Key Trends That Impacted L’Oreal’s Performance In 2014

L’Oreal (OTC:LRLCY) is the international leader in cosmetics and beauty care and competes with other notable pure-play cosmetics manufacturers like Estee Lauder (NYSE:EL), Shiseido, Avon Products (NYSE:AVP) and Revlon (NYSE:REV). The company also competes with cosmetics products from global consumer product companies such as Unilever (NYSE:UL), Procter & Gamble (NYSE:PG) and Beiersdorf.

In results posted thus far, L’Oreal witnessed a moderate 2014, as judged by its financial performance. For the first nine months of 2014, L’Oreal reported a sales contraction of 0.4% to €16 billion. Like-for-like sales, which exclude currency headwinds and other inorganic growth impacts, increased 3.5% during the nine months in FY14. Currency headwinds tempered down during the third quarter of 2014, compared to the first half.

L’Oreal’s cosmetics branch is further divided into four segments. Below, we give a description and the first nine months’ year-on-year sales performance  of these divisions:

• Professional Products Division: Products sold and used in hair salons. (+2.8% like for like growth)
• Consumer Products Division: Products sold in mass market retail channels. (+1.2% like for like growth)
• L’Oreal Luxe Division: Products sold in selective retail outlets i.e. department stores, perfumeries, travel retail, the Group’s own boutiques and certain online sites. (+6.5% like for like growth)
• Active Cosmetics Division: Products for “borderline” complexions (i.e. neither healthy nor problematic), sold through all health channels such as pharmacies, parapharmacies, drug stores, and medispas. (+9% like-for-like growth) ^[1]

In this article, we discuss the major trends that impacted the company’s performance in 2014.

We have a $37 price estimate for L’Oreal, which is at a slight premium to the current market price.

See Our Complete Analysis for L’Oreal Here

Strategic Acquisitions Fueled Global Growth

L’Oreal completed the acquisition of Chinese facial masks maker Magic Holdings and Sheseido’s spa brands Decléor and Carita in April 2014. In June 2014, the company announced an agreement to acquire American makeup cosmetics manufacturer NYX Cosmetics. In September 2014, L’Oreal announced to acquire Niely Cosmeticos, one of the largest hair care companies in Brazil. L’Oreal also announced the agreement to acquire New York based multi-cultural beauty brand, Carol’s Daughter and Israel based hair research company, Coloright, towards the end of 2014. Since its founding, L’Oréal has embarked on a growth-by-acquisitions strategy to build its product base and expand its revenues, with all brands except the core L’Oréal portfolio being acquired over time. Acquiring brands consistently requires good cash generation capabilities, and the lack of significant debt showcases the strength of L’Oréal’s business. (We will soon be publishing a detailed article on L’Oreal’s acquisitions for 2014).

L’Oreal Luxe And Active Products Division Overshadowed The Consumer Products Division

In the first nine months of fiscal 2014, the luxury cosmetics division of L’Oréal Luxe was the star performer, driven by growing demand in the overall market-particularly, in China, U.S., and Western Europe. Revenues for the division grew 6.5% on a like-for-like basis (+3.2% based on reported figures) and reached €4.4 billion.

The strong performance for L’Oréal Luxe was driven by robust performance of brands such as Yves Saint Laurent, Giorgio Armani, Urban Decay, Kiehl’s and Clarisonic. The American make-up product maker Urban Decay, acquired by L’Oréal in 2012, registered a 93% jump in revenues in the first half of 2014. The market for specialized make-up brands constitutes 44% of luxury make-up market in the U.S. Hence, the strong revenue growth from Urban Decay could translate into market share gains in the US. The Luxury Division witnessed growth in all categories, particularly in make-up, which was being prioritized in 2014.

L’Oreal’s Consumer Products division, on the other hand, grew by 1.2% on a like-for-like basis (-3.2% based on reported figures) to reach €8 billion. 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. The company’s performance in North America was impacted by a high comparison base from last year due to a product launch.

Over all, 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.

Emergence Of The Emerging Markets

L’Oreal’s revenue for 2013 was $30.5 billion and the major contributing regions were: North America (25%), Western Europe (35%), and Emerging Markets (40%). Putting things into perspective, the same regions’ respective contribution to L’Oreal’s revenue in 2005 were: 27%, 47%, and 26%. This rapid expansion of the emerging markets in L’Oreal’s revenue mix implies that, along with economic growth, the consumers’ purchasing power in emerging nations have increased, hence, the consumption of discretionary products have been on a steady rise.

For the first nine months of 2014, if we compare the like for like sales, North America and Western Europe registered a growth of 0.9% and 1.8% respectively. On the other hand, Asia Pacific, Latin America, Eastern Europe, and Middle East &  Africa experienced like for like growth to the tunes of 5.5%, 8.5%, 6.1%, and 13.8%, respectively.

Adverse Economic Conditions Dampened L’Oreal’s Performance

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. 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.

The company’s results were heavily impacted by volatile currency fluctuations in the emerging markets. According to the company, currency fluctuation had a negative impact of around -3.8 percentage points. Revenues for the first nine months of 2014 stood at €16 billion representing a -0.4% decline from a year-ago period. Excluding currency fluctuations, constant dollar revenues increased 3.5% 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). ^[1]

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Sales at September 30, 2014, loreal.com, November 2014 [↩] [↩]