Currency Headwinds & A Sluggish North American Market Could Depress L’Oréal’s Sales

For the remaining period of 2014, global beauty leader L’Oréal (OTC:LRLCY) expects slower growth in the global cosmetics market. Bloomberg recently reported that the French group Chief Executive Officer Jean-Paul Agon now expects the market to grow at 3.0-3.5%, lower than the company’s earlier estimate of 3.5-4.0%. ^[1] However, the CEO believes the global market slowdown would have minuscule impact on L’Oréal top line growth estimates for the fiscal year.

The company’s first half results were heavily impacted by volatile currency fluctuations in the emerging markets. Revenues for H1FY14 stood at €11.17 billion compared to €11.34 billion from a year-ago period. 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%-4.0% for the first half of 2014.

The company’s largest segment, Consumer Products, witnessed the greatest decline in reported revenues in H1’14. The division accounts for over 50% of total cosmetics sales, with reported revenues falling more than 4% from the comparable prior-year period. On a like-for-like basis, the division observed a modest 2% growth in the first half of fiscal year 2014.

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Weakness in Consumer Products Segment Could Depress L’Oréal’s Second Half Results

The company’s weakness in the consumer products segment in the first half of FY14 was a result of a slow recovery in the North American cosmetics market, combined with slower growth in emerging markets. Geographically, Western Europe, North America and emerging markets respectively account for 37%, 24% and 39% of total cosmetics sales for L’Oréal (excluding Body Shop sales). Sales from Western Europe improved faster than other developed economies, driven by a revival in the European hair care market. The launch of products such as Fibralogy by L’Oréal Paris and Ultimate Blends by Garnier contributed to a revival in the European hair care market.

However, the company’s performance in North America was impacted by a high comparison base from last year due to a product launch. Moreover, the market for mass-market cosmetics has remained sluggish both in North America and emerging markets, particularly the Asia-Pacific region. Towards the start of 2014, L’Oréal announced its intention to discontinue operating its flagship mass-market brand Garnier in China due to low consumer uptake of the brand’s products.

Comparatively, prestige beauty product manufacturer Estee Lauder has reported stronger sales performances from both these regions during a similar period. This underpins the shift in consumer buying pattern, with more consumers in these geographic regions opting for premier labels at affordable price points. We estimate L’Oréal’s full fiscal year revenues to stand at about $31.8 billion, implying a dollar estimate of about $16.5 billion for the second half of FY14.

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1. L’Oreal Shares Retreat as Agon Lowers Forecast for Market Growth, Bloomberg, September 2014 [↩]