Excluding The Effect Of Currency Tailwinds, L’Oreal Performed Moderately Due To Problems In Its New Markets And Travel Retail

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L'Oreal

L’Oreal (OTC:LRLCY) posted its Q3 2015 earnings on October 29th. Boosted by currency tailwinds, L’Oreal delivered a strong quarter once again with a 10% year-on-year growth in sales to €6 billion. The like-for-like sales growth, i.e. the comparable sales growth excluding the impact of the exchange rate, was around 4%. The Group reported a 13% year-on-year growth in sales at the end of nine months ending in September to around €19 billion. L’Oreal’s Consumer Products Division is continuing with its gradual recovery, boosted primarily by the growth of makeup brands such as Maybelline, L’Oreal Paris, and NYX. The Professional Division’s performance surpassed that of the market. The Active division reported impressive growth in line with the recent quarters. However, the Luxe Division – L’Oreal’s best performing division over past several quarters – didn’t perform up to its past reputation. The market unrest over the summer in Asia, and in the travel retail channel, led to the slowdown. [1] Regionally, L’Oreal’s North America and Western Europe sales are on a path of gradual recovery. L’Oreal’s sales in its New Markets (comprised of Asia Pacific, Eastern Europe, Latin America, and Middle-East and Africa) was dampened due to the economic weakness in Brazil, problems in Asia, and in the Middle East. In Q3 2015, the year-on-year growth in reported sales of New Markets was only 7%, compared to 16% in Q2 2015. [2] However, the company’s sales in China performed as per expectations, in line with the past quarters.

We are in the process of updating our $36 price estimate for L’Oreal.

A Brief Overview Of L’Oreal’s Performance In Its Key Geographies 
  • North America: L’Oreal’s reported sales growth for the first nine months of 25.4% on a year-on-year basis (3% like-for-like). The main drivers were the Active Cosmetics and Professional Division and their products such as La Roche-Posay and Redken. The Consumer Products Division saw growth on account of makeup brands, particularly NYX which is still growing at an impressive rate. [1] L’Oreal’s 2014 acquisition of NYX proved to be a wise move. The company, which is a direct competitor of L’Oreal’s chief rival, Estee Lauder‘s M-A-C brand, has displayed almost 70% growth in sales in the first half of 2015. L’Oreal aimed at regaining its market demand in the sluggish North American market through the NYX acquisition and it has proved to be a prudent move by the company.
  • Asia Pacific: L’Oreal’s New Markets reported performance below expectation in the third quarter mainly due to a disappointing performance in Hong Kong and the slowdown of Travel Retail Asia. However, the company’s Consumer Products Division depicted growth in India, Australia, and Thailand. L’Oreal’s sales in China was as per expectation driven by the growth of L’Oreal Paris. [1] Magic Holdings, the leader in the Chinese facial care market, is L’Oreal’s largest acquisition in China. L’Oreal faced intense pressure from domestic players in China and hence acquired Magic Holdings to counter competition. Currently, Magic Holdings is in a transitional phase.
  • Latin America: L’Oreal’s sales for the first nine months grew by 4.7% in Latin America (5.5% like-for-like) and was dampened primarily due to Brazil’s grim economic scenario, and also due to the IPI (Tax on Industrialized Products). Excluding Brazil, all other Latin American regions experienced double-digit growth. [1]
  • Middle East And Africa: L’Oreal’s sales in the Middle East and Africa grew by 28.1% (9.8% like-for-like) in the first nine months of 2015. A part of the growth was eroded due to the reorganization of distribution channels in the Gulf States. L’Oreal is demonstrating strong performance in the region, in an environ where most of its peers are experiencing a setback. Egypt and Saudi Arabia are some of the high growth regions in this sector. In Q1 2015, L’Oreal has signed a partnership with CFAO, the specialized distributor from Cote D’Ivoire, to cover the production and distribution of cosmetics in the Ivory Coast. The partnership is expected to bolster L’Oreal’s distribution channels in the African region, where distribution is still unstructured and hence, cumbersome. CFAO is currently the sole distributor of L’Oreal products in French-speaking West Africa. [1]

L’Oreal’s Digital Focus Will Fuel Growth

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L’Oreal’s numerous digital initiatives are paying off. The company witnessed a 40% year-on-year surge in its e-commerce sales and expects sales through this medium to surpass €1 billion by the end of 2015. [1] L’Oreal is the most digitally advanced beauty company. The company continuously enhances and upgrades its digital facilities. For example, in September L’Oreal started research to connect its products digitally through the Internet of Things. Through this technology, L’Oreal’s makeup items such as a mascara or a lipstick will provide network connectivity with the help of embedded electronics, software, and sensors. The company will be able to better track its customers through this means. [3]

Conclusion

Though the cosmetics leader seems to be suffering from setbacks in a lot of regions, due to the economic slowdown and political unrest, we believe these are temporary setbacks and L’Oreal, with its strategic alliances, digital initiatives, and research and development focus, is on a path of sustainable growth.

 

 

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Notes:
  1. Sales at September 30, 2015, L’Oreal Finance, October 29, 2015 [] [] [] [] [] []
  2. First Half 2015 Results, L’Oreal Finance, July 30, 2015 []
  3. Connected mascara? L’Oreal explores the Internet of Things, Marketing Magazine, September 17, 2015 []