26) Accounting Standards for Stock OptionsEffective from the year ended March 31, 2007, the Company applied Accounting Standard for Share-BasedPayment (Accounting Standards Board of Japan, Statement No. 8, December 27, 2005) and ImplementationGuidance on Accounting Standard for Share-Based Payment (Accounting Standards Board of Japan, Guidance No.11, final revision on May 31, 2006). As a result, for the year ended March 31, 2007, selling, general and admin-istrative expenses increased ¥52 million, operating income and income before income taxes decreased by the sameamount and net income decreased by ¥45 million.

(27) Revision to Accounting Standard for Treasury Stock and Reduction of Legal ReservesEffective from the year ended March 31, 2007, the Company applied the revised Accounting Standard forTreasury Stock and Reduction of Legal Reserves (Accounting Standards Board of Japan, Statement No. 1, final revi-sion on August 11, 2006) and Implementation Guidance on Accounting Standard for Treasury Stock andReduction of Legal Reserves (Accounting Standards Board of Japan, Guidance No. 2, final revision on August 11,2006). The change had no impact on the consolidated statements of income for the year ended March 31, 2007.

(28) Application of Control Criteria and Influence Criteria to Investment AssociationsEffective from the year ended March 31, 2007, the Company applied Practical Solution on Application ofControl Criteria and Influence Criteria to Investment Associations (Accounting Standards Board of Japan, PITF No.20, September 8, 2006). As a result, for the year ended March 31, 2007, operating income increased ¥1,376 mil-lion, while income before income taxes decreased ¥507 million, and net income decreased ¥337 million.

(29) Changes in ClassificationIn the year ended March 31, 2006, the Company introduced a new consolidated operations managementframework. This entailed setting up a Group-standard account item system, from the perspective of combining theinstitutional accounting and management accounting frameworks. The Company also reassessed its method forcalculating business earnings, with the aim of gaining a more accurate assessment of its financial performance. Toobtain a clearer insight into cost of sales compared to net sales, the Company reassessed the nature of certainitems, such as distribution costs and research and development expenses; which previously had been included with-in cost of sales. As from the year ended March 31, 2006, those items are now included within selling, general andadministrative expenses. With a view to providing a more accurate report of the Company’s operating income, amor-tization of goodwill and trademark rights, previously included within other expenses, is now included within sell-ing, general and administrative expenses, because acquisitions of goodwill and trademark rights are expected tobenefit the Company’s operating earnings.

In the previous fiscal year, negotiable certificates of deposit issued by domestic corporations was included in “Cashand Time Deposits.” Effective from the year ended March 31, 2008, however, this item is included in “Short-TermInvestments in Securities.” This change is in accordance with “Practical Guidelines for Accounting for FinancialInstruments” (Accounting Committee Report No. 14, issued by the Japanese Institute of Certified PublicAccountants, July 4, 2007), and amended “Q&A on Accounting for Financial Instruments” issued by theJapanese Institute of Certified Public Accountants (JICPA, November 6, 2007).

3. CASH FLOW INFORMATIONThe reconciliation of cash and time deposits shown in the consolidated balance sheets and cash and cash equivalentsshown in the consolidated statements of cash flows as of March 31, 2007 and 2008 is as follows:


2007 2008 2008Cash and time deposits ··························································· ¥ 65,453 ¥ 67,413 $ 672,784Short-term investments in securities ········································ 85,544 65,075 649,451

Total ··········································································· ¥150,997 ¥132,488 $1,322,235Time deposits with maturities exceeding 3 months··················· (4,121) (9,679) (96,596)Equity securities and debt securities with maturities exceeding 3 months ···· (1,616) (2,415) (24,102)Cash and cash equivalents······················································· ¥145,260 ¥120,394 $1,201,537



The assets and liabilities on the date of sale of Mieux Products Co., Ltd., which was sold during the year ended March31, 2007, and the relationship between the proceeds from sale of shares and net cash proceeds from sale of shares isas follows:

Thousands ofMillions of yen U.S. dollars (Note1. (1))

Current assets····························································································· ¥1,707 $14,455Non–current assets ······················································································ 904 7,655Current liabilities ·························································································· (790) (6,690)Non–current liabilities·························································································· (236) (1,998)Minority interests in consolidated subsidiaries ······················································ (555) (4,700)Loss on sale of shares of Mieux Products Co., Ltd. ··········································· (20) (169)Proceeds from sale of shares of Mieux Products Co., Ltd. ·································· ¥1,010 $ 8,553Cash and cash equivalents of Mieux Products Co., Ltd.······································ (878) (7,435)Net cash proceeds from sale of shares of Mieux Products Co., Ltd. ····················· ¥ 132 $ 1,118

The assets and liabilities on the date of sale of Shiseido Logistics Co., Ltd., which was sold during the year endedMarch 31, 2008, and the relationship between the proceeds from sale of shares and net cash proceeds from sale ofshares is as follows:


Current assets····························································································· ¥ 4,411 $ 44,022Non-current assets······················································································· 522 5,209Current liabilities ·························································································· (3,754) (37,465)Non-current liabilities ·························································································· (653) (6,517)Investment account after sales of shares ····························································· 0 0Decrease in retained earnings resulting from exclusion of consolidated subsidiaries ····· (53) (529)Profit on sale of shares of Shiseido Logistics Co., Ltd. ······································· 2,379 23,743Proceeds from sale of shares of Shiseido Logistics Co., Ltd. ······························· ¥ 2,852 $ 28,463Cash and cash equivalents of Shiseido Logistics Co., Ltd.··································· (1,923) (19,191)Net cash proceeds from sale of shares of Shiseido Logistics Co., Ltd. ·················· ¥ 929 $ 9,272

The assets and liabilities on the date of sale of Shiseido Lease Co., Ltd., which was sold during the year ended March31, 2008, and the relationship between the proceeds from sale of shares and net cash proceeds from sale of shares isas follows:


Current assets····························································································· ¥ 3,449 $ 34,421Non-current assets······················································································· 6,367 63,543Current liabilities ·························································································· (4,660) (46,507)Non-current liabilities··························································································· (4,236) (42,275)Unrealized profit and other ·················································································· 38 379Investment account after sales of shares ····························································· (18) (180)Decrease in retained earnings resulting from exclusion of consolidated subsidiaries ···· (61) (609)Profit on sale of shares of Shiseido Lease Co., Ltd. ··········································· 723 7,216Proceeds from sale of shares of Shiseido Lease Co., Ltd. ··································· ¥ 1,602 $ 15,988Cash and cash equivalents of Shiseido Lease Co., Ltd.······································· (120) (1,198)Net cash proceeds from sale of shares of Shiseido Lease Co., Ltd. ······················ ¥ 1,482 $ 14,790

