Times are tougher in the beauty world.
While L’Oréal on Thursday reported gains in all its divisions and geographic zones in the second quarter, the world’s largest beauty company significantly benefited from strong currency tailwinds during the period. Those same tailwinds turned into headwinds for U.S.-based Procter & Gamble Co. and Avon Products Inc., though, both of which continued to be plagued by their own problems. P&G’s net income plummeted 80 percent in its fourth quarter, while Avon saw a 51.6 percent increase in profits in its second quarter. But the number of its active sales representatives remained on a downward slope, a major issue for the firm.
L’Oréal, which published results for the three months ended June 30 after the market closed in Paris on Thursday, said revenues jumped 15.3 percent in reported terms to 6.38 billion euros, or $7.06 billion. But revenues on a like-for-like basis advanced 3.6 percent, below the market consensus of 4 percent. The like-for-like figure represented a slowdown from the first quarter when comparable sales rose 4 percent.
Contributors to the downtick included factors such as a decline in Brazil, wrote ConsumerEdge Research analyst Javier Escalante in a note. “Shipments [were] possibly down 5 percent to 10 percent — as retailers built inventories in Q1 ahead of the implementation of higher taxes on cosmetics,” he explained.
Escalante also highlighted that the company’s sales slowed to 5 percent in Asia, and that L’Oréal flagged a weakness in Hong Kong (but not Mainland China).
“The biggest negative surprise was in the New Markets [L’Oréal’s largest geographic zone with revenues of 2.4 billion euros, or $2.65 billion, up 5.1 percent on a like-for-like basis], which had been showing some signs of renewed momentum in the last two quarters, but took a big step back in Q2 to its lowest level in over six years, since the depths of the global recession in Q1 2009,” wrote Andrew Wood, an analyst at Sanford C. Bernstein & Co.
In comparable terms, revenues were up 1.5 percent in Latin America and 4.1 percent in the Asia, Pacific zone, for instance.
Meanwhile, the more mature regions — Western Europe, where sales gained 2.6 percent, and North America, where revenues advanced 2.9 percent on a like-for-like basis — performed better than expected, according to Eva Quiroga, an analyst at UBS Investment Bank.
“We believe that the market will be comforted by the improvement in the two developed regions,” she wrote in a note.
L’Oréal’s Professional and Consumer divisions, which registered revenue gains of 3.5 percent and 2 percent, respectively, in comparable terms also came in slightly ahead of UBS’s forecasts. The Active Cosmetics and Luxury divisions, with upticks of 6.5 percent and 5.8 percent, were under the bank’s estimates.
L’Oréal said net profit in the first half of the year increased 8.5 percent to 1.88 billion euros, or $2.1 billion. Operating profit, which advanced 14.5 percent to 2.32 billion euros, or $2.6 billion, was in line with consensus, as was the operating margin, which declined 10 basis points to 18.1 percent.
Céline Pannuti, an analyst at J.P. Morgan Cazenove, noted that mergers and acquisitions in the Professional division and the rebalancing of the Active Cosmetics division’s margin negatively impacted the company’s margin in the first half.
“We would expect [the] margin to rise in H2 2015,” she added.
L’Oréal’s first-half sales gained 14.7 percent to 12.82 billion euros, or $14.32 billion.
“At the end of June, our reported growth is the strongest recorded for the last 20 years, with a very positive currency effect,” stated Jean-Paul Agon, L’Oréal chairman and chief executive officer.
Currency fluctuations had a favorable impact of 9.7 percent and acquisitions, of 1.2 percent, in the six months.
On a like-for-like basis, revenues grew 3.8 percent, and at constant currency rates, they increased 5 percent.
Dollar figures are converted at average exchange for the period to which they refer.
Agon stated that the L’Oréal Luxe division is significantly outperforming the worldwide market with double-digit growth of its brands Giorgio Armani, Yves Saint Laurent and Kiehl’s. L’Oréal Professionnel and Redken International are bolstering the Professional Products division, which is rebounding. The Active Cosmetics division is strengthening its position globally because of La Roche-Posay, and the Consumer Products division is showing slight improvement, due particularly to Maybelline.
“Thanks in particular to a rich innovation portfolio, prospects of rapid e-commerce growth and the continuing roll-out of recently acquired brands, we are projecting an acceleration in growth in the second half,” stated Agon. “We are confident in our ability to outperform the beauty market and achieve a year of significant growth in both sales and profits.”
“In light of the market caution on the extent of the industry slowdown into Q2 2015, we believe L’Oréal H1 2015 results should reassure and would expect a neutral stock reaction,” wrote Pannuti.
P&G and Avon, meanwhile, faced a string of challenges in their most recent quarters.
