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Luxe Division, North America Drive L’Oréal’s Third-Quarter Growth

The world's largest beauty company registered its best quarterly performance in more than four years.

PARIS — L’Oréal bucked the beauty industry’s trends in the third quarter, growing at its strongest rate in four years thanks to strength in its luxury division and in North America.

The world’s largest beauty maker, which published results after the close of the Bourse here on Thursday, posted sales in the period of 6.15 billion euros, or $6.87 billion at average exchange, up 3.6 percent. On a like-for-like basis, group revenues gained 5.6 percent, compared to the 4.5 percent expected by analysts.

“It was a much better quarter than expected,” said Eva Quiroga, an analyst at Deutsche Bank. She noted that L’Oréal posted the second-best organic top-line growth among the European consumer staples companies to have reported, after British American Tobacco, and the best by far of what the European and U.S. cosmetics companies have registered.

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The standout performances of L’Oréal’s Luxe Division and business in North America, where organic sales were up 9.3 percent and 7.5 percent, respectively, contrasted significantly with the Estée Lauder Cos.’ most recent quarterly results, published on Wednesday. The U.S. giant’s net sales in the period ended Sept. 30 were up just 2 percent and revenues were down 3 percent on a reported basis in North America.

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“L’Oréal bucked the trend of a tough [third-quarter 2016] for our European Food and [Home and Personal Care] names,” wrote Andrew Wood, an analyst at Sanford C. Bernstein & Co., in a research note. “Unilever had been the only company to grow faster than expectations…and even then its Q3 sales were fairly weak and the out-performance was slight.”

Wood called L’Oréal’s third-quarter sales “a major out-performance” and a “strong acceleration” versus its first-half revenue gain of 4.3 percent. “Indeed, Q3 was the best quarter for L’Oréal in over four years, since Q2 2012,” he continued.

Céline Pannuti, an analyst at J.P. Morgan Cazenove, wrote that the quarterly result “should anchor visibility into [full-year] 2016 and possibly into [full-year] 2017, a striking contrast versus other players.”

In the third quarter, the L’Oréal’s Luxe Division posted sales of 1.86 billion euros, or $2.08 billion, a 9 percent gain in reported terms. L’Oréal chairman and chief executive officer Jean-Paul Agon, during a conference call with analysts and journalists on Thursday, said the division’s quarter was strong mainly in two regions. One was the U.S., where it made market-share gains, while the other was China, where the luxury market remains dynamic and L’Oréal’s Luxe Division is over-performing.

L’Oréal’s sales in North America grew 8.2 percent in reported terms to 1.75 billion euros, or $1.96 billion. Agon highlighted the Luxe and Consumer Divisions’ good performances in the U.S.

“The Consumer Division had a very strong growth – double-digit for North America this quarter,” he said, explaining that was due to the strategy of maximizing makeup in brands such as NYX, Maybelline and L’Oréal Paris; the deployment of Garnier’s Ultra Doux, and some hair-color initiatives.

Agon described the makeup market globally — both mass and luxury — as “really booming.”

“For us this is clearly a great opportunity, as we are the number-one makeup manufacturer in world. Year to date, our [organic] growth in makeup in total is around plus 15 percent, which is really a record growth in the category,” explained Agon.

He attributed the gains to the addition of new brands, like NYX, which is doubling its business compared to the prior year, and Urban Decay, which is growing plus 40 percent in color cosmetics.

L’Oréal’s larger brands are also performing well in the segment. “In luxury, for example, Yves Saint Laurent makeup is at plus 40 percent. Giorgio Armani makeup is also [up] 50 percent,” said Agon.

“It is reassuring to see that they are doing well with their small brands — especially NYX and Urban Decay — and their big brands,” continued Deutsche Bank’s Quiroga. “There has been a lot of concern in the industry about big brands’ ability to survive the continued emergence of small challenger brands.”

Meanwhile, skin-care revenues are slowing down industry-wide. “We are growing like the market, which is low-single digits,” continued Agon.

Geographically, France, where beauty sales in practically all channels are negative, continues to be a sticking point. “Our performance [there] is globally in line with the markets, which means at the end of the year we are not going to lose or gain any significant market share [there],” said Agon. “We hope that next year will be better, but we don’t see any real perspective of improvement at least until the end of this year.”

L’Oréal’s business in China, outside of the luxury segment, remains challenging. “In terms of mass, the market is very low-single digit and we are slightly below it, but not far,” said Agon.

Overall, in the first nine months of the year, L’Oréal registered revenues of 19.05 billion euros, or $21.26 billion, up 1.6 percent in reported terms and 4.7 percent on an organic basis.

Given the company’s performances, Agon reiterated his confidence that L’Oréal will deliver in 2016 another year of sales and profit growth.