Weak North American Market Shrinks Q1FY14 Sales Growth For L’Oréal

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LRLCY: L'Oreal logo
LRLCY
L'Oreal

Global beauty giant L’Oréal (OTC:LRLCY) reported its Q1FY14 results on April 14, after the close of the European markets. Quarterly sales for the company stood at €5.46 billion, 2% lower than sales from a similar period in fiscal 2013. On a like-for-like basis (i.e., adjusted for constant currencies and acquisitions and divestitures), sales were approximately 4% higher over the Q1FY2013 period. However, this like-for-like growth rate was lower than the 6% registered between Q1FY13 and Q1FY12.

Geographically, Western Europe, Africa and the Middle East were the only regions where reported revenues showed positive growth. The remaining regions where L’Oréal has business presence posted year-on-year declines in revenue in Q1FY14. In this earnings note, we look at specific trends impacting L’Oréal operating divisions. We have a Trefis price estimate of $34 for L’Oréal that is approximately in line with its current market price.

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Professional Products Witness First Signs Of Growth

The company’s Professional products business, comprising of notable brands such as L’Oréal Professional, Kératase, Redken and Matrix, witnessed the first quarter of positive like-for-like sales growth in Q1FY14. The division’s 3.7% like-for-like growth rate this quarter is higher than the flat performance from a similar period last fiscal. However, currency headwinds resulted in sales declines from the segment on a reported basis, at approximately €735 million, which was 2% lower than the €753 million in sales in Q1FY13. Comparatively, reported revenues stood marginally lower in Q1FY13 compared to Q1FY12.

The growth in like-for-like revenues in the Professional products division for L’Oréal was supported by a boost in sales from geographies like Western Europe, United States, Brazil, Russia and India. This boost in sales was facilitated by new product launches in the hair colorant area with the relaunch of Nutritive from Kératase and Inoa and Majirel from L’Oréal Professional. We believe this acceleration in product sales across geographies from its most visible brands should be able to support an expansion in L’Oréal’s market share in the hair care market globally.

Consumer Segment Q1 Sales Trip On Hostile North American Weather

More importantly, L’Oréal’s Consumer Product division posted weak sales growth this quarter. The Consumer Products division accounts for more than 50% of revenues and any adverse impact to sales growth in this division impacts overall company performance. For the quarter, sales stood at €2.76 billion, only 1.2% higher on a like-for-like basis. Comparatively, this growth rate for the segment in Q1FY13 stood at 6.5%. Sales for Consumer Products in Q1FY14 were negatively impacted by the weak environment in the North American market, where adverse weather conditions resulted in weak sales numbers for various brick-and-mortar retailers.

Furthermore, the strong like-for-like sales in Q1FY13 were supported by the launch of important products such as Advanced Hair Care by L’Oréal Paris and Olia from Garnier. These new product offerings created higher sales volumes in Q1FY13 for the Consumer Products division. Going forward, L’Oréal expects healthy like-for-like growth in its Consumer Products division. The company is revamping its hair care product line with Elvive Fibrology in Europe and Volume Filler in the U.S. Similarly, the continued roll-out of the Garnier Olia hair colorant is expected to boost like-for-like sales in the future.

In the skin care product category, L’Oréal’s roll-out of Miracle Skin Cream from Garnier and Revitalift Laser from L’Oréal Paris should spur sales growth across its geographic base. We expect new product launches in the skin care segment to cater to an expansion in market share, especially in emerging economies of India and China. By April 1, the recent acquisition of Magic Holdings was consolidated into the L’Oréal group. With this acquisition and the shut down in China of the Garnier brand, L’Oréal expects a re-acceleration in sales from this region in FY14.

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