L’Oreal (PINK:LRLCY), the French cosmetics giant, will release its Q3 2012 sales figures on November 6. The company reported a strong performance in the first half 0f 2012 with double digit sales growth in Q2 and strong sales growth in North America and Asia which made up for the losses in Western Europe. We are looking forward to the sales trend in the Middle East & Africa and Asia-Pacific markets and the company’s strategy to battle a potential sales decline as the European economy struggles. 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).
Strong sales growth in non-traditional markets
During the first half of the year, the company recorded positive growth of 0.8% in the flat to slightly negative Western European market. This figure reflects contrasting trends with good scores in the United Kingdom, France, Germany and Travel Retail and negative trends in the countries of Southern Europe. In its second biggest market, North America, it achieved growth of 7.3% like-for-like in the same period. These performances were supported by the growing popularity of professional products targeted at beauty saloons. We will look for sales in professional products and the company’s strategy to turn around the slowdown in growth in European markets.
The major impetus to growth came from the Middle East & Africa and Asia-Pacific which grew at 17% and 12%, respectively. The consumer products segment, which comprises of products sold through mass-market retail channels, is the growth leader here. The segment also contributes half the company’s global sales, and we will look at L’Oreal’s strategy to expand its geographical presence of this segment. The Garnier and Maybelline brands have been instrumental in consolidating the company’s presence in India and China, respectively, and we look forward to their sales trends in addition to the company’s overall performance in these markets.
The Body Shop business is not for sale
There were rumors during the third quarter that the company was looking to sell its Body Shop division. However, it categorically denied any such intentions. The Body Shop’s net sales grew at a stable 5.4% during the first half of the year.
The segment’s sales are characterized by strong seasonal fluctuations due to a high level of activity during the last few months of the year, and we will look forward to the company’s strategy to build on the seasonality in Q4. The segment has performed strongly in Southeast Asian markets with strong sales in India and Indonesia. It has also developed an e-commerce platform and operates 20 online sales sites currently. The Body Shop operated 2,781 stores as of June, and we are interested to know how the company plans to expand its physical presence in these growth markets.
Continued focus on innovation even as expenses are kept in check
L’Oreal’s sales have belied overall market trends in Western Europe and to some extent Asia-Pacific on good performance of its recently introduced products. This was enabled by growth in research and development expenses even as the company has kept the latter steady as a percentage of sales. Selling, general and administrative expenses as a percentage of sales came down slightly during the first half of the year as the company focused on enhancing its productivity.
We have a Trefis price estimate of $27 for L’Oreal, 5% ahead of the current market price.
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