4. SECURITIESThe acquisition cost, carrying amount, gross unrealized gains and losses for securities with fair value by security typeat March 31, 2007 and 2008, are as follows:

Available-for-sale securities:Millions of yen

2007Cost Carrying amount Gross unrealized gains Gross unrealized losses

Equity securities ·········································· ¥11,077 ¥34,127 ¥23,072 ¥22Corporate bonds ·········································· 8,532 8,509 4 27Other ·························································· 1,100 1,285 185 —

···································································· ¥20,709 ¥43,921 ¥23,261 ¥49

Millions of yen2008

Cost Carrying amount Gross unrealized gains Gross unrealized losses

Equity securities ·········································· ¥ 9,505 ¥18,976 ¥9,603 ¥133Corporate bonds ·········································· 4,500 4,024 6 390Other ·························································· 1,615 1,627 13 92

···································································· ¥15,620 ¥24,627 ¥9,622 ¥615


Thousands of U.S. dollars (Note 1)2008

Cost Carrying amount Gross unrealized gains Gross unrealized losses

Equity securities ·········································· $ 94,860 $189,381 $95,838 $1,328Corporate bonds ·········································· 44,910 40,160 60 3,892Other ·························································· 16,118 16,237 130 918

···································································· $155,888 $245,778 $96,028 $6,138The carrying amount of securities without fair value by security type as of March 31, 2007 and 2008 is summarized

as follows:

Available-for-sale securities:Carrying amount

Thousands of Millions of yen U.S. dollars (Note 1)

2007 2008 2008Unlisted equity securities························································· ¥ 17,822 ¥11,142 $111,198Unlisted bonds········································································ 3,669 2,456 24,511Other ····················································································· 82,305 65,227 650,968...................................................................................................... ¥103,796 ¥78,825 $786,677

Proceeds from sales, gross realized gains and losses from the sale of available-for-sale securities in the years endedMarch 31, 2006, 2007 and 2008 are as follows:

Carrying amountThousands of

Millions of yen U.S. dollars (Note 1)2006 2007 2008 2008

Proceeds from sales ······························· ¥14,235 ¥10,212 ¥13,682 $136,547Gross realized gains ································ 519 310 2,109 21,047Gross realized losses······························· — 167 1,687 16,836

The carrying value of debt securities by contractual maturities for securities classified as available-for-sale as ofMarch 31, 2008 is as follows:


Due in 1 year or less····················································································· ¥15,206 $151,757Due after 1 year through 5 years ···································································· 2,111 21,068Due after 5 years through 10 years ································································· 128 1,277Due after 10 years ······························································································ 4,000 39,920

¥21,445 $214,022

5. INVENTORIESInventories held by the Companies as of March 31, 2007 and 2008 are as follows:


2007 2008 2008Merchandise and products······················································· ¥ 48,346 ¥41,365 $412,824Raw materials ········································································· 14,218 15,421 153,902Work in process ······································································ 3,991 4,304 42,954Supplies ··········································································· 7,336 7,396 73,813

¥73,891 ¥68,486 $683,493

6. SHORT-TERM AND LONG-TERM DEBT

Short-term debt mainly consisting of bank borrowings as of March 31, 2007 and 2008 is ¥4,456 million and¥4,704 million ($46,946 thousand), respectively. The weighted average interest rates on short-term debt out-standing at March 31, 2007 and 2008 are 5.31% and 4.25%, respectively.

Long-term debt as of March 31, 2007 and 2008 is as follows:


2007 2008 2008Long-term borrowings from banks and other financial institutions

(Borrowings due within one year, weighted average interest rate 1.66%) ···· ¥ 3,820 ¥27,100 $270,459(Borrowings due after one year, weighted average interest rate 5.14%) ···· 34,547 4,566 45,569

0.40% unsecured yen bonds due in May 2007·························· 50,000 — —1.12% unsecured yen bonds due in March 2010······················· 20,000 20,000 199,601Medium-Term Notes due 2007–2008* ····································· 15,015 6,849 68,353

........................................................................................ ¥123,382 ¥58,515 $583,982Less: portion due within one year············································· (61,688) (33,949) (338,812)

........................................................................................ ¥ 61,694 ¥24,566 $245,170

*** These notes have been issued by Shiseido International Corporation and Shiseido International Europe S.A. The interest rates during theyear ended March 31, 2008 ranged from 4.01% to 4.05%.



The aggregate annual maturities of long-term debt as of March 31, 2008 are as follows:

Thousands of For the Years Ending March 31 Millions of yen U.S. dollars (Note 1)

2009 ········································································································ ¥33,949 $338,8122010 ········································································································ 20,000 199,6012011 ········································································································ — —2012 ········································································································ 2,283 22,7842013 ········································································································ 2,283 22,7852014 and thereafter······························································································ — —

¥58,515 $583,982

Assets pledged as collateral as of March 31, 2008 are as follows:


Buildings and structures···························································································· ¥19,058 $190,200Other investments ······························································································ 15,200 151,696Investments in securities····················································································· 1,512 15,090Cash and time deposits ······················································································· 1,242 12,395

······················································································································ ¥37,012 $369,381

The above assets are pledged as collateral for derivative transactions (interest rate swaps) and the following col-lateralized liability as of March 31, 2008:


Current portion of long-term debt ············································································· ¥27,100 $270,459

7. ACCRUED RETIREMENT BENEFITSThe Company and its domestic consolidated subsidiaries have contributory funded pension plans and unfunded ter-mination allowance plans, which are defined benefit plans. In September 2004, the Company transferred part of its pen-sion plan to an unfunded termination allowance plan. In October 2004, the Company discontinued part of its defined ben-efit plan and transferred to a defined contribution plan and a prepaid termination allowance plan. In some cases, addi-tional voluntary retirement benefits are paid when an employee retires. These are accounted for as retirement bene-fit expenses when incurred.

Certain overseas consolidated subsidiaries also have defined benefit pension plans, unfunded terminationallowance plans and defined contribution plans.

