Currency Headwinds Mask Growth Across L’Oréal’s Mid- To High-End Cosmetics Lines

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L’Oréal (OTC:LRLCY) reported first half earnings on July 31, 2014. Revenues for H1FY14 stood at €11.17 billion compared to €11.34 billion from a year-ago period. This represents a 1.5% decline in reported revenues for the H1FY14. Excluding currency fluctuations, constant dollar revenues increased 3.6% during the period. According to estimates from the company, its constant dollar revenue performance is in-line with the performance from the the worldwide market for cosmetics, which registered a growth rate ranging between 3.5%-4% for the first half of 2014.

Dermo-cosmetics registered the strongest growth rate globally in H1FY14, increasing 5.5% over H1FY13. However, the relatively small base of the dermo-cosmetics segment tends to inflate growth rates in general. More importantly, luxury cosmetics sales continued to grow faster than mass-market cosmetics products as the global economy continued its recovery process. Global luxury cosmetics sales increased 4.5% for the period compared to a 3.5%-4% growth in the mass-market cosmetics market.

The rapid growth in the dermo-cosmetics and luxury cosmetics markets has helped L’Oréal outpace market growth in these segments. Sales from the L’Oréal Luxe segment increased 7.4% in like-for-like terms to €2.9 billion while L’Oréal Active Cosmetics increased 8.1% to €921 million on a like-for-like basis during H1FY14. Like-for-like revenues for the other two segments of Professional Products and Consumer Products increased 3% and 2% respectively to reach €1.5 billion and €5.48 billion.

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View our detailed analysis for L’Oréal here

L’Oréal Luxe Shines on Recovering U.S. Market Demand

In the first half of fiscal 2014, the luxury cosmetics division of L’Oréal Luxe was the star performer, driven by growing demand in the overall market. Revenues for the division grew 7.4% on a like-for-like basis and reached €2.9 billion. Like-for-like basis of revenue recognition adjusts for currency headwinds, acquisitions and divestitures, and hence provides a good comparison between divisional performances.

The strong performance for L’Oréal Luxe was driven by robust performance of brands such as Urban Decay, Kiehl’s and Clarisonic. The American make-up product maker Urban Decay, acquired by L’Oréal in 2012, registered a 93% jump in revenues in H1FY14. The market for such specialized make-up brands represent 44% of luxury make-up market in the U.S., and the strong revenue growth from Urban Decay could translate into market share gains. Similarly, Kiehl’s and Clarisonic registered like-for-like growth rates of 22% and 16% respectively during the period.

The double digit performance of these luxury cosmetics brands indicates the shifting demand trend from mass cosmetics to luxury products within the U.S. market. Last quarter, L’Oréal guided a slowdown in the mass color cosmetics market within the U.S. As the U.S. economy continues to pick up pace, luxury cosmetics products are likely to see greater demand, and subsequently higher growth rate, over mass-market cosmetics products.

Profitability Expands Across Divisions as Demand for Luxury Products Increase

Operating profit margins witnessed expansion across all divisions excepting the Professional Products division. The company reports strong polarization towards the luxury product base in cosmetic consumption globally, and this has contributed to expanding margins through regular product launches that meet demand requirements.

The Active Cosmetics division had the highest operating profit margin, at 28.2% in H1FY14 compared to 27.7% in H1FY13. Margins for L’Oréal Luxe and Consumer Products divisions registered a 0.3% increase during the period, to reach 20.3% and 21.1% respectively. However, operating profit margins declined 0.5% for the Professional Products division, primarily impacted by the acquisitive effects of Decleor, Carita and increased investments into marketing activities.

Brands in the luxury cosmetics space such as Urban Decay, Kiehl’s and Clarisonic in the U.S. and Lancome, Yves Saint Laurent and Giorgio Armani in Europe are witnessing strong uptake from customers. Additionally, new product roll-outs such as Neovadiol Magistral Elixir, SkinCeuticals and Roger&Gallet within the Active Cosmetics space are fueling revenues and margins. Going forward, operating profit margins are likely to grow higher, driven by improving efficiencies and productivity of operations. Additionally, the company’s strong investments into R&D activities could improve long-term profitability for the company.

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