L’Oreal Shows Signs Of Recovery, But Growth Still Dampened By Weak North American Demand And Sluggish Consumer Division

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L’Oreal (OTC:LRLCY), the international leader in cosmetics and beauty care, released its fourth quarter earnings on February 12th. The company witnessed a moderate 2014, as judged by its financial performance. For the fourth quarter of 2014, L’Oreal reported a sales expansion of 8.5% to €6 billion. Like-for-like sales, which exclude currency headwinds and other inorganic growth effects, increased 4.9% during the fourth quarter. L’Oreal’s annual sales for 2014 were €22.5 billion reflecting year-on-year growth of 1.7% (3.8% in like-for-like terms).

L’Oreal’s cosmetics branch is further divided into four segments. Below, we give a description and the full 2014 sales performance of these divisions: Professional Products Division: Products sold and used in hair salons. (+2% reported growth); Consumer Products Division: Products sold in mass market retail channels. (-1% reported growth); L’Oreal Luxe Division: Products sold in selective retail outlets i.e. department stores, perfumeries, travel retail, and, online sites. (+5.7% reported growth); and, Active Cosmetics Division: Products for “borderline” complexions, sold through pharmacies, parapharmacies, drug stores, and medispas. (+5.3% reported growth) [1] According to L’Oreal, currency fluctuation had a negative impact of around -2.3 percentage points on the overall sales.

In this article, we discuss the major factors that impacted L’Oreal’s performance in the fourth quarter.

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We will be shortly updating our $37 price estimate for L’Oreal, based on the fourth quarter report.

See Our Complete Analysis for L’Oreal Here

L’Oreal Luxe Steals The Show, While L’Oreal Strives To Revive The Sluggish Consumer Products Division With The Aid Of Acquisitions

L’Oreal Luxe has been the most successful division for L’Oreal in 2014, with a reported year-on-year growth of 5.7% to reach sales of €6.2 billion. The strong performance for L’Oréal Luxe was driven by robust sales of brands such as Yves Saint Laurent (which witnessed a double-digit sales rise in 2014), Lancôme (its fragrance “La vie est belle”, is a top selling fragrance in France, and is the second most popular brand in Europe), and Giorgio Armani. The alternative lifestyle brands Urban Decay, Kiehl’s, Clarisonic and Shu Uemura are also boosting the Division’s growth. In 2014, L’Oréal Luxe outperformed the market in Europe, China, the Middle East and the United States.

L’Oreal’s Active Cosmetics division recorded 5.3% year-on-year growth to record year end sales at €1.7 billion. The division was boosted by brands such as Vichy, La Roche-Posay, and SkinCeuticals. Active cosmetics experienced growth in all regions. The division’s sales were primarily propelled by France, Brazil and China. Note that Brazil is the world’s largest dermocosmetics market, where the Division is contributing to the development of the market. [1]

L’Oreal’s Consumer Products division, on the other hand, reported a 1% year-on-year decline in revenue to €10.8 billion. The market for mass-market cosmetics has remained sluggish both in North America and emerging markets, particularly the Asia-Pacific region. However, this division showed some improvement towards the end of 2014. Towards the start of 2014, L’Oreal announced its intention to discontinue operating its flagship mass-market brand, Garnier, in China due to low consumer uptake of the brand’s products. Two of L’Oreal’s 2014 acquisitions: Magic Holdings in China and NYX Cosmetics in North America, helped in uplifting the Consumer Products division. In the European market, the Consumer Products division is reinforcing its leading position.

Overall, L’Oreal Luxe and Active Cosmetics performed better than the Consumer Products in almost all the regions for L’Oreal. This underpins the shift in consumer buying pattern, with more consumers opting for premier labels at affordable price points.

L’Oreal’s Western Europe Region Recovers In The Fourth Quarter; North America Still Remains Sluggish

L’Oreal’s Western Europe Division grew by 3.1% year on year to report revenues of €7.7 billion. In the first half of the year, 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 Western European region. The growth in this region picked up in the fourth quarter especially in countries such as Germany, the United Kingdom and Spain. L’Oreal Luxe and Active Cosmetics are the primary growth drivers in this region.

Impacted by adverse weather conditions and a slowdown in the North American beauty market has resulted in weak consumer offtake for cosmetics. L’Oreal’s growth in the North American cosmetics market slowed down from 4.4% in 2012 to 2.6% in 2013 and to a meagre 0.6% in 2014 (€5.4 billion revenues in 2014). The acquisition of NYX Cosmetics and Carol’s Daughter should add support to a recovery in the weak North American market.

L’Oreal’s new markets (combined) registered a growth rate of 1.3% with sales of €8.6 billion in 2014. In the Asia Pacific Region, the growth was boosted by brands such as Kiehl’s, Yves Saint Laurent, Giorgio Armani, La Roche-Posay and Clarisonic. Countries such as India, Indonesia, Hong Kong and Australia recorded high growth. China’s Magic Holding displayed healthy growth in the market for beauty masks. In the Latin American region, each of the Professional Products Division, Active Cosmetics and L’Oréal Luxe Division recorded double-digit growth.

In 2014, L’Oreal witnessed the maximum year-on-year growth from the Middle East and Africa region (up 13.5% on a like-for-like basis and up 12.5% based on reported figures). All the divisions recorded double digit growth and countries such as South Africa, the Gulf states, Egypt, Saudi Arabia and Pakistan posted strong performance. [1]

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Notes:
  1. L’Oreal 2014 Annual Results, L’Oreal Finance, February 12, 2015 [] [] []