The reconciliation of projected benefit obligations, plan assets, funded status of the pension benefit plans, prepaidpension expense and accrued retirement benefits for significant plans recognized in the accompanying balancesheets as of March 31, 2007 and 2008 is as follows:


2007 2008 2008Projected benefit obligations··················································· ¥(190,449) ¥(195,564) $(1,951,736)Fair value of plan assets ························································· 190,405 173,532 1,731,856Funded status of the pension benefit plans ····························· (44) (22,032) (219,880)Unamortized net obligation at transition* ································· 1,083 932 9,301Unrecognized net actuarial loss··············································· 5,010 27,973 279,172Unrecognized prior service cost ·············································· (9,157) (7,136) (71,218)Additional minimum liability* ·················································· (1,482) (1,351) (13,483)Net retirement benefit obligation ················································ ¥ (4,590) ¥ (1,614) $ (16,108)Prepaid pension expense ······················································· 32,630 35,159 350,888Accrued retirement benefits ··················································· ¥ (37,220) ¥ (36,773) $ (366,996)

The net periodic pension benefit cost for the years ended March 31, 2006, 2007 and 2008 are as follows:


2006 2007 2008 2008Service cost ················································ ¥ 7,606 ¥ 7,876 ¥ 7,862 $ 78,463Interest cost················································ 4,304 4,546 4,646 46,367Expected return on plan assets ···················· (5,983) (7,328) (7,614) (75,988)Amortization of net obligation at transition* ············ 108 113 113 1,128Amortization of net actuarial loss······················· 5,367 3,069 2,843 28,373Amortization of prior service cost ················· (2,124) (2,125) (2,021) (20,169)The net periodic pension benefit cost ··········· ¥ 9,278 ¥ 6,151 ¥ 5,829 $ 58,174

*** These figures pertain to a Taiwanese subsidiary, according to the Taiwanese retirement allowance accounting system.Net obligation at transition is amortized by the straight-line method over a 17-year period.


The discount rate used to determine the actuarial present value of projected benefit obligations as of March 31, 2007and 2008 under the plans that cover employees of the Company and certain domestic subsidiaries is 2.5%. The expect-ed rate of return on plan assets of those plans as of March 31, 2007 and 2008 is 4.0%. Allocation of pension benefitsto each year of service of the employees is based on the “benefits/years-of-service” approach, whereby the sameamount of benefits is allocated to each year.

In addition, certain other overseas consolidated subsidiaries record accrued retirement benefits, according to theaccounting standards of their respective countries. The total amount of these accrued retirement benefits at March 31,2007 and 2008 is ¥1,423 million and ¥1,529 million ($15,259 thousand), respectively.

8. INCOME TAXESIncome tax applicable to the Company and its domestic consolidated subsidiaries consist of corporation, inhabi-tants’ and enterprise taxes. The statutory income tax rate is approximately 41.0% for the years ended March 31, 2006,2007 and 2008.

Since the difference between the statutory tax rate and the effective tax rate for the fiscal years ended March 31,2007 and 2008 is less than 5%, a reconciliation of these two rates is not presented.

Deferred tax assets and liabilities (both current and non-current) as of March 31, 2007 and 2008 are as follows:


2007 2008 2008Deferred tax assets:

Unrealized intercompany profit in inventory andproperty, plant and equipment ············································· ¥ 8,944 ¥ 9,020 $ 90,020

Depreciation ········································································ 10,731 8,244 82,275Write-down of investments in securities and other investments······ 8,981 7,909 78,932Non-deductible cost and valuation loss on inventory················· 6,465 6,572 65,589Tax losses carried forward····················································· 9,845 5,651 56,397Accrued expenses································································ 4,980 5,401 53,902Accrued bonuses for employees············································ 4,613 4,868 48,583Accrued enterprise tax·························································· 812 777 7,754Accrued retirement benefits ·················································· 1,129 409 4,082Other·················································································· 7,745 4,947 49,372Total gross deferred tax assets ·············································· 64,245 53,798 536,906Less: valuation allowance······················································ (10,931) (8,839) (88,213)Total deferred tax assets······················································· ¥ 53,314 ¥44,959 $448,693

Deferred tax liabilities:Unrealized gains (losses) on available-for-sale securities ··········· ¥ 9,526 ¥ 3,674 $ 36,666Goodwill and other intangible assets ······································ 1,636 1,869 18,653Undistributed earnings of foreign subsidiaries ························· — 1,256 12,535Special tax-purpose reserve··················································· 1,101 1,063 10,609Depreciation ········································································ 518 288 2,874Other·················································································· 497 211 2,106Total deferred tax liabilities ···················································· ¥ 13,278 ¥ 8,361 $ 83,443Net deferred tax assets ························································ ¥ 40,036 ¥36,598 $365,250

9. CONTINGENT LIABILITIESAs of March 31, 2008, the Company was contingently liable as a guarantor for Shiseido Lease Co., Ltd.’s own guaranteesfor the lease liabilities of third customers, amounting to ¥153 million ($1,527 thousand). Shiseido Lease Co., Ltd. wasdisposed during the year ended March 31, 2008. As of March 31, 2007, the Company had no such contingent liabilities.

Note: Shiseido Lease Co., Ltd. was renamed SDL Co., Ltd. as of April 1, 2008.

10. NET ASSETSThe Corporate Law (“the Law”) became effective on May 1, 2006, replacing the Commercial Code (“the Code”). UnderJapanese laws and regulations, the entire amount paid for new shares is required to be designated as common stock.However, a company may, by a resolution of the Board of Directors, designate an amount not exceeding one half ofthe price of the new shares as additional paid-in capital, which is included in capital surplus.