On Thursday morning, P&G reported that fourth quarter net income declined to $521 million. Avon for its part saw second quarter net income rise 51.6 percent, but the number of active representatives at the beauty firm declined.
At P&G, when A.G. Lafley steps down from the top post this fall to clear the way for incoming president and ceo David Taylor, he intends to deliver a simpler, easier-to-manage company with a streamlined portfolio and narrowed business focus. Lafley told Wall Street analysts on Thursday that the company will be “40 to 50 percent less complex,” not mentioning that many of the operations he has sold were businesses he bought during his first stint as ceo.
But during P&G’s earnings call, several analysts asked Lafley, P&G’s chairman, president and ceo, if the strategy, along with the cost-cutting programs he’s installed, were enough to improve the business.
During P&G’s earnings call, Sanford Bernstein analyst Ali Dibadj pressed Lafley on whether P&G’s changes are transformational enough, declaring, “I still struggle to see what’s going to be different.…How long do you want us to wait before you do think about bigger changes?”
Lafley responded with a question of his own, “Do you have a recommendation, Ali?”
Dibadj said breaking up the company was a viable option. The analyst later told WWD, “Are smaller companies that have more focus more successful? Possibly.”
In Lafley’s view, the quarter capped off a year of significant change for P&G. But some of the measures are in a holding pattern. Its $12.5 billion deal with Coty — a cornerstone of Lafley’s plan to cut the company’s portfolio in half to 65 brands across 10 key categories — isn’t expected to close for another year. The 43 brands headed to Coty were included in P&G’s fourth-quarter results. They will be reported as discontinued operations beginning in the first quarter of fiscal 2016.
“Every choice we take, every move we make is intended to accomplish one of three things: increase shopper and consumer preference for P&G brands and products; improve operational effectiveness and executional excellence, develop more balanced reliable sustainable growth and value creation,” Lafley told analysts.
For example, for Olay, P&G said it is trimming the assortment and testing easier-to-shop shelf displays with certain retailers.
P&G’s net sales for the three months ended June 30 declined 9.2 percent to $17.79 billion, compared with $19.60 billion, dragged down by a negative 9 percentage point impact from foreign currency exchange. Organic sales grew one percent. Excluding the businesses P&G is exiting, including the beauty brands going to Coty, organic sales gained 2 percent.
By category during the quarter, beauty, hair and personal-care sales declined 10 percent to $4.14 billion; grooming sales slid 18 percent to $1.69 billion; health-care sales decreased 6 percent to $1.71 billion; fabric care and home care was down 7 percent to $5.32 billion, and baby, feminine and family-care sales declined 7 percent to $4.82 billion.
Dibadj said P&G’s quarterly results were surprisingly poor in light of P&G’s attempts to turn the business around. “In totality, nothing has gotten better….They are frustrated, and we are frustrated.” He added if Lafley can’t fix the business in two years, he is not sure another ceo can — even given a longer time frame.
Taylor, whose appointment by the board was disclosed on Tuesday, will take the reins Nov. 1. Lafley will become P&G’s executive chairman.
P&G isn’t the only one facing struggles. Avon has to figure out how to reverse the ongoing slide in its active representatives, the number of which dropped 2 percent in the quarter — dragged down by a 16 percent fall in North America. Avon on Thursday reported that second-quarter net income attributable to the company rose to $28.8 million, or 7 cents a diluted share, compared with $19 million, or 4 cents a share, in the year-ago period. Total revenue for the three months ended June 30 declined 16.7 percent to $1.82 billion, compared with $2.19 billion in the year-earlier period.
Sheri McCoy, Avon’s ceo, said “trends are moving in the right direction” with “strong active representative trends in two-thirds of our top markets” in the first half of 2015.
But analysts seemed unconvinced.
“The data doesn’t bear out the rhetoric,” said Dibadj.
Avon’s beauty sales declined 17 percent, but gained one percent in constant dollars.
For the first half, net loss attributable to Avon was $118.5 million, or 27 cents a diluted share, compared with a loss of $149.3 million, or 34 cents a share, in the year-ago period.
Total revenue for the six months declined 17.2 percent to $3.62 billion, compared with $4.37 billion in the year-ago period.
The company said it’s bent on shifting to a social selling model by encouraging more representatives to order online, but the move is slowgoing. McCoy said e-commerce is going at a double-digit clip but accounts for less than 10 percent of Avon’s sales.
“We’re still working with our representatives to get them to shift over and order more online,” said McCoy.
Dibaji said, “The difference between Avon and P&G is that Avon has fewer levers to pull. P&G’s potential is great, it’s just not being utilized.”