Riding On Higher Luxury Cosmetics Demand And Growth In Its New Markets, L’Oreal Delivered A Solid Q1 2017

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L'Oreal

After outperforming the global beauty market and ending 2016 with a 4% y-o-y growth, L’Oreal seems to be riding on the growth wave well into 2017. For the first quarter of the year, L’Oreal Group reported a growth of 7.5% y-o-y (4.2% like-for-like*) to end with total sales of ~€7.05 billion. According to Mr. Jean-Paul Agon, Chairman and Chief Executive Officer of L’Oreal, the beauty industry witnessed a significant growth in the demand for luxury products especially from regions like Asia, with a slower rate witnessed by the Mass Cosmetics and Professional divisions. Geographically, Western Europe witnessed a healthy performance (2.8% like-for-like growth) except for the weakness in France. This growth was mainly due to regions including  United Kingdom, Germany, and Spain. The North American market also grew well with 3.8% like-for-like growth. However, the New Markets were clearly the best performer with a 5.6% like-for-like growth rate with Eastern Europe and Asia being the main growth drivers. The company, which happens to be the beauty leader in e-commerce initiatives, witnessed a 27% y-o-y growth in its digital sales. The digital sales accounted for 6.8% of the total sales in Q1 2017.

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(*Like-for-like growth implies growth based on a comparable structure and identical exchange rates.)

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Strategic Highlights Of Q1 2017

  • L’Oreal Announced The Decision To Acquire Three Active Cosmetics Brands

In an effort to further grow its active cosmetics (cosmeceutical) segment, in January 2017, L’Oreal announced its intention to acquire the skincare brands, CeraVe, AcneFree, and Ambi from Valeant Pharmaceuticals for a sum of $1.3 billion. The brands’ popularity among health professionals suggest that they are expected to strengthen the company’s ties with the professionals who are a key towards developing products in the active cosmetics market. The global cosmeceutical market is expected to grow at a CAGR of nearly 6% between the period of 2017 to 2021. The biggest markets are expected to be the US, China, Brazil, Japan, and India. L’Oreal’s market position in North America, the fastest growing market for active cosmetics, is expected to grow further due to these acquisitions. The company’s influence in other geographies, by virtue of being the global beauty leader, gives it the opportunity to expand the footprints of the acquired brands beyond North America.

  • L’Oreal Is Looking For Strategic Alternatives For The Body Shop

In its Q4 2016 earnings call, L’Oreal mentioned that it was looking to sell off its ownership of The Body Shop on account of the brand’s persistent weak performance. Recent reports suggest that L’Oreal has attracted bids from 15 private equity firms and companies including CVC Capital Partners, Carlyle Group LP, BC Partners, Bain Capital and Advent International Corp, and South Korea’s CJ Group. However, none of the bidders or L’Oreal has confirmed this news, so far.

Founded in 1976, The Body Shop is currently present in over 3,000 stores across 66 countries. Its sales fell by ~5% to reach €920.8 million in 2016 while its operating profit declined by 38% during the same period to reach €33.8 million. The company’s operating margin fell below 4% in 2016 while that of L’Oreal’s main consumer business stood at 20%. The dilution of The Body Shop’s brand image post its acquisition by L’Oreal, the rise of more powerful competitors in the ethical and organic beauty space, coupled with L’Oreal’s lack of digital initiatives for the brand, are being quoted as some of the reasons for the present weakness of The Body Shop brand.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for L’Oreal