Under the Law, in cases where dividend distribution of surplus is made, the lesser of an amount equal to 10% of thedividend or the excess, if any, of 25% of common stock over the total of additional paid-in capital and legal earningsreserve, must be set aside as additional paid-in capital or legal earnings reserve. Legal earnings reserve is included inretained earnings in the accompanying consolidated balance sheets. Under the Code, companies were required to setaside an amount equal to at least 10% of cash dividends and other cash appropriations as legal earnings reserve untilthe total of legal earnings reserve and additional paid-in capital equaled 25% of common stock. Under the Code, legalearnings reserve and additional paid-in capital could be used to eliminate or reduce a deficit by a resolution of the share-holders’ meeting or could be capitalized by a resolution of the Board of Directors. Under the Law, both of these appro-



priations generally require a resolution of the shareholders’ meeting.Additional paid-in capital and legal earnings reserve may not be distributed as dividends. Under the Code, however,

additional paid-in capital and legal earnings reserve could be transferred to retained earnings by the resolution of the share-holders’ meeting as long as the total amount of legal earnings reserve and additional paid-in capital remained equal toor exceeded 25% of the common stock balance. Under the Law, all additional paid-in capital and legal earningsreserve may be transferred to other capital surplus and retained earnings, respectively, which are potentially availablefor dividends. The maximum amount that the Company can distribute as dividends is calculated based on the non-con-solidated financial statements of the Company in accordance with the Law. Under the Law, companies can pay dividendsat any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders’ meeting. Forcompanies that meet certain criteria such as: (1) having a Board of Directors, (2) having accounting auditors, (3) havinga Board of Corporate Auditors, (4) the term of service of the directors is prescribed as one year rather than two yearsas the normal term by its articles of incorporation, and (5) the opinion of accounting auditors is unqualified, theBoard of Directors may declare dividends if the company has prescribed so in its articles of incorporation.Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles ofincorporation of the company so stipulate. Under the Code, certain limitations were imposed on the amount of capitalsurplus and retained earnings available for dividends. Cash dividends charged to retained earnings during the fiscal yearwere year-end cash dividends for the preceding fiscal year and interim cash dividends for the current fiscal year.

Appropriations are not accrued in the consolidated financial statements for the corresponding period, but arerecorded in the subsequent accounting period after shareholders’ approval has been obtained.

Retained earnings at March 31, 2008 include amounts representing year-end cash dividends of ¥6,871 million ($68,573thousand), ¥17.0 ($0.17) per share, which were approved at the shareholders’ meeting held on June 25, 2008.

On November 7, 2007, the Company retired 14,562,353 shares of treasury stock.

11. STOCK OPTION PLANSummarized information on the stock options granted as of March 31, 2008 is as follows:

➀ Stock option plan approved by the shareholders on June 27, 2002Stock options granted on

July 16, 2002 Total

Number of shares for options granted 578,000 shares 578,000 sharesNumber of shares for options outstanding 253,000 shares 253,000 sharesExercise price ¥1,669Exercisable period July 1, 2004 - June 26, 2012

➁ Stock option plan approved by the shareholders on June 27, 2003Stock options granted on

July 31, 2003 Total

Number of shares for options granted 878,000 shares 878,000 sharesNumber of shares for options outstanding 181,000 shares 181,000 sharesExercise price ¥1,287Exercisable period July 1, 2005 - June 26, 2013

➂ Stock option plan approved by the shareholders on June 29, 2004Stock options granted on Stock options granted on Stock options granted on

July 26, 2004 November 30, 2004 March 9, 2005 Total

Number of shares for options granted 1,004,000 shares 16,000 shares 78,000 shares 1,098,000 sharesNumber of shares for

options outstanding 749,000 shares — — 749,000 sharesExercise price ¥1,427 ¥1,419 ¥1,445Exercisable period July 1, 2006 - June 28, 2014 December 1, 2004 - November 30, 2007 April 1, 2005 - March 31, 2008

➃ Stock option plan approved by the shareholders on June 29, 2005Stock options granted on Stock options granted on

July 28, 2005 July 28, 2005

Number of shares for options granted 408,000 shares 261,000 sharesNumber of shares for options outstanding 316,000 shares 258,000 sharesExercise price ¥1 ¥1,481Exercisable period July 1, 2008 - June 30, 2011 July 1, 2007 - June 28, 2015

Stock options granted on Stock options granted on Stock options granted onOctober 27, 2005 November 7, 2005 March 8, 2006 Total

Number of shares for options granted 11,000 shares 1,851,000 shares 63,000 shares 2,594,000 sharesNumber of shares for

options outstanding 3,000 shares 705,000 shares 21,000 shares 1,303,000 sharesExercise price ¥1,865 ¥1,896 ¥2,012Exercisable period November 1, 2005 - October 31, 2008 July 1, 2007 - June 30, 2010 April 1, 2006 - March 31, 2009


➄ Stock option plan approved by the shareholders on June 29, 2006Stock options granted on

August 23, 2006

Number of shares for options granted 9,000 sharesNumber of shares for options outstanding 9,000 sharesExercise price ¥1Exercisable period July 1, 2008 - June 30, 2011

Stock options granted on Stock options granted on Stock options granted onAugust 23, 2006 August 23, 2006 August 23, 2006 Total

Number of shares for options granted 12,000 shares 67,000 shares 74,000 shares 162,000 sharesNumber of shares for

options outstanding 12,000 shares 67,000 shares 74,000 shares 162,000 sharesExercise price ¥1 ¥2,300 ¥2,300Exercisable period July 1, 2008 - June 30, 2011 August 1, 2008 - July 30, 2016 August 1, 2008 - July 30, 2016

➅ Stock option plan approved by the shareholders on June 26, 2007Stock options granted on

August 23, 2007

Number of shares for options granted 2,000 sharesNumber of shares for options outstanding 2,000 sharesExercise price ¥1Exercisable period July 1, 2008 - June 30, 2011

Stock options granted on Stock options granted on Stock options granted onAugust 23, 2007 August 23, 2007 August 23, 2007 Total

Number of shares for options granted 15,000 shares 81,000 shares 78,000 shares 176,000 sharesNumber of shares for

options outstanding 15,000 shares 81,000 shares 78,000 shares 176,000 sharesExercise price ¥1 ¥2,615 ¥2,615Exercisable period July 1, 2008 - June 30, 2011 August 1, 2009 - July 30, 2017 August 1, 2009 - July 30, 2017

12. RESEARCH AND DEVELOPMENTResearch and development expenses, which are included in selling, general and administrative expenses, totaled ¥16,452million, ¥16,133 million and ¥14,566 million ($145,369 thousand) for the years ended March 31, 2006, 2007 and 2008,respectively. There are no research and development expenses included in total manufacturing expenses for theyears ended March 31, 2006, 2007 and 2008.

13. TRANSACTIONS WITH RELATED PARTIESThe Company contributed ¥1 million ($10 thousand) to the Shiseido Social Welfare Foundation (the Foundation) in theyears ended March 31, 2007 and 2008. The Foundation performs social support specializing in child welfare.

Shinzo Maeda, President and CEO (Representative Director) of the Company, is the Chairman of the Foundation.The Company approved the amount of contribution at the Board of Directors meeting.

