NYX Cosmetics Acquisition Could Drive L’Oréal’s North American Sales Higher

L’Oréal (OTC:LRLCY), the world’s largest cosmetics manufacturer, signed an agreement to acquire American makeup cosmetics manufacturer NYX Cosmetics on June 18. ^[1] NYX Cosmetics would mark the company’s third acquisition this year, having completed the acquisition of Chinese facial masks maker Magic Holdings and Sheseido’s spa brands Decléor and Carita in April 2014. Since its founding, L’Oréal has embarked on a growth-by-acquisitions strategy to build its product base and expand its revenues, with all brands expect the core L’Oréal portfolio being acquired over time. Acquiring brands consistently requires good cash generation capabilities, and the lack of significant debt showcases the strength of L’Oréal’s business.

Additionally, the 8% stake buyback from Nestlé earlier this year raises L’Oréal’s total spending on deals to over $5 billion so far in 2014. However, this stake repurchase from Nestlé should have negligible contribution to the company’s sales performance. In this note, we take a look at the latest acquisition and where it will fit into the L’Oréal Group. We have a $34 Trefis price estimate for L’Oréal which is approximately in line with its current market price.

View our detailed analysis for L’Oréal here

NYX Cosmetics To Broaden L’Oréal’s Makeup Portfolio

L’Oréal’s latest acquisition, NYX Cosmetics, is a high-growth mass market makeup cosmetics brand with presence in more than 70 countries globally. The company is a direct competitor to Estèe Lauder’s M-A-C brand of makeup cosmetics and has seen explosive growth in sales over the last two fiscal years. Sales for NYX Cosmetics increased by 46% and 57% in the years ending May 2013 and May 2014, to reach $93 million. ^[1]

More importantly, L’Oréal wants to replicate the success it had with brands such as Maybelline and Kiehl’s in the makeup space. Prior to acquisition in 1996 and 2000, Maybelline and Kiehl’s had revenues of $300 million and $30 million respectively. ^[2] Now, these brands are L’Oréal’s most popular brands in the low-end and prestige makeup space, with annual revenues of approximately $2.7 billion and $810 million for Maybelline and Kiehl’s respectively. ^[3] The long term acquisition strategy has payed off very well for L’Oréal until now, and NYX should contribute to its success going forward.

Acquisition Could Help Bolster North American Performance

The acquisition of NYX Cosmetics should add support to a recovery in the weak North American market. Impacted by adverse weather conditions during the first quarter of 2014, L’Oréal’s revenues from North America declined by 60 basis points in constant currency terms to approximately $1.3 billion. The effects of a strengthening Euro against the Dollar further reduced L’Oréal’s North American revenues (in reported terms) by 5 percentage points.

In addition to the impact of adverse weather, a slowdown in the North American beauty market has resulted in weak consumer offtake for cosmetics. According to L’Oréal, growth in the North American cosmetics market slowed down from 4.4% in 2012 to 2.6% in 2013, while other developed markets showed signs of expansion. ^[4] Going forward, the company expects the North American market to rebound to higher growth driven by an expansion in trendy mass market color cosmetics such as NYX Cosmetics, M-A-C and UrbanDecay. With demand for hair care products, especially in the mass market space, expected to remain under pressure, L’Oréal could increase its product base in the color cosmetics space. This should drive incremental revenues going forward and contribute to a recovery in the North American cosmetics market.

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1. L’Oréal signs agreement to acquire NYX Cosmetics, L’Oréal Finance, June 18, 2014 [↩] [↩]
2. L’Oreal’s Agon Sees More Acquisitions After NYX Cosmetics, Bloomberg, June 19, 2014 [↩]
3. ref:1 [↩]
4. 2013 Results, L’Oréal Finance [↩]