It remains a tough beauty world out there.
Companies on three different continents continued their uphill battles against unenthusiastic consumers, inventory-adverse retailers and unsteady currencies even as their financial results revealed the ugliness in the market.
This story first appeared in the July 31, 2009 issue of WWD. Subscribe Today.
Second-quarter earnings dropped 64.3 percent at Avon Products Inc. and nearly evaporated entirely at Revlon Inc., with both citing restructuring initiatives and currency fluctuation as contributing to the decreases.
In Tokyo, Shiseido Co. Ltd. reported a 57.8 percent slide in first-quarter profits along with a 14.9 percent sales decline. Fighting the appreciation of the yen and weakness in its home market, the Japanese beauty giant slashed profit targets for the first half and full year based on deteriorating market conditions. Shiseido’s shares inched up 0.6 percent.
In Paris, L’Oréal, reporting sales but not earnings, and identified the end of March as perhaps the weakest point of the recession but was able to report top-line growth accelerated in the second quarter. Doing business in euros, currency shifts benefited its business and it forecast “gradual” improvement for the remainder of the fiscal year. Its shares also picked up 1 percent in Thursday trading.
Elsewhere, both Sally Beauty Holdings Inc. and Nu Skin Enterprises Inc. registered 7.3 percent increases in quarterly net income, with Sally’s sales down less than 1 percent and Nu Skin’s up a similar amount.
For the three months ended June 30, Avon’s net income was $84.6 million, or 19 cents a diluted share, compared with $237 million, or 55 cents, in the year-ago quarter. Excluding restructuring costs, earnings per share was 38 cents, 4 cents above the average analyst estimate carried by Yahoo Finance.
Revenues dipped 9.7 percent to $2.47 billion from $2.74 billion, but were up 5 percent in local currencies. Gross margin fell 150 basis points to 62.2 percent of sales.
In local currencies, fragrance sales were up 8 percent, color cosmetics were up 7 percent, personal care was up 6 percent and skin care rose 1 percent. However, translated into dollars, the businesses fell by a respective 9 percent, 9 percent, 10 percent and 12 percent.
For the six months, income was off 52.2 percent at $202.1 million, or 46 cents a diluted share, compared with $423.2 million, or 97 cents, a year ago. Total revenues decreased 11.2 percent to $4.65 billion from $5.24 billion.
Andrea Jung, chairman and chief executive officer, said Thursday that, although the number of active representatives grew an “exceptional” 11 percent, the continuing shifts in currency had a negative impact on reported results.
Still, she said, top-line results built on strong momentum that carried over from the end of the first quarter. “This was driven by both channel and brand strength,” she said.
She also told analysts the firm continued to register strong results in Latin America, where Avon enjoyed “healthy double-digit growth” for the ninth consecutive quarter.
Jeffries & Co. Inc. analyst Douglas Lane maintained his “buy” rating on the stock. “We continue to believe underlying momentum acceleration under way at [Avon] is being masked by adverse currency, and would continue to buy the stock ahead of the currency comps becoming much more favorable” in the fourth quarter, he wrote, noting that organic growth, unit volumes and sales force activity accelerated further in the second quarter.
Shares added $2.51, or 8.4 percent, to close at $32.25.
Revlon said hefty restructuring charges and unfavorable currency exchange rates pulled its second-quarter profits down 99 percent to $200,000, or breakeven on a per-share basis, in the period ended June 30, from $19.9 million, or 39 cents, in the prior-year quarter. Current-quarter results included restructuring charges of $18.3 million or 36 cents a share, and foreign currency losses of $3.3 million.
Quarterly sales slid 12.2 percent to $321.8 million from $366.5 million. In the U.S., revenue declined 14 percent to $186.2 million, driven primarily by lower sales of Revlon and Almay color cosmetics. International sales fell 9.7 percent to $135.6 million, due in part to lower sales in Europe and currency fluctuations, which were offset by higher sales in Latin America and Asia.
For the first half, Revlon had a 25.9 percent drop in profits to $12.9 million, or 25 cents a share, versus $17.4 million, or 34 cents, in the 2008 period. Sales dipped 7.8 percent, to $625.1 million from $678 million.
Alan Ennis, president and ceo, said the restructuring plan outlined in May, at a cost of 400 jobs, will reduce the company’s annual cost base by $30 million, half of which should be realized in the year’s second half. This “action represented an important, necessary and logical next step forward for Revlon,” enabling it to become a “stronger, more financially sound organization,” he said.
Although Wall Street took kindly to Revlon’s results — with shares jumping 42 cents, or 7.4 percent, to $6.08 — J.P. Morgan retail analyst Carla Casella, who rated the company “overweight,” remained cautious.
“High-end beauty manufacturers are beginning to target lower price points,” she wrote in a note to clients. “Revlon is introducing a number of new products in 2009, much of which has been shipped into stores already, raising returns risk if launches are unsuccessful.” She said the firm also faces a “modest refinancing risk in 2010 when a $107 million junior subordinated term loan comes due.”
Shiseido’s net income fell 57.8 percent to 4.32 billion yen, or $44.4 million at average exchange rates for the period, for the three months ended June 30. Sales declined 14.9 percent to 139.7 billion yen, or $1.43 billion.
