France-based L'Oreal SA (LRLCY) recently reported 2014 first half sales figures. Sales declined 1.5% as against sales growth of 4.7% in the first half of 2013. The decline was due to a difficult operating environment and currency headwinds. Currency fluctuations impacted sales by 5.1% in the quarter, while the net impact of changes in consolidation was negative 0.2%.
On a constant currency basis, first half 2014 sales grew 3.8%, driven by 4% growth in total cosmetics division, which a 1.7% decline in The Body Shop. Last year, the company delivered sales growth of 5.4% in the first half. Sales, on a constant currency basis, increased 4.1% in the second quarter of 2014, compared with last year quarter growth of 5.2%.
Gross margin improved 10 basis points to 71.8% in the first half of 2014, while operating margin expanded 30 basis points to 18.2%. With the exception of the Professional Products Division, whose profitability has declined from 20.1% to 19.6%, profitability of each of the divisions in the cosmetics category increased during the first half of 2014.
Adjusted earnings per share increased 7.5% (in local currency) in the first half of 2014, driven by improved operating margins.
The company operates through the Cosmetics Divisions and The Body Shop. The cosmetics division is further sub-divided into four categories: Professional Products, Consumer Products, L'Oréal Luxe and Active Cosmetics.
Operational Segment Details
Cosmetics Division: On a constant currency basis, the division grew 4% in the first half of 2014, while it increased 4.3% in the second quarter.
Professional Products: The Professional Products division posted an increase of 3% on a constant currency basis in the first half of 2014. Rate of growth improved from 1.4% in the first half of 2013 owing to an improvement in Western Europe and the United States. The company witnessed momentum in the New Markets (excluding Japan), especially in India, Russia and Brazil. In the second quarter of 2014, the division grew 2.2% from the year-ago quarter.
The improvement came on the back of Haircare and hair colourants products. The re-launch of TecniArt by L'Oréal Professionnel and Redken's styling range also helped growth.
Consumer Products: The Consumer Products division posted an increase of 2% on a constant currency basis in the first half of 2014. Growth however was lower than last year’s growth of 6.3% in the first half due to sluggishness in the American mass market and weakness in the emerging markets. The division was still benefited by the gradual improvement in the European markets. In the second quarter of 2014, the division grew 2.8% from the year-ago quarter.
The new launches in this division were not able to win market share. However, the division received good response in haircare. In hair colourants, the recently introduced Garnier Olia continues to perform well, while in make-up, L'Oréal Paris is expanding well, and is innovating with Butterfly and Miss Manga mascaras.
L'Oréal Luxe: The division posted an increase of 7.4% on a constant currency basis in the first half of 2014. Growth was higher than last year’s 6.4% in the first half, driven by market share gains across all geographic zones, particularly in China, United States and Western Europe. In the second quarter of 2014, the division grew 7.5% from the year-ago quarter.
L’Oréal Luxe is growing rapidly, driven by the vitality of the novel brands Urban Decay, Kiehl’s and Clarisonic and by the success of fragrances with Lancôme, “La Vie est Belle” and Giorgio Armani, "Sì".
Active Cosmetics: The division posted an increase of 8.1% on a constant currency basis in the first half of 2014. Growth improved from last year’s growth of7.8% in the first half, driven by market share gains in France, Russia, Brazil and China. In the second quarter of 2014, the division grew 7.4% from the year-ago quarter.
The division grew strongly with the continuing recovery of Vichy and the roll-out of SkinCeuticals.
The Body Shop: The division recorded sales decline of 1.7% on a constant currency basis in the first half of 2014 due to challenges in some of the Asian markets. However, innovations led to improved businesses in Europe, North America, the Middle East, Africa and Brazil in the first half. In the second quarter of 2014, the division reported flat sales.
In the first half of 2014, the company’s results were impacted by currency headwinds. The company continues to expect currency to negatively impact sales by 4.3% in full year 2014. However, we are optimistic on the company’s newly-acquired businesses of Decléor and Carita and Magic Holdings International Limited, which are expected to add around 0.4% to the company’s full year sales.
In addition, the finalization of the strategic transaction between L’Oréal and Nestlé on Jul 8, 2014 will help the company to record a capital gain of more than 2 billion euros in 2015. Also, the buyback of 48.5 million L’Oreal shares owned by Nestle will have an accretive impact of more than 5% on net earnings in 2015.
L’Oreal holds a Zacks Rank #4 (Sell).
Some better-ranked companies in the consumer staple sector include Treehouse Foods, Inc (THS), BRF S.A. (BRFS) and Pinnacle Foods Inc (PF). While Treehouse sports a Zacks Rank #1 (Strong buy), BRF S.A. and Pinnacle hold a Zacks Rank #2 (Buy).
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