L’Oreal Reports 21.9% Surge in Profits

Jean-Paul Agon, L'Oreal's new chief executive officer, cited the firm's strong performance at its financial analyst meeting Thursday.

View Slideshow

PARIS — Jean-Paul Agon, L’Oréal’s newly minted chief executive officer, presided over his first corporate financial analyst meeting Thursday with a flourish. The company exceeded market expectations, when it reported a 21.9 percent spike in net profits to 1.09 billion euros, or $1.34 billion at average exchange, for the first half of this year.

The strong performance, due to cost-control efforts, added-value products and the positive impact of currency fluctuations, makes it look highly likely that the French beauty giant will hit double-digit earnings-per-share gains for 2006.

Operating profits for the company rose 19.6 percent to 1.33 billion euros, or $1.64 billion, in the period ended June 30. L’Oréal’s earnings before interest and taxes margin was 17.1 percent, versus 15.6 percent in the first half of 2005.

The company’s profits came on revenues that, as reported, reached 7.79 billion euros, or $9.58 billion, an 8.7 percent increase in the half. On a like-for-like basis, L’Oréal’s sales rose 5.8 percent.

They were the best half-yearly revenues the company has posted since 2001.

L’Oréal’s profits were announced at a financial analyst meeting held in the company’s headquarters in the Paris suburb of Clichy.

The conference was banner in a couple of respects. The meeting marked the change in management that occurred earlier this year when Agon took over the helm from Lindsay Owen-Jones, who had presided as ceo for the last 22 years. He is now the company’s non-executive chairman.

At the conference, Agon said, “We are happy with the upturn in sales growth.” He also reiterated that half-yearly figures are not necessarily representative of full-year results.

Agon highlighted L’Oréal’s sales growth in all of its markets, particularly Western Europe, where the company’s consumer and luxury products had particularly strong showings.

He emphasized, as well, that a first for the company was that its cosmetics sales in the “rest of the world” zone (not including Western Europe and North America) outpaced those in North America in the most recent half. During the period, for those regions outside Europe and North America, revenues came to about 2 billion euros, or $2.46 billion, up 17.5 percent year-on-year. North America’s reached 1.97 billion euros, or $2.42 billion, a 9.5 percent gain.

This story first appeared in the September 1, 2006 issue of WWD.  Subscribe Today.

Cosmetics sales for L’Oréal in Eastern Europe grew 21.9 percent and Latin America’s, 16.2 percent, in the period.

In North America, L’Oréal’s cosmetics revenues were stymied by changes among distributors, including the May-Federated merger that caused 80 doors to be shuttered; Alberto-Culver’s sale of almost half of Sally’s beauty supplies business to an investment fund managed by Clayton, Dubilier & Rice, and a reduction of inventory by mass market clients such as Wal-Mart. Such shifts negatively impacted L’Oréal’s product sell-in, but not its sell-through, and will not affect the mid- and long-term business of its brands, said Agon.

He continued, saying that overall, “the progression of our business in the first half is very encouraging, and our rhythm of growth of 5.8 percent [on a like-for-like basis] is very close to our midterm objective of 6 percent. Six percent would have been reached had there not been the turbulence in American distribution.”

Agon said L’Oréal’s cosmetics business over the second half of 2006 should be impacted — both positively and negatively — by similar phenomena to those present in the first half, and that, therefore, the company should register sales gains almost on a par with the first half’s (or about 6 percent).

As for currency effects, an inverse trend is expected for the second semester versus what there was in the first. In the January-through-June period, currency fluctuations boosted L’Oréal’s business by 2.4 percent. However, the weakening of the dollar and other currencies versus the euro in the second half are expected to become a negative influence on the company’s overall sales, said Agon.

Yet, revenues from the recent purchase of The Body Shop, which have been consolidated into L’Oréal’s accounts starting in early July, are expected to offset negative currency impacts for the second half.

Gross profits at L’Oréal were 71.5 percent of sales in the first half of 2006, up 170 basis points against the same period last year. Agon said the company’s gross-profits progression will be slower in the second half, but is to remain significant and lead to substantial gross-profits growth for the entire year.

L’Oréal’s EPS rose 25.2 percent to 1.76 euros, or $2.17, in the first six months of this year versus the first half of last year.

The company’s research and development costs grew 5.4 percent to 254 million euros, or $312.7 million, representing 3.3 percent of revenues.

Advertising and promotion expenses increased 8.2 percent to 2.36 billion euros, or $2.91 billion, equal to 30.3 percent of sales. In the prior-year period, they represented 30.5 percent of L’Oréal’s revenues.

Among the key launches for the company’s professional products division in the first half were the Play Ball and Hair Mix styling lines from L’Oréal Professionnel, the Nutritive hair care collection from Kérastase and the Shimmer One hair color series from Redken.

L’Oréal’s consumer products division’s business was boosted in part by sales gains from Elseve hair care products and Garnier’s Fructis, Nutrisse and Garnier Skin Naturals items.

Recent key launches from L’Oréal’s active cosmetics division included Vichy’s Normaderm Nuit skin care and Inneov Solaire sun care, among others.

For the company’s luxury products division, the fragrance business was bolstered by strong sales from the likes of Hypnôse by Lancôme, Armani Code Women by Giorgio Armani and Polo Black by Ralph Lauren.

The financial community lauded L’Oréal’s first-half turnout.

“L’Oréal’s profits significantly exceeded expectations, due to much better operating margins,” said Sandy Beebee, vice president at HSBC in New York. “The benefits from their cost-saving initiatives were boosted by very strong price-mix improvements and positive currency effects. We were also surprised that the margins were strong despite higher advertising spending than we had been forecasting. Overall, this was a very strong performance.

“Earnings growth will be slower in the second half of the year,” she continued. “L’Oréal loses the benefits from currency and margin comparisons are challenging. They also plan to boost A&P spending again to support key hair care launches in Europe and the U.S. However, full-year earnings growth is still very attractive. We are confident L’Oréal will achieve double-digit EPS growth and sustain organic sales growth at close to 6 percent.”

L’Oréal’s stock closed up 2 percent to a unit price of 81.70 euros, or $104.63 at current exchange, on the Paris Bourse Thursday.

View Slideshow