The Body Shop


PARIS — L’Oréal is reportedly considering the sale of The Body Shop, and industry experts laud the idea, saying it could make a good fit for a private equity player or an Asian beauty concern.

“The Body Shop has been a drag on like-for-like growth – which has since the acquisition averaged 2.6 percent [gains] versus 4.4 percent for the rest of L’Oréal – and margins – 5.7 percent last year versus 17.8 percent for the [group],” said Eva Quiroga, an analyst at Deutsche Bank.

“Management would be seen as willing to pull the plug on a continued underperformer,” she added. “And the key reasons for owning The Body Shop have largely not materialized over time: Its position as a natural brand, one of the fastest-growing segments of the market, never really appealed to the consumers. Its position as a masstige brand did ultimately fail, as L’Oréal has had to adjust prices downward, and its own store expertise was eventually trumped by the learning from the much more successful Kiehl’s business.”

“L’Oréal should consider divesting The Body Shop,” agreed Javier Escalante, a consultant. “Strategically, the brand isn’t extendable into other beauty categories like makeup or skin care, as management thought it would be.

“Financially, The Body Shop not only earns lower returns on capital and operating margins relative to the balance of L’Oréal’s portfolio, but it also has consistently underperformed operationally and financially key competitors such as Bath and Body Works,” he continued.

Escalante highlighted, as well, L’Oréal’s recent “series of expensive acquisitions and [that it has] pushed a vertical integration into retail of many of its other brands. While strategically these moves are sound, they negatively impact the company’s returns on invested capital and eventually lead to the compression of its shares’ trading multiple.”

Investors generally reacted favorably to the news of the possible divestiture, boosting L’Oréal’s shares up 1.9 percent to 173.35 euros, or $185.26 at current exchange, on Wednesday on France’s CAC 40 exchange that gained 0.3 percent.

The world’s largest beauty company is working with Lazard bankers to review its options for The Body Shop, which it purchased 11 years ago, according to the Financial Times, which reported Wednesday an outright sale of the activity for 1 billion euros, or $1.07 billion, is among the most likely outcomes.

A spokeswoman from L’Oréal had no comment on the report. Neither did a Lazard spokesman reached by WWD.

The Body Shop has been ailing for years. “In its home and largest market, the U.K., growth has remained rather flat, hovering around 1 percent in recent years, in comparison to 2 to 3 percent for the total company,” said Nicholas Micaleff, senior industry analyst for beauty and personal care at Euromonitor International. “The Body Shop performed more strongly in Asian markets, such as India and Indonesia, where it achieved double-digit [compound annual growth rate] over 2010 to 2015.”

For the first nine months of 2016, The Body Shop registered sales of 599.5 million euros, or $669.2 million at average exchange rates, down 4 percent in reported terms and up 0.5 percent on a like-for-like basis. L’Oréal said that market slowdowns in Hong Kong and Saudi Arabia were continuing to have a negative impact on The Body Shop’s global growth, while its business was improving in North America.

Anita Roddick and her husband Gordon founded The Body Shop in 1976. In the early years, the brand was at the forefront of the naturals movement, offering products based on everyday and exotic ingredients; promoted environmental issues by encouraging recycling, and spearheaded beauty’s ethical drive, with high-impact campaigns against animal testing and endorsing fair trade — long before they became fashionable causes.

Roddick also championed a holistic approach to beauty and promoted a more inclusive take on what is considered appealing.

L’Oréal acquired The Body Shop in 2006 for 652 million pounds, which at the time was worth $1.14 billion, to bolster its activity in the natural skin-care market.

Escalante said he does not see an obvious strategic fit for The Body Shop in the portfolio of L’Oréal’s peers. “Buyers, if attracted by a discounted valuation, would likely be among private equity investors,” he said.

“The Body Shop is better suited in the hands of a beauty player seeking a lower-cost debut in Asia and can take on the British brand as a stepping stone into the region,” said Micallef.

“Might one of the Korean or other Asian players have a go?” suggested another analyst.

Speculation has long been rife that L’Oréal might sell The Body Shop. In October 2012, the company denied reports about a possible divestiture after rumors swirled in the British press.

For its part, L’Oréal has been on a buying spree, recently making a spate of acquisitions in the skin-care space. In early January, the company said it had signed a definitive agreement with Valeant Pharmaceuticals International Inc. to purchase the CeraVe, AcneFree and Ambi labels for $1.3 billion. The move would build the company’s U.S. business in the dynamic active cosmetics segment.

In July 2016, L’Oréal said it was acquiring IT Cosmetics — whose makeup gives a natural look — for $1.2 billion.

 

 

 

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