Weakness In Western Europe And Slowdown In Emerging Markets Impact L’Oréal’s Sales Growth

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L'Oreal

L’Oréal (OTC:LRLCY) reported its third quarter sales results on November 3rd. Reported sales increased 2% during the quarter to €5,391 million. For the nine months into FY14, reported sales contracted marginally by 0.4% to €16,566 million. Like-for-like sales, which exclude currency headwinds and other inorganic growth impacts, increased 2.3% during the quarter and 3.3% during the nine months in FY14, respectively. Currency headwinds tempered down during the quarter compared to the first half. However, like-for-like sales continued to slow down across L’Oréal’s geographic portfolio. Below, we provide a quick recap of individual performances for each of L’Oréal’s operating divisions in the last quarter.

Review of Q3FY14

The company’s largest segment, Consumer Products, shrank on a like-for-like basis during the quarter. Quarterly like-for-like sales for the segment stood 0.4% lower at €2,576 million, held back by poor summer weather in most of Western Europe. For full 9MFY14, like-for-like sales from the Consumer Products division increased 1.2% to €8,058 million. Within the Consumer Products segment, hair care products weathered the slowdown during the quarter, supported by brands such as L’Oréal Paris, Garnier and Maybelline.

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In addition to the slowing market for consumer products, L’Oréal’s luxury product segment slowed down significantly after a robust H1FY14. Quarterly sales grew 4.9% in like-for-like terms to €1,500 million. Comparatively, H1FY14 sales grew 7.4% on a like-for-like basis to €2,903 million. The L’Oréal Luxe segment primarily consists of designer and prestige fragrance products such as Kiehl’s, Ralph Lauren, Shu Uemura etc., and we believe a deterioration in consumer sentiment following the rapid deceleration in Western European economies partly impacted organic sales during the quarter.

L’Oréal’s Professional Products segment, which has performed decently in H1FY14, marginally decelerated owing to the economic slowdown in Europe. Like-for-like sales for the segment increased 2.6% to €745 million, slightly lower than the H1FY14 growth rate. However, the depreciating Euro in Q3FY13 primarily against the U.S. Dollar acted as a tailwind to reported sales, which expanded over 4% during the quarter. Comparatively, reported sales in H1FY14 were flat at €2,250 million. Hair care was the number one contributor to growth in the Professional Products segment, boosted by sales from Kérastase, Matrix, L’Oréal Professional and Essie in the U.S., Brazil and India.

The company’s Active Cosmetics segment continued to remain the fastest growing segment in L’Oréal portfolio. Like-for-like sales increased 11.3% while reported sales increased 9% to €380 million during the quarter. This growth rate was higher sequentially compared to 8.1% in like-for-like sales growth in H1FY14, driven by the division outperforming the market across all geographic zones.

Market Slowdown Could Depress Growth Rates Despite Subdued Currencies

The weak performance of the Euro against the U.S. Dollar, declining prices due to deflation, and slowing GDP economies across Western Europe weighed on sales from the region. Like-for-like sales from L’Oréal’s domestic Western Europe market contracted 0.4% during the quarter. While the performance of L’Oréal Luxe and Active Cosmetics remained strong in this region, sales from its consumer products segment remains under pressure from a tough economic environment. We expect this slowdown in sales to continue from Western Europe going forward.

Similarly, the Asia-Pacific region, which is L’Oréal biggest emerging market, witnessed a sharp slowdown in Q3FY14. Like-for-like sales during the quarter from Asia-Pacific stood at 3.4% compared to 6.6% in H1FY14. Within the Asia-Pacific region, bigger economies such as India, Australia and China have registered high growth during the quarter. However, the broader market is slowing and is expected to put further pressure on like-for-like sales from the region. Other emerging markets, such as Latin America, Eastern Europe and Africa & the Middle East, had a smaller contraction compared to the Asia-Pacific region in like-for-like sales, bolstered by growth initiatives such as new product and channel launches in make-up, deodorants and hair color products.

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