PARIS — The beauty industry is not immune to economic woes, which have recently dampened demand for luxury in certain regions.
This story first appeared in the August 30, 2012 issue of WWD. Subscribe Today.
But the outlook is still bright.
“We believe that the cosmetics market should remain buoyant, even though over the summer we noted some obvious signs of slowdown,” Jean-Paul Agon, L’Oréal chairman and chief executive officer, said Wednesday while addressing financial analysts and journalists the day after the French beauty giant reported that its profit margins contracted in the first six months of 2012.
“Our performance during the first half of the year has grown strongly,” he said, even as shares in L’Oréal took a tumble and at least one investment firm downgraded the stock.
Agon acknowledged a slowdown in the luxury market in Asia and the U.S., as well as in the travel-retail channel.
Despite that, L’Oréal believes the worldwide cosmetics market should grow by around 4 percent over the whole year. And Agon vowed that the company would tackle the second half with “great confidence and determination.”
The assurances didn’t stop L’Oréal stock from closing down 4.4 percent on the Paris Bourse Wednesday to 96.58 euros, or $121.02 at current exchange, following the publication of its first-half profit figures on Tuesday night. Analysts took issue with the French beauty giant’s profit margins, which just missed their estimates.
L’Oréal’s gross profit as a percentage of sales was 71 percent in the six months ended June 30, versus 71.5 percent in the same prior-year period. The company said the variation particularly reflects the euro’s weakening, the consolidation of Clarisonic and a slight increase in promotional offers.
In a research note, Andrew Wood, an analyst at Sanford C. Bernstein & Co., said that L’Oréal results “came in below our expectations with generally poor quality.”
He indicated gross margins were down 50 basis points against the consensus of plus 30 basis points “and had it not been for a [minus] 55-basis-point cut in A&P spending as percent of sales, operating margin growth [of 15 basis points] would have been negative, too, and even further below consensus [of plus 50 basis points].”
Operating profit growth was “well below” consensus of plus 14 percent “but was somewhat rescued by nonoperating items, principally a lower-than-expected tax rate, to give underlying [earnings per share] growth [up 9 percent] slightly above consensus expectations but below our estimates,” continued Wood.
Bernstein maintained an underperform rating on L’Oréal, noting its disappointing results and lack of change in full-year guidance “should drive some stock weakness.”
UBS, meanwhile, on Wednesday cut its L’Oréal recommendation to neutral from buy.
“Although we continue to like L’Oréal for the long term, we are downgrading it to neutral with an unchanged price target of 100 euros [or $125.30],” UBS analyst Eva Quiroga said in a research note.
As reported, L’Oréal first-half net profits rose 10.8 percent to 1.63 billion euros, or $2.11 billion. Company operating profits increased 11.4 percent to 1.9 billion euros, or $2.46 billion, while its sales gained 10.5 percent to 11.21 billion euros, or $14.55 billion.
Dollar figures were converted at average exchange for the period.
Agon stressed L’Oréal is confident about its second-half business, which will be bolstered by a strong pipeline of new products through yearend. He named projects including Lancôme’s La vie est belle and Yves Saint Laurent’s Manifesto fragrances, plus Blue Therapy from Biotherm, Revitalift Laser XS from L’Oréal Paris and Idéalia Pro from Vichy in skin care. Agon explained such initiatives would boost brands’ growth over the upcoming 18 months.
Since many of the major projects are set to launch in October and November, Agon expects L’Oréal’s gains to be stronger in the fourth quarter than in the third quarter.
He reiterated that the group’s ambition is “to outperform the market and achieve another year of growth in sales, results and profitability.”