The company said Thursday that during the quarter “consumer sentiment continued to weaken, causing market conditions in the domestic cosmetics industry to remain difficult. Overseas, the cosmetic markets in Europe and the Americas were affected by the economic recession, resulting in weak conditions overall.”
In a reduction of its guidance, the firm said net profit for the six months ending Sept. 30 is now seen coming in at 14 billion yen, or $147.9 million, compared with an earlier forecast of 15.5 billion yen, or $163.7 million. Full-year net profit is now expected to land at 30 billion yen, or $316.9 million, down from an earlier forecast of 31 billion yen, or $327.5 million.
The company said sales in its home market of Japan suffered as consumer sentiment weakened, competition intensified and retailers adjusted inventories. Shiseido’s cosmetics sales in Japan slid 6 percent to 90.4 billion yen, or $928.7 million.
The rest of Asia, and especially China, turned in a “solid performance,” Shiseido said, although the recession and the appreciation of the yen bit into business in Europe and the Americas. International cosmetics sales slid 25.9 percent to 46.9 billion yen, or $481.3 million.
Last week, Shiseido’s rival, Kao Corp., said first-quarter net profit slid 31 percent to 11.8 billion yen, or $121.19 million. Sales decreased 9.4 percent to 287.21 billion yen, or $2.95 billion.
In Tokyo, Shiseido’s shares closed up 0.6 percent to 1,563 yen, or $16.51 at current exchange.
In Paris, L’Oréal reported a 2.6 percent increase in second-quarter sales to 4.4 billion euros, or $5.86 billion at average exchange for the period, helped by the Consumer Products Division and an uptick in new markets. Revenues in the three months ended June 30 dipped 2.1 percent on a like-for-like basis.
The French beauty giant’s first-half sales gained 1.4 percent to 8.77 billion euros, or $11.69 billion. On a constant basis, they fell 3.2 percent.
Structural changes — such as the acquisition of YSL Beauté and the consolidation of Club des Créateurs de Beauté’s entirety — added 3.6 percent in the half.
Currency fluctuations positively affected L’Oréal’s half-yearly results by 1 percent.
Jean-Paul Agon, L’Oréal’s ceo, commented that inventory and sales appear to be coming into balance in some markets. In Western Europe, for instance, “the destocking process was very important in the first quarter, especially in luxury. Apparently, now the numbers for sell-in are quite close to the numbers for sell-out,” he said.
During a financial analyst conference call Thursday night, Caroline Millot, head of L’Oréal’s investor relations, said the end of March was a “low point” almost everywhere.
L’Oréal’s Consumer Products Division registered revenue gains of 1.6 percent to 2.21 billion euros, or $2.94 billion, in the second quarter. During that period, the “rest of world” zone posted growth of 6.1 percent to 1.33 billion euros, or $1.77 billion.
L’Oréal’s outlook is upbeat. “We expect improvement to be gradual through the end of this year,” said Millot.
Shares closed at 58.25 euros, or $82.26 at current exchange, up 0.97 euros, or $1.37, or 1 percent.
Sally Beauty Holdings’ third-quarter net income came in at $31.5 million, or 17 cents a diluted share, from $29.4 million, or 16 cents a share, in the year-ago period. The company, which operates the Sally Beauty Supply and Beauty Systems Group store chains, registered sales of $673.3 million, 0.5 percent below the $676.8 million reported for the year-ago period.
Revenues included a negative impact from foreign currency exchange of $21.9 million, or 3.2 percent of sales.
Same-store sales were up by 2.6 percent and, at the end of the third quarter, total store count was 3,821, an increase of 105 stores over the same period last year. Sales of the firm’s Sally Beauty Supply division were up by 1.6 percent to $434.7 million from $428 million in the third quarter of 2008. Same-store sales in the division rose 3.2 percent.
Meanwhile, sales at BSG dipped 4.1 percent to $238.6 million from $248.9 million a year ago, although they rose 0.6 percent on a same-store basis.
Year-to-date profits jumped 28.6 percent to $72.1 million, or 39 cents a share, while sales slid 0.8 percent to $1.96 billion.
Shares fell 19 cents, or 2.7 percent, to $6.84 on Thursday.
Reporting on Wednesday, direct marketer Nu Skin Enterprises reported second-quarter net income was up 7.3 percent to $22.1 million, or 35 cents a diluted share. Excluding a restructuring charge, EPS was 36 cents, above the analyst consensus estimate of 30 cents.
Sales rose 0.3 percent to $322.6 million versus $321.7 million a year ago. Excluding the effects of currency exchange, sales were up 4 percent.
“Our growth is a result of continued strength in the skin care category, with sales up 14 percent,” Truman Hunt, president and ceo of Nu Skin, said during a conference call Wednesday. “Additionally, our business transformation efforts (dating back to 2006), most recently in Japan, have helped us track ahead of our operating margin targets.”
Gross margin fell 40 basis points to 81.2 percent of sales, primarily because of “foreign currency fluctuations and shifting product mix.”
Year-to-date net income fell 0.4 percent to $34 million, or 53 cents a share, while revenues fell 0.2 percent to $618.8 million compared with $619.8 million in the first half a year ago.
“I’m very encouraged by the direction of the business,” said Hunt. “And we remain on track to exceed our goals for the year and post another record year.”