Shoichiro Iwata, an External Director of the Company, is the Representative Director of ASKUL Corporation. TheCompany purchases stationery and other products from ASKUL Corporation and the amount of transactions was ¥94million ($938 thousand) for the year ended March 31, 2008 and the ending balance was ¥42 million ($419 thousand)in other payable as of March 31, 2008.

14. ACCOUNTING FOR LEASESThe Companies have various lease agreements whereby the Companies act both as a lessee and a lessor.Information on finance lease contracts other than those deemed to transfer the ownership of the leased assets as a les-see and a lessor for the years ended March 31, 2006, 2007 and 2008, is as follows:




2006 2007 2008 2008➀ As lessee:

The scheduled maturities of future lease rental payments on such lease contracts are as follows:Due within one year ···························· ¥ 4,166 ¥ 2,788 ¥ 3,335 $ 33,284Due after one year ······························ 8,107 4,161 4,050 40,419

¥ 12,273 ¥ 6,949 ¥ 7,385 $ 73,703

Balance of allowance for impairment loss on leased assets···························· — ¥ 15 ¥ 14 $ 140

Reversed lease impairment loss················· — ¥ 103 ¥ 9 $ 90Lease rental expenses for the year ············· ¥ 5,371 ¥ 3,688 ¥ 3,229 $ 32,226Assumed depreciation ······························ ¥ 5,371 ¥ 3,681 ¥ 3,220 $ 32,136Impairment loss ······································ — ¥ 7 ¥ 8 $ 80

Leased machinery and equipment:Assumed purchase cost ······················ ¥ 27,187 ¥15,155 ¥ 22,012 $ 219,681Assumed accumulated depreciation········ (14,914) (8,206) (14,627) (145,978)Assumed impairment loss ····················· — (15) (14) (140)Assumed net book value ····················· ¥ 12,273 ¥ 6,934 ¥ 7,371 $ 73,563

Assumed purchase cost and the scheduled maturities of future lease rental payment include the capitalizedinterest thereon, as the proportion of future lease rental payments to total property, plant and equipment isimmaterial.

Assumed depreciation is based on the straight-line method over the lease term of the leased assets, assumingno residual value.


2006 2007 2008 2008➁ As lessor:

The scheduled maturities of future lease rental receipts onsuch lease contracts are as follows:Due within one year ···························· ¥ 1,619 ¥ 1,324 — —Due after one year ······························· 2,939 2,046 — —

¥ 4,558 ¥ 3,370 — —

Lease rental income for the year ················ ¥ 1,930 ¥ 1,999 ¥1,596 $15,928Depreciation ············································ ¥ 1,757 ¥ 1,740 ¥1,380 $13,772Assumed interest income ························· ¥ 345 ¥ 203 ¥ 165 $ 1,647

Leased machinery and equipment:Purchase cost ····································· ¥ 9,442 ¥ 8,784 — —Accumulated depreciation ··················· (5,164) (5,584) — —Net book value····································· ¥ 4,278 ¥ 3,200 — —

Assumed interest income is calculated based on the interest method.

Lease obligations under operating leases at March 31, 2006, 2007 and 2008, are as follows:


2006 2007 2008 2008➀ As lessee:

The scheduled maturities of future lease rental payments onsuch lease contracts are as follows:Due within one year ···························· ¥ 3,797 ¥1,629 ¥2,260 $22,555Due after one year ······························· 27,505 4,454 6,514 65,010

¥31,302 ¥6,083 ¥8,774 $87,565➁ As lessor:

The scheduled maturities of future lease rental receipts onsuch lease contracts are as follows:Due within one year ···························· ¥ 212 ¥ 210 — —Due after one year ······························· 394 381 — —

¥ 606 ¥ 591 — —


15. DERIVATIVE FINANCIAL INSTRUMENTSThe contract amount, estimated fair value and unrealized gain (loss) of the derivative contracts as of March 31, 2007and 2008 are as follows:

Millions of yen

2007Contract amount

Total Settled over Estimated Unrealizedone year fair value gain (loss)

Currency swap contracts:To receive Yen/to pay Euro ······················ ¥1,317 — ¥(334) ¥(334)

Interest swap contracts:To receive variable/to pay fixed················· ¥2,382 ¥2,382 ¥ (35) ¥ (35)

Millions of yen

2008Contract amount


Interest swap contracts:To receive variable/to pay fixed················· ¥2,283 ¥2,283 ¥(107) ¥(107)

Thousands of U.S. dollars (Note 1)

2008Contract amount


Interest swap contracts:To receive variable/to pay fixed················· $22,784 $22,784 $(1,068) $(1,068)

Derivatives that meet the criteria for hedges are excluded from the above table.

16. IMPAIRMENT LOSSFor impairment accounting purposes, the Companies pool their business-use assets separately from their idle assets.Business-use assets are generally pooled according to the minimum independent cash-flow-generating unit,based on business classification. Idle assets are pooled according to each separate property. Business-useassets due to be sold have been devalued from the book value to the recoverable value, with the differences report-ed as other expenses. Idle assets whose market value has declined have been devalued from the book value to therecoverable value, with the differences reported as other expenses. Recoverable values are calculated according toestimated net sale value, which are mainly based on real estate appraisal values.

Impairment loss on overseas assets is mainly recognized due to decreasing profitability of long-lived assets of NorthAmerican subsidiaries.

Impairment losses for the years ended March 31, 2006, 2007 and 2008 are as follows:


Thousands of U.S. Millions of yen dollars (Note 1)

Domestic

Business-use assets:Land ····················································Building and structures, etc. ··················

Idle assets:Land ····················································Building and structures, etc. ··················

OverseasBuilding and structures, etc. ··················Goodwill ··············································Trademark rights ··································

