Macroeconomic Headwinds Continue To Slow L’Oréal’s Top Line Growth

Leading cosmetics company L’Oreal (PINK:LRLCY) reported Q3 sales results on October 30. Revenues in constant currency terms grew at 4.4% y-o-y in Q3 FY13, 30 basis points slower than the growth rate seen in Q3 FY12. Much of this slowdown in growth is due to weak consumer sentiment in developed markets which impacted consumer product sales. Strong EM currency volatility in the June – September period pulled y-o-y growth rate into the red. On a reported basis, overall cosmetics revenues for the company declined 0.5% in Q3 compared to a growth of 11.7% during the same period in 2012.

L’Oréal Luxe and Active Cosmetics segments continued to show strength for the company, posting growth rates of 5.9% and 8.5% in revenues excluding currency variations. In comparison, growth rates in these divisions were 6.4% and 7.8% during the first half of 2013. The majority of the slowdown in revenues came from the company’s largest operating division. The Consumer Products segment, which accounts for more than 50% of total revenues, witnessed like-for-like growth rates decline down from 6.3% in the first half to 3.4% this quarter.

View our detailed analysis for L’Oreal here

Weak Consumer Spending, EM Currency Weakness Impact Product Sales

Macroeconomic concerns in developed markets of Western Europe and North America dampened consumer confidence, which led to decreased spending and increased saving from customers across the world. This weakness in consumer spending resulted in a decrease in confidence among retailers and distributors. An acceleration in inventory reductions from distributors in the North American market culminated to a steep decline in revenues for L’Oreal. On a sequential basis, sales from North America, which remained flat at €1,371 million in Q1 and Q2, declined by about €60 million in Q3. The decline in sales of consumer products resulting from weak consumer confidence was however, partially overshadowed by an increase in luxury product sales such as Yves Saint Laurent and Armani in the region. The company reports an increase in market share for luxury products within the North American market. ^[1]

Additionally, the recovery in the European markets seemed to have little impact in boosting the company’s sales. Revenues from Western Europe, which is the company’s largest single market by revenues, continued to tread lower at increasing pace. Sequentially, L’Oreal had a revenue decline of €82 million in Q2, from €1,990 million in Q1 FY13. Western European sales in Q3 had a further €127 million decline over Q2. We believe the cause for this acceleration in sales decline is the continued weakness in consumer confidence in Europe. Despite the fact that the economic situation is Eurozone is recovering, L’Oreal has a sizable footprint in under-performing Southern European markets such as France, which could be offsetting growth from Northern European markets such as Germany.

Continuous Product Innovations and Launches Should Support Impressive Like-For-Like Sales Growth

Although sales for the quarter grew at a relatively lower rate on a yearly basis, L’Oreal’s top line growth continued to outpace industry growth. Strong top line growth for the company is a result of major product initiatives driven by continuous adaptation to consumer tastes and global roll-out of new products. In the third quarter, L’Oreal globalized newer versions of products across the consumer, luxury and active cosmetics segments such as Olia from Garnier, Elvive from L’Oreal Paris, Si from Giorgio Armani, Dreamtone by Lancome and Idealia from Vichy. The company has a new product from The Body Shop scheduled for launch in the fourth quarter and is continuing global roll-out of its ‘Pulse’ store concept to improve sales momentum for The Body Shop. We expect these regular product launches to aid in the expansion of market share for the company and overall growth across all beauty segments, particularly the hair care and skin care divisions.

L’Oreal’s success in the beauty and personal products industry stems from its impressive financial position and cash reserves, which give leeway for continuous investments into R&D. The company has constantly financed the construction of new manufacturing plants and R&D facilities in the last three years across its New Market portfolio to grab market share at the fastest pace. Manufacturing plants have been built in high growth markets of Indonesia, Egypt and Mexico, whereas new R&D facilities were constructed in Bangalore and Mumbai, India. A combination of new R&D facilities and new manufacturing plants in close proximity is part of the company’s strategy in developing technologically advanced beauty products relevant to the local geography. The company also ventured into the African continent by acquiring Interconsumer Products in Kenya which has seen high growth since its acquisition. With increasing focus on the Sub-Saharan Africa region from global beauty companies, we expect L’Oreal to begin investing proactively to develop its own line of products in the near term.

Our $32.85 Trefis price estimate for L’Oreal stands at a discount of 4% to the current market price of $34.18.

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1. http://www.loreal-finance.com/eng/news-release/sales-at-september-30-2013-923.htm, L’Oreal News Release, October 2013 [↩]