L’Oréal SA (OTC:LRLCY) is scheduled to report its full fiscal 2013 earnings after the close of the Euronext Paris exchange on February 10. The company is the world’s largest cosmetics manufacturer, with a market capitalization of $98.5 billion and annual revenues of approximately $29 billion in 2012.
In the nine months year-to-date of 2013, revenues for the company stood at approximately €16 billion. However, the company’s performance in reported terms in 2013 was rather muted due to heavy currency volatility in the ‘New Markets’ region constituting Asia/Pacific, Latin America, Eastern Europe and Africa/Middle East. Revenues from the ‘New Markets’ region grew 9.4% on a constant currency basis to €6.36 billion. However, including currency effects, this growth rate slumped to 4.4% during the nine month period. The ‘New Markets’ geographic division contributes nearly 40% to the company’s revenues, and is a strong driver in L’Oréal’s growth strategy. Additionally, the company has acquired various companies within this region in 2013 to provide an inorganic boost to top line.
We have a $33 Trefis price estimate for L’Oréal which is approximately in-line with its market price of $34.
Inorganic Revenue Channels Support Top Line Growth
During the January – September period, L’Oréal has completed the acquisitions of Interconsumer Products Group in Kenya and Cheryl’s Cosmeceuticals in Mumbai to expand its footprint in the skin care and hair care segments. Additionally, the company has made a $850 million bid for Chinese facial masks’ manufacturer Magic Holding Limited to gain foothold in the rapidly expanding facial care segment. (See: L’Oréal Vies For Top Spot In Growth Markets With Rapid Acquisitions)
Recently, the company announced the approval of the acquisition by the Ministry of Commerce of the People’s Republic of China. Magic Holdings generated revenues of approximately €160 million last year and L’Oréal expects this acquisition to support its strong performance in other leading brands such as L’Oréal Paris and Maybelline. The acquisition is expected to be completed by Q2FY14 and should add to the company’s existing market leadership in China. 
Additionally, the company recently reported that it is in talks with Japanese cosmetics manufacturer Shiseido towards the acquisition of Decléor and Carita.  Both these companies are manufacturers of various skin care, hair care and fragrance products and are together ranked number two globally in the professional skin care and beauty market. Should this acquisition materialize, L’Oréal would benefit from their leadership in the professional skin care market. Recently, L’Oréal announced that it would pull out its mass market Garnier brand from China. Aggressively acquiring market leaders in niche and pricier product categories also bodes well with the company’s strategy to differentiate itself and focus more on the prestige products in the Asian markets.
Body Shop And Dermatology Division Performance In Focus
Revenues from The Body Shop, which L’Oréal acquired in 2006, grew at a meager compounded annual growth rate of 0.4% until 2012. In the nine months in 2013, revenue growth from the division slowed further, standing at -2.9% on a reported basis and 0.4% in constant currency terms. To boost the group’s performance, L’Oréal launched a global roll-out of its ‘Pulse’ store concept to entice customers into visiting Body Shop’s outlets at the start of 2013.
During the H1FY13 conference call, management provided a tepid guidance for The Body Shop in 2013 because its innovation plan was not strong enough in increasing recurring sales from existing customers. The company announced a restructuring in organization and combining The Body Shop’s activities with its Luxe, Active Cosmetics and Professional Products divisions.  The Body Shop also acquired 51% in Brazil’s Emporio Body Store to capture market share in the Brazilian cosmetics market. This consolidation in operations with L’Oréal and its stake acquisition in the Emporio Body Store should contribute to a revival in growth and operational stability for The Body Shop in the longer term, although its performance in Q4FY13 should see some downward pressure.
L’Oréal also has a 50% stake in Galderma, an International dermatology company, which generates about $1 billion in revenues and contributes to about 2.6% of the company’s value. Revenues have grown at a compounded annualized growth rate of 15.2% between 2007 – 2012. However, the division witnessed a weak 1.1% growth in revenues in the nine months reported so far in 2013. This sudden slowdown in revenue growth was due to heightened competitive pressure primarily in the U.S., due to the advent of generics from certain products. We expect revenues from the Dermatology division to amount to $1.025 billion in 2013. However, Galderma’s acquisition of Spirig in the dermatology space could lend support to its weakening core sales, resulting in higher revenues for L’Oréal.Notes:
- L’ORÉAL ANNOUNCES THE APPROVAL BY THE MOFCOM TO PROCEED WITH THE ACQUISITION OF MAGIC HOLDINGS IN CHINA, L’Oréal Investor Relations, January 2014 [↩]
- DRAFT AGREEMENT BETWEEN L’ORÉAL AND SHISEIDO FOR THE ACQUISITION OF DECLÉOR AND CARITA, L’Oréal Investor Relations, January 2014 [↩]
- L’Oreal SA Management Discusses H1 2013 Results – Earnings Call Transcript, Seeking Alpha, August 2013 [↩]