2007

¥1,389699

1,159143

407801

—¥4,598

2008

¥ 939161

——

51——

¥1,151

2008

$ 9,371 1,607

——

509——

$11,487

2006

¥ 2142,597

2,356919

—3,3572,961

¥12,404


¥453,3605,131

¥458,491424,231

¥ 34,260¥238,456¥ 15,040¥ 4,840¥ 14,991

¥447,5576,232

¥453,789416,919

¥ 36,870¥243,882¥ 14,362¥ 2,115¥ 12,150

¥439,021 6,471

¥445,492 402,362

¥ 43,130 ¥229,202 ¥ 14,133 ¥ 1,080 ¥ 14,756

DomesticCosmetics

DomesticCosmetics

¥196,331379

¥196,710193,875

¥ 2,835¥211,346¥ 6,595¥ 6,360¥ 8,578

¥224,3201,347

¥225,667215,222

¥ 10,445¥229,795¥ 7,617¥ 1,255¥ 8,739

¥263,703 1,771

¥265,474 247,600

¥ 17,874 ¥248,443 ¥ 8,944 ¥ 51 ¥ 12,261

OverseasCosmetics

OverseasCosmetics

¥21,26619,293

¥40,55939,577

¥ 982¥53,335¥ 5,360¥ 1,256¥ 5,028

¥22,71723,113

¥45,83043,585

¥ 2,245¥77,993¥ 6,519¥ 1,228¥ 5,463

¥20,761 19,487

¥40,248 38,253

¥ 1,995 ¥58,822 ¥ 4,630 ¥ 20 ¥ 2,649

Others

Others

¥670,95724,803

¥695,760657,683

¥ 38,077¥503,137¥ 26,995¥ 12,456¥ 28,597

¥694,59430,692

¥725,286675,726

¥ 49,560¥551,670¥ 28,498¥ 4,598¥ 26,352

¥723,485 27,729

¥751,214 688,215

¥ 62,999 ¥536,467 ¥ 27,707 ¥ 1,151 ¥ 29,666

Subtotal

Subtotal

— ¥ (24,803)¥ (24,803)

(25,605)¥ 802¥168,705¥ (23)¥ (52)¥ 29

— ¥ (30,692)¥ (30,692)

(31,137)¥ 445¥188,163¥ (23)

—¥ 14

—¥ (27,729)¥ (27,729)

(28,195)¥ 466 ¥139,397 ¥ 3

—¥ 72

Elimination/corporate


¥670,957—

¥670,957632,078

¥ 38,879¥671,842¥ 26,972¥ 12,404¥ 28,626

¥694,594—

¥694,594644,589

¥ 50,005¥739,833¥ 28,475¥ 4,598¥ 26,366

¥723,485 —

¥723,485 660,020

¥ 63,465 ¥675,864 ¥ 27,710 ¥ 1,151 ¥ 29,738

Consolidation

Consolidation

Millions of yen2006

Net salesSales to outside customers···············Intersegment sales or transfers········

Total ··············································Operating expenses2,3 ····················Operating income3 ·························Total assets4 ··································Depreciation3,5 ·······························Impairment loss5 ····························Capital expenditure5 ·······················

Millions of yen2007

Net salesSales to outside customers ·········Intersegment sales or transfers········


Millions of yen2008



17. SEGMENT INFORMATION(1) Business Segment Information1

The Companies operate principally in the following 3 business segments.The business segments are classified based on the internal organization of the Companies.

Domestic Cosmetics: Cosmetics division (Production and sale of cosmetics, cosmetic accessories and toiletries)

Professional division (Production and sale of beauty salon products, etc.)Healthcare division (Production and sale of health & beauty foods and

over-the-counter drugs)Overseas Cosmetics: Cosmetics division (Production and sale of cosmetics, cosmetic

accessories and toiletries)Professional division (Production and sale of beauty salon products, etc.)

Others: Frontier Sciences division (Production and sale of cosmetic ingredients, medical-usepharmaceuticals, and beauty therapy cosmetics)

Others (Sale of clothing and accessories, operation of restaurants, real estate rental, etc.)

The business segment information of the Companies for the years ended March 31, 2006, 2007 and 2008, is as fol-lows:

DomesticCosmetics

OverseasCosmetics

Others Subtotal Elimination/corporate

Consolidation



Millions of yen2006

Net salesSales to outside customers ·········Intersegment sales or transfers ···

Total ··············································Operating expenses1,2 ····················Operating income2 ·························Total assets3 ··································

Japan

¥475,65421,072

¥496,726472,699

¥ 24,027¥309,980

Americas

¥46,0168,476

¥54,49253,562

¥ 930¥59,547

Europe

¥85,5733,870

¥89,44384,065

¥ 5,378¥84,696

Asia/Oceania

¥63,71484

¥63,79856,131

¥ 7,667¥65,383

Subtotal

¥670,95733,502

¥704,459666,457

¥ 38,002¥519,606


—¥ (33,502) ¥ (33,502)

(34,379) ¥ 877¥152,236

Consolidation

¥670,957—

¥670,957632,078

¥ 38,879¥671,842

Thousands of U.S. dollars (Note 1) 2008



Notes: 1. Effective for the year ended March 31, 2007, the Company has reclassified business segment reporting from “cosmetics,” “toi-letries” and “others” to “domestic cosmetics,” “overseas cosmetics” and “others.”• “Cosmetics” includes toiletries, beauty salon products, health & beauty foods, and over-the-counter drugs, which had previously

been included in “toiletries” and “others” segments.• “Cosmetics” with its wider product domain is divided into domestically-operated “domestic cosmetics” and overseas-operat-

ed “over-seas cosmetics.”• “Others” include medical-use drugs, clothing, accessories, and other businesses that are not included in the scope of “domestic cos-

metics” and “overseas cosmetics.”Through these changes, segments are reclassified to reflect the integration of cosmetics with its peripheral businesses and other

internal organizational changes, and to clarify overseas cosmetics business results.Business segment information for years up to March 31, 2006 have been restated to retrospectively reflect changes in business

segments from the year ended March 31, 2007.

2. Effective for the year ended March 31, 2007, the Company has reassessed the segment allocation of its operating expenses. Certainadministrative expenses and basic research and development expenses, etc., which had previously been included under theElimination line as unallocatable operating expenses, are now allocated to each segment. The Company also redefined certain inter-segment transactions. By allocating all administrative expenses to each business segment, these changes aim to provide a moreappropriate presentation and disclosure of business segment results, in line with the reclassification in business segmentreporting.

Business segment information for years up to March 31, 2006 have been restated to retrospectively reflect changes in allocationof operating expenses from the year ended March 31, 2007.

3. Pursuant to an amendment to the Japanese Corporate Tax Law, effective from the year ended March 31, 2008, the Company andits domestic consolidated subsidiaries depreciate the difference between the original residual value of 5% of acquisition cost ofassets acquired before April 1, 2007 and the new residual value of 1 Yen (memorandum value) by the straight-line method over5 years commencing from the fiscal year following the year in which the asset becomes fully depreciated to the original residualvalue. Depreciated amounts are included in depreciation expenses. As a result of this change, operating expenses in theDomestic Cosmetics, Overseas Cosmetics and Others segments rose ¥622 million ($6,208 thousand), ¥55 million ($549 thousand)and ¥9 million ($90 thousand), respectively, while operating income in those segments declined by the same amounts.

