L'Oreal's Weak Mass Brands Overshadow High-End Growth in China

(Bloomberg) -- L’Oreal SA posted disappointing sales of mass-market cosmetics, triggering a slide in the share price even as buoyant Chinese demand lifted revenue from high-end products.

The French beauty conglomerate’s sales of consumer brands such as Maybelline rose at a less-than-stellar pace of 2.3 percent in the second quarter, the company said. While L’Oreal turned in a much stronger performance from luxury brands like Lancome and Giorgio Armani, Chief Executive Officer Jean-Paul Agon said the mass-market unit was unsatisfactory.

“Clearly we are not happy with the growth of this division,” Agon said Friday on a call with analysts. “We’d like to get back progressively, but soon, to 3 or 4 percent growth.”

The shortfall is emblematic of the challenges facing sellers of mass-market goods, in industries ranging from beverages to packaged foods. Unlike companies from Danone to Procter & Gamble Co., L’Oreal hasn’t been targeted by an activist investor. But its second-biggest shareholder, Nestle SA, has been, and the L’Oreal results may give that activist, Dan Loeb, more ammunition to push Nestle to dump its 23 percent holding in the cosmetics company.

Stellar Performance

One argument Nestle and L’Oreal have in favor of the status quo: L’Oreal has been a great investment, even with Friday’s drop: The stock has returned 14 percent a year over the past decade, outpacing the 13 percent return for the Stoxx 600 Personal & Household Goods Index. Nestle has repeatedly resisted calls to sell the L’Oreal stake.

“I have no comment on that,” Agon said in an interview with Bloomberg Television. “What I can tell you is that Nestle keeps repeating that we are a great investment for them, and I keep repeating that they are a great shareholder. I can tell you that the relationship is excellent.”

L’Oreal dropped 3.9 percent to 201.30 euros at 12:45 p.m. in Paris, valuing the company at 113.1 billion euros ($131.6 billion).

A push to reinvigorate the consumer division bore fruit more slowly than expected. The unit, which sells mainstream brands such as Maybelline, has faced a slump in U.S. retail as well as more competition from niche brands. Sales were weak in France, the U.K. and Brazil, the company said.

The luxury division did better, with sales rising 13 percent on a strong performance by Lancome’s Genifique and Kiehl’s Midnight Recovery ranges. Chinese consumers have kept their appetite for L’Oreal’s high-end names such as La Roche-Posay even amid concerns that luxury spending may slow in that market. LVMH, which sells Sephora beauty products, said earlier this week that demand hasn’t yet been dented by concern over China’s declining stock market and trade war with the U.S.

Second-quarter sales rose to 6.61 billion euros ($7.71 billion) overall, excluding currency swings, narrowly missing the 6.62 billion average estimate of analysts.

The results “reinforce our confidence in our ability to once again outperform the cosmetics market in 2018, and to achieve significant like-for-like sales growth and an increase in our profitability,” Agon said in a statement Thursday.

In the first quarter, a spike in the euro’s value against the dollar wiped out nearly all of L’Oreal’s reported gains even as the company posted its fastest growth in eight years. The euro has since weakened, giving a boost to L’Oreal’s bottom line. First-half operating profit was 2.58 million euros.

©2018 Bloomberg L.P.