L'Oreal SA manufactures, markets, and distributes health and beauty aids. The Company produces colorants, styling, hair care, cosmetics, skin care products, perfumes and dermatological and pharmaceutical products.
The shares of L’Oreal have beaten the performance of the market year-to-date. L’Oreal shares are up 26.5 per cent whereas the Euro Stoxx 50 is up 19.5 per cent and the Euro Stoxx 600 is up 20.7 per cent. What’s interesting at this point is to understand whether this positive momentum which is building in the share price will continue in 2015 and beyond.
From the first quarter sales and revenues figure for 2015 we already got an indication that not only is the company on the right track but also that our expectations for 2015 were too conservative.
The Group managed to increase sales in all divisions and geographical locations. The increase was mainly due to strong demand for its products and currency tailwinds. I will go into further detail on both attributes.
Forex tailwinds
Sales increased by 14.1 per cent in Q115, nine per cent of which was due to a weak euro.
We expect this strong one off advantage for European companies to continue for the rest of 2015. However, we do not expect to see the same level of gains in 2016. Although we expect the Euro to remain weak against the dollar, we do not expect to see large swings resulting in a weaker euro at this stage.
I am more confident today about my affirmation that the euro has bottomed after the ECB president last week said it was “pointless” to go short on the single currency — challenging anyone who disagreed to do it. History has taught us never to bet against the forecast of central banks.
Strong demand
This attribute towards the top line is more important than the weakness in the currency because it is one of the important factors which will determine whether L’Oreal will continue to grow its top line even if the Euro did not continue to weaken.
The group managed to increase demand for both its existing products and by the addition of new line up of products. We expect this positive momentum in sales to continue in line with the company’s objective of tapping new markets and targeting the middle class. Management is positioning the businesses to take advantage of a continued increase of the middle class in emerging markets.
L’Oreal was successful in managing to increase sales in all divisions and geographical locations and this is important because it shows that the company is managing to keep on growing its top line. Management continues to see growth in Western Europe and the USA. The largest contributors to growth are the US, India and Brazil. The Group is winning market share in North America, Eastern Europe and Latin America.
We expect the strong rollout of new products across the divisions to continue in 2015 and beyond as global growth picks up.
Positive news for The Body Shop
The Body Shop, which up to last year was the weakest link in the group, recorded growth of 4.2 per cent like-for-like and 9.1 per cent based on reported figures. The brand is building up its momentum in key regions and categories. This growth is coming from the group’s strategy to amplify innovation and drive skincare products. For example in Q115, The Body Shop launched ‘Drops of Youth Bouncy Sleeping Mask’ which was one of the growth driver in the quarter. We expect The Body Shop to continue in this positive trend and continue launching new products which will drive growth.
Important events during the first quarter
On February 2, The Body Shop announced the acquisition of its Australian franchise Adidem Pty Limited, which operates 91 stores in Australia.
On March 6, L'Oréal and CFAO announced the signing of a protocol agreement covering the production and distribution of cosmetic products in Ivory Coast. This new partnership will enable L'Oréal to step up the presence and accelerate the expansion of its brands in Ivory Coast and French-speaking West Africa.
On March 31, L'Oréal finalised the acquisition of Niely Cosméticos in Brazil, announced on September 8, for which the regulatory authorities' approval was obtained in January .
In addition, on April 16, L'Oréal unveiled the first results of its ‘Sharing Beauty With All’ sustainable development programme.
Disclaimer:
This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.