L’Oreal Shows Strength In U.S. Market But Slowing Asian Luxury Sales A Concern

by Trefis Team
+9.60%
Upside
33.65
Market
36.88
Trefis
LRLCY
L'Oreal
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L’Oreal (PINK:LRLCY), the French cosmetics giant, recently released strong results for the first half of 2012 with double digit sales growth last quarter. The growth was supported by strong growth in luxury sales and recovery in the North American market. However, it noted weakening trends in demand for luxury products from Asian markets like China. Nonetheless, it reaffirmed its full-year guidance as business in the emerging markets and the U.S. more than offset the reverses in the troubled European market. L’Oreal is the world’s largest cosmetics and beauty care company that competes with Estee Lauder (NYSE:EL), Revlon (NYSE:REV) and Avon Products (NYSE:AVP).

View our detailed analysis for Estee Lauder here

North America Sales More Than Offsets European Weakness

L’Oreal’s sales grew 10% during the first half of the year on sales strength in North America, Asia, Africa and the Middle East. Sales in North America benefited from the success of brands like Lancome, Yves Saint Laurent and Kiehl’s and the integration of Clarisonic. At the same time, sales in developing markets, now L’Oreal’s focus markets for future growth, grew by 14%. However, European sales slowed down to 2% amid strong macroeconomic headwinds and weak consumer sentiment.

Despite the weakness in its home market, the company maintained a forecast of solid sales this year. It expects to outperform the growth of the global cosmetics market, which is likely to grow at 4% this year. Overall, Q1 sales grew 6.4% while Q2 sales growth was close to 5.7% on a like-for-like basis.

Luxury Market Losing Steam In Asia?

Even though strong luxury sales and a recovering North American market helped L’Oreal offset stagnation in Western Europe, the company faced a slowdown in the luxury market, particularly in Asia. L’Oreal reported that Asian-Pacific sales growth slowed to 9.2% last quarter, down from 15.5%.

High-spending Asian consumers have been one of the biggest growth drivers for L’Oreal over the last few quarters. But a slowdown in demand from key markets like China resulted in luxury sales cooling off to 8.7% in Q2, compared to a high of 12.2% in Q1.

We have a Trefis price estimate of $26 for L’Oreal, 5% ahead of the current market price.

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