L’Oreal SA (XPAR:OR) engages in the manufacture of beauty and hair products. It has four major segments of operation –Â Professional products, Consumer products, Luxury products and Active cosmetics. When the beauty brand released its third-quarter numbers on November 3, analysts and investors were left surprised with the bleak sales numbers posted for the quarter as well as the first half of the fiscal year. The stock spiraled downward after the quarter results. In fact, the earnings miss came along with the news that the U.S. rating agency Standard & Poor's downgraded the company’s ratings on beauty products company Avon to junk status. Now, a very vital question which the investors are raising – are their investments secure and should they still hold on to the stock instead of going short on it? Let’s find out the key takeaways from L’Oreal’s third quarter to find this answer.
Examining each segmentÂ
With regards to the Consumer products segment, which is the largest segment for the cosmetics company, sales shrank on a like-for-like basis during the quarter. Quarterly like-for-like sales for the segment stood 0.4% lower when compared on a year-over-year basis at 2,576 million euros. This sudden dip has been attributed to the poor summer weather in most of Western Europe which has taken a toll on the like-for-like sales.
However, hair care products weathered the slowdown supported by brands such as L’Oreal Paris, Garnier and Maybelline.
In addition to the contraction of sales in the consumer products category, L’Oreal's luxury product segment also showed significant slowdown after a robust performance in the first half of the fiscal year. This segment that comprises of designer and prestige fragrance products such as Keihl’s, Ralph Lauren and Shu Uemura saw rapid detoriation in consumer sentiment led by a decline in Western European economies which partially impacted the organic sales of the division during the quarter.
L’Oreal’s professional products segment marginally declined owing to the economic slowdown in Europe. Like-for-like sales for the segment improved 2.6% to 745 million euros, a bit lower than the first half of the fiscal year. However, the depreciating euro against the U.S. dollar served as a tailwind and aided to expand sales by 4% for the segment during the quarter. Hair care remained the best performer in this segment boosted by improved sales from Kerastase, Matrix, and L’Oreal Professional.
The Active Cosmetics segment remains the fastest growing segment for the company with like-for-like sales increasing 11.3% while reported sales increased 9% to 380 million euros during the quarter.
Headwinds have led to geographical slump in sales
While the performance of the luxury and active cosmetics segments were still firm, sales from its consumer products segment remained under immense pressure due to the tough economic environment.
During the earnings call, CEO Jean-Paul Agon said, “L'Oreal recorded low growth because of a slight contraction in the consumer products division, as the mass market hit an air pocket in Western Europe…”
Similarly, L’Oreal faced lower sales in the Asia Pacific region where like-for-like sales stood at 3.4% compared to 6.6% in the first half of the fiscal year. While sales in India, China and Australia registered high growth during the quarter, the broader market sales has been gradually slowing down putting further pressure on the like-for-like sales from the region.
A few good points
Bringing some key positives into light, it was noted that the U.S. market showed remarkable improvement in like-for-like sales which is surely a bright spot for the cosmetics giant. In fact, the consumer products category achieved improved results, thanks to L’Oreal Paris which won a huge portion of the market share. Also, L’Oreal recently announced the acquisition of NYX Cosmetics in July, a brand that is expanding strongly, which complemented and boosted the product offering of the consumer products division. This in turn, aided in boosting U.S. sales further in the consumer products division.
L'Oreal also aquired Neily Cosmetics, the largest independent hair color and hair care company in Brazil, and Agon expects like-for-like sales to see an surge in the fourth quarter when he spoke on the future outlook of L’Oreal. “All in all, 2014 should be another year of improved economic performance for L'Oreal, with the group slightly outperforming the worldwide cosmetics market, improving operating profitability, and increasing its net earnings per share...,”Agon said.
At the same time, the CEO accepts that the market for cosmetics is no longer as buoyant it was earlier, and thus expects the cosmetics market to register a 3-3.5% growth during the second half of the year, which is slightly lower to the 3.5-4% forecast released earlier by the company.
To conclude
L'Oreal's performance has been weak during the third quarter, with the slump in the markets taking a toll on the top line. But the impact of the acquisitions and the expectations set by the management to witness a rise in sales could carry the company forward to better sales in the next quarter. Investors need to be cautious of their investments and should keep a note on the company’s moves in the coming quarter to take a well-informed decision on whether they should still hold on to their investment in the L’Oreal stock.