4. Corporate assets included in the Elimination line item were ¥142,341 million ($1,420,569) thousand), consisting mainly ofdeferred tax assets, financial assets of the Company (cash and time deposits, short-term investments in securities, and investmentsin securities), and assets related to administrative operations.

5. Depreciation, impairment loss and capital expenditure include amounts relating to long-term prepaid expenses.

(2) Geographic Segment Information Segmentation between countries and regions is based on geographic proximity.

Americas: United States, Canada, BrazilEurope: France, Italy, Germany, SpainAsia/Oceania: China (including Hong Kong), Taiwan, South Korea, Southeast Asia, Australia

The geographic segment information of the Companies for the years ended March 31, 2006, 2007 and 2008 is as fol-lows:

$4,381,447 64,581

$4,446,028 4,015,589

$ 430,439 $2,287,445 $ 141,048 $ 10,778 $ 147,265

DomesticCosmetics

$2,631,766 17,675

$2,649,441 2,471,058

$ 178,383 $2,479,471 $ 89,261 $ 509 $ 122,365

OverseasCosmetics

$207,196 194,481

$401,677 381,766

$ 19,911 $587,046 $ 46,208 $ 200 $ 26,437

Others

$7,220,409 276,737

$7,497,146 6,868,413

$ 628,733 $5,353,962 $ 276,517 $ 11,487 $ 296,067

Subtotal

—$ (276,737)$ (276,737)

(281,387)$ 4,650 $1,391,188 $ 30

—$ 719


$7,220,409 —

$7,220,409 6,587,026

$ 633,383 $6,745,150 $ 276,547 $ 11,487 $ 296,786

Consolidation


Notes: 1. Effective for the year ended March 31, 2007, the Company has reassessed the segment allocation of its operating expenses.Certain administrative expenses and basic research and development expenses, etc., which had previously been included under theElimination line as unallocatable operating expenses, are now allocated to each segment. The Company also redefined certain inter-segment transactions. By allocating all administrative expenses to each geographic segment, these changes aim to provide a more appro-priate presentation and disclosure of geographic segment results, in line with the reclassification in geographic segment reporting.

Geographic segment information for years up to March 31, 2006 has been restated to retrospectively reflect changes in account-ing policies from the year ended March 31, 2007.

2. Pursuant to an amendment to the Japanese Corporate Tax Law, effective from the year ended March 31, 2008, the Company andits domestic consolidated subsidiaries depreciate the difference between the original residual value of 5% of acquisition cost ofassets acquired before April 1, 2007 and the new residual value of 1 Yen (memorandum value) by the straight-line method over5 years commencing from the fiscal year following the year in which the asset becomes fully depreciated to the original residualvalue. Depreciated amounts are included in depreciation expenses. As a result of this change, operating expenses in the Japan seg-ment rose ¥687 million ($6,856 thousand), while operating income in this segment declined by the same amount.

3. Corporate assets included in the Elimination line item were ¥142,341 million ($1,420,569) thousand), consisting mainly ofdeferred tax assets, financial assets of the Company (cash and time deposits, short-term investments in securities, and investmentsin securities), and assets related to administrative operations.

(3) Overseas Sales* Overseas sales of the Companies (which represent the exports made by the Company and its domestic consolidatedsubsidiaries and sales (other than exports to Japan) of its overseas consolidated subsidiaries) for the years ended March31, 2006, 2007 and 2008, are as follows:


2006 2007 2008 2008Overseas sales:

Americas ·········································· ¥ 47,527 ¥ 53,969 ¥ 59,333 $592,146Europe ················································ 80,395 79,326 92,785 925,998Asia/Oceania······································ 69,319 91,503 112,146 1,119,221

...................................................... ¥197,241 ¥224,798 ¥264,264 $2,637,365Percentage of such sales against

consolidated net sales ·························· 29.4% 32.4% 36.5% 36.5%*** Classification of overseas sales is determined by geographical location.

Millions of yen2007



Millions of yen2008



Thousands of U.S. dollars (Note 1) 2008



Japan

¥471,20522,116

¥493,321465,986

¥ 27,335¥337,971

Japan

¥460,714 25,898

¥486,612 454,827

¥ 31,785 ¥306,576

Japan

$4,597,944 258,463

$4,856,407 4,539,192

$ 317,215 $3,059,641

Americas

¥51,7308,139

¥59,86957,060

¥ 2,809¥59,428

Americas

¥56,559 9,007

¥65,566 61,572

¥ 3,994 ¥56,765

Americas

$564,461 89,890

$654,351 614,491

$ 39,860 $566,517

Europe

¥88,3644,335

¥92,69986,388

¥ 6,311¥95,801

Europe

¥103,775 5,092

¥108,867 99,881

¥ 8,986 ¥105,720

Europe

$1,035,679 50,819

$1,086,498 996,816

$ 89,682 $1,055,090

Asia/Oceania

¥83,295112

¥83,40772,195

¥11,212¥74,131

Asia/Oceania

¥102,437 154

¥102,591 86,711

¥ 15,880 ¥ 86,557

Asia/Oceania

$1,022,325 1,537

$1,023,862 865,379

$ 158,483 $ 863,842

Subtotal

¥694,59434,702

¥729,296681,629

¥ 47,667¥567,331

Subtotal

¥723,485 40,151

¥763,636 702,991

¥ 60,645 ¥555,618

Subtotal

$7,220,409 400,709

$7,621,118 7,015,878

$ 605,240 $5,545,090


—¥ (34,702) ¥ (34,702)

(37,040) ¥ 2,338¥172,502


—¥ (40,151)¥ (40,151)

(42,971)¥ 2,820 ¥120,246


—$ (400,709)$ (400,709)

(428,852)$ 28,143 $1,200,060

Consolidation

¥694,594—

¥694,594644,589

¥ 50,005¥739,833

Consolidation

¥723,485 —

¥723,485 660,020

¥ 63,465 ¥675,864

Consolidation

$7,220,409 —

$7,220,409 6,587,026

$ 633,383 $6,745,150



18. SUBSEQUENT EVENT

(Establishment of Significant Subsidiary)

(1) Background and PurposeOn December 26, 2007, the Board of Directors approved a resolution to establish a wholly owned production sub-

sidiary in Vietnam to construct a manufacturing facility that will serve as the Group’s production base for the expand-ing Asian market. The new subsidiary, called Shiseido Vietnam Inc., was established on April 24, 2008.

(2) Overview of Subsidiary

Company name Shiseido Vietnam Inc.

Location Bien Hoa City, Dong Nai Province, Vietnam

Description of business Manufacture of cosmetics

Amount of capital Approx. ¥4.0 billion (US$38 million)(plan)

Ownership 100% owned by Shiseido Co., Ltd.

(3) Overview of Investment (plan)

Size of operation Land: 100,000m2; production facility: 21,400m2

Size of investment Approx. ¥4.0 billion (US$38 million)

Dec. 2008 (start construction);Schedule Oct. 2009 (complete construction);

Dec. 2009 (commence operations)


To the Shareholders and Board of Directors of

Shiseido Company, Limited:

We have audited the accompanying consolidated balance sheets of Shiseido Company, Limited and consolidated sub-

sidiaries as of March 31, 2008 and 2007, and the related consolidated statements of income, changes in net assets and

cash flows for the years then ended, expressed in Japanese yen. These consolidated financial statements are the respon-

sibility of the Company’s management. Our responsibility is to independently express an opinion on these consolidated

financial statements based on our audits. The consolidated financial statements of Shiseido Company, Limited and con-

solidated subsidiaries for the year ended March 31, 2006 was audited by other auditors whose report, dated June 29,

2006, expressed an unqualified opinion on those statements.

We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards

require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are

free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and dis-

closures in the financial statements. An audit also includes assessing the accounting principles used and significant esti-

mates made by management, as well as evaluating the overall financial statement presentation. We believe that our

audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the con-

solidated financial position of Shiseido Company, Limited and subsidiaries as of March 31, 2008 and 2007, and the con-

solidated results of their operations and their cash flows for the years then ended, in conformity with accounting prin-

ciples generally accepted in Japan.

Without qualifying our opinion, we draw attention to the following:

(1) As discussed in Note 2(28) to the consolidated financial statements, effective for the year ended March 31,

2007, Shiseido Company, Limited applied Practical Solution on Application of Control Criteria and Influence

Criteria to Investment Associations.

(2) As discussed in Note 17(1) to the consolidated financial statements, Shiseido Company, Limited changed the

classification of business segments in the year ended March 31, 2007.

The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended

March 31, 2008 are presented solely for the convenience of the reader. Our audit also included the translation of yen

amounts into U.S. dollars and, in our opinion, such translation has been made on the basis described in Note 1 to the

consolidated financial statements.

Tokyo, Japan

June 25, 2008

Repor t of Independent Auditors

Head Office

Shiseido Company, Limited 5-5, Ginza 7-chome, Chuo-ku Tokyo 104-0061, Japan Tel: +81-3-3572-5111

Foundation

September 17, 1872

Incorporation

June 24, 1927

Capital

¥64,506,725,140

Number of Employees

3,497 (28,793 for the Shiseido Group)

Fiscal Year-End

March 31

Common Shares Issued and Outstanding

410,000,000 (including 5,794,022 in treasury stock)

Number of Shareholders

33,075

Shareholders’ Meeting

The Ordinary General Meeting of Shareholdersis normally held in June in Tokyo.

Stock Listings

Common Stock: Tokyo Stock Exchange (Code: 4911)American Depositary Receipts: U.S. Over-the-Counter

Accounting Auditors

KPMG AZSA & Co.

Share Registrar

The Chuo Mitsui Trust and Banking Company, Ltd. 33-1, Shiba 3-chome, Minato-ku, Tokyo 105-8574, Japan

American Depositary Receipts

CUSIP: 824841407 Ratio (ADR:ORD): 1:1 Exchange: OTC (Over-the-Counter) Symbol: SSDOY Depositary: The Bank of New York Mellon

101 Barclay Street, New York, NY 10286, U.S.A. Tel: +1 (212) 815-3874 U.S. toll free: (888) 269-2377http://www.adrbnymellon.com

(As of March 31, 2008)

Corporate Information

Composition of Shareholders(by number of shares)

Composition of Shareholders (%)

Principal ShareholdersNumber of Percentageshares held of

Shareholders (thousands) shareholding

The Master Trust Bank of Japan, Ltd. (Trust Account) 22,505 5.48Mizuho Bank, Ltd. 21,226 5.17State Street Bank and Trust Company 20,467 4.99Japan Trustee Services Bank, Ltd. (Trust Account) 19,073 4.65Hero & Co. 15,118 3.68NIPPONKOA Insurance Company, Ltd. 13,112 3.19Asahi Mutual Life Insurance Company 12,079 2.94Mizuho Corporate Bank, Ltd. 11,382 2.77Mitsui Sumitomo Insurance Company, Ltd. 10,211 2.49Nippon Life Insurance Company 9,747 2.37In addition to the above, Shiseido Company, Limited holds 5,794 thousand shares of treasury stock.

(¥) (Nikkei Stock Average)

(Thousands of shares)

Share Price Trading Volume Nikkei Stock Average (Closing Price)3,500

3,000 18,000

20,000

14,000

10,000

60,000

40,000

20,000

0

2,500

2,000

1,500

1,000

500

005/04 06/04 07/04 08/03

%

ForeignInvestors28.08%

Individuals17.08%

FinancialInstitutions46.23%

Other JapaneseCompanies 5.17%

Treasury Stock1.41%

Securities Companies2.00%

(By number of shares) 2007 2008Foreign Investors 30.94 28.08Individuals 17.52 17.08Financial Institutions 41.91 46.23Securities Companies 1.65 2.00Other Japanese Companies 5.22 5.17Treasury Stock 2.76 1.41

(By number of shareholders) 2007 2008Foreign Investors 1.25 1.41Individuals 96.52 96.32Financial Institutions 0.47 0.48Securities Companies 0.12 0.11Other Japanese Companies 1.64 1.65Treasury Stock 0.00 0.0014.56 million shares of treasury stock (3.42% of commonshares issued and outstanding) were retired in November 2007.

For further information, please contact Investor Relations, Financial DepartmentShiseido Company, Limited 6-2, Higashi-shimbashi 1-chome Minato-ku, Tokyo 105-8310, Japan F a x : +81-3-6218-5544 E-mail: [email protected]

WebsiteEnglish Edition: http://www.shiseido.co.jp/e/ Japanese Edition: http://www.shiseido.co.jp/

Monthly Share Price Range and Trading Volume


Shiseido AR

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