L’Oréal H1FY14 Preview: Developed Market Sales Growth Should Offset Weaker Results Elsewhere

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Global beauty giant L’Oréal (OTC:LRLCY) is scheduled to report half-year results for fiscal 2014 on July 31, 2014. First quarter sales for the company stood at €5.46 billion, 2.2% lower than sales from a similar period in fiscal 2013. On a like-for-like basis (i.e., adjusted for currency headwinds, acquisitions and divestitures), sales were approximately 3.5% higher over the Q1FY2013 period. Currency headwinds, which constitute a major part of the difference between like-for-like and reported sales growths, had a negative 5% impact on sales in the first quarter. This currency weakness is expected to impact sales for H1FY14 as well.

In addition to currency headwinds, weak performances in major cosmetics markets such as U.S. and Canada in Q1FY14 impacted L’Oréal’s financial results last quarter. Geographically, Western Europe, Africa and the Middle East were the only regions registering a positive growth in reported revenues, despite the currency headwinds. The remaining regions where L’Oréal has business presence posted year-on-year declines in reported revenues in Q1FY14. While reported revenues in most markets were negatively impacted by currency fluctuations, like-for-like sales from North America contracted by 0.6% during the quarter due to adverse weather conditions. Going into Q2FY14, improving weather conditions should accelerate sales growth in these developed markets.

Below, we present key areas of focus from the upcoming Q2FY14 financial results of L’Oréal.

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Improving Economic Conditions in Developed Markets Spurs Spending on Professional Cosmetics

Last quarter, the professional products segment displayed a 3.7% expansion in like-for-like sales. This is higher than the flat performance displayed by the division in Q1FY13. Currencies however played spoil-sport as reported revenues shrunk 2.3% to finish at €735 million. In general, second quarter sales for L’Oréal are sequentially higher than first quarter sales, particularly in the professional products division. This business cyclicality should drive sales higher in the upcoming second quarter.

More importantly, improving economic conditions in developed markets is beginning to expand consumption levels. Developed cosmetics markets such as Western Europe and U.S. have shown returned to growth last quarter. Consumption of luxury haircare products is leading the recovery, with new product launches from brands such as Keratase and Matrix delivering good results. Additionally, styling product sales from L’Oréal Professional and Redken are growing strongly, indicating a growth in footfalls for salons from customers in developed markets.

Consumer Product Sales in Focus; Eastern European Performance Could Be Weak

Consumer product sales grew 1.2% like-for-like last quarter, compared to 6.5% from a similar period a year ago. L’Oréal cited two reasons for the weak growth registered last quarter. One reason was the flat mass market for cosmetics products in the U.S. that dragged down growth. Additionally, launches of Advanced Hair Care by L’Oréal Paris and Olia hair coloring by Garnier in the U.S. during the beginning of last fiscal year (Q1FY13) resulted in a high comparison base for Q1FY14. [1]

By definition, the like-for-like sales metric from L’Oréal excludes the effects of currencies, acquisitions and divestitures. Hence, new product launches within a specific brand during a particular quarter are not excluded for a comparable analysis, which explains the huge gap between from Q1FY12 to Q1FY13 and from Q1FY13 to Q1FY14. This quarter, revenue growth is expected to provide a more accurate analysis of divisional performance. Consumer products division grew 6.1% on a like-for-like basis during Q2FY13, and any new product launches during Q2FY14 could accelerate the growth rate. However, currency volatility is expected to severely cut into like-for-like sales growth this quarter.

Geographically, the improving economic scenarios in developed economies of Western Europe and North America is expected to take the division’s sales higher. On the flipside, macroeconomic factors such as the turmoil in Ukraine and Israel should weigh on like-for-like as well as reported revenue growth for the Eastern Europe division. This geographic region accounts for approximately 7.5% of total revenues for L’Oréal.  We note, however, that the revenue contribution of theses two affected countries is small.

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Notes:
  1. L’Oreal’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, April 2014 []