Aug. 31 (Bloomberg) -- L’Oreal SA may decline in Paris trading after the world’s largest maker of cosmetics reported first-half profit that trailed analysts’ estimates.
Operating profit rose 2 percent to 1.7 billion euros ($2.5 billion), the Paris-based company said yesterday after markets closed. The median estimate of nine analysts surveyed by Bloomberg News was for profit of 1.78 billion euros. The company, which holds a conference call with analysts today, repeated its guidance for the year.
Earnings as a percentage of revenue narrowed to 16.8 percent from 17.3 percent a year earlier as L’Oreal spent more on research and development, advertising and promotion to win over customers amid higher unemployment and slowing economic expansion. Consumers in Eastern Europe spent less on L’Oreal products in the second quarter, which curbed sales growth.
“The operating performance is a disappointment and this could prove a drag on the shares,” Eamonn Ferry, an analyst at Exane BNP Paribas, said in an e-mailed note. He has an “outperform” rating on the stock, which he estimate could drop as much as 3 percent.
L’Oreal fell 1.8 percent to 77.01 euros in Paris trading yesterday. The stock has declined 7.3 percent this year, giving the Maybelline maker a market value of 46.3 billion euros.
The company, which also manufactures Kiehl’s lip balm and Garnier deodorant, repeated its forecast for an increase in full-year sales and profit. Revenue will grow faster than the global cosmetic market’s 4 percent expansion as demand surges in Latin America and Asia, it has predicted.
L’Oreal is “more confident than ever” in its ability to build sustainable and profitable growth, even amid an uncertain economic environment, Chief Executive Officer Jean-Paul Agon said in the statement. L’Oreal said on July 12 that first-half sales rose 5 percent to 10.1 billion euros.
Profitability narrowed at all divisions except luxury products, where it widened to 18.9 percent from 18 percent a year earlier as more shoppers in Asia and Latin America scooped up products including Kiehl’s wrinkle fillers and Lancome lipsticks.
Investment in research and development increased 12 percent in the period, while spending on advertising and promotion rose 6.3 percent, the 102-year-old company said. The company is investing in a new Fructis initiative and a new fragrance for its Yves Saint Laurent men’s line.
“Overall, the results show that fighting for market share limits profit growth at present,” Andreas Riemann, an analyst at Commerzbank, said by e-mail. He recommends buying the shares.
Profitability at the professional products division, which supplies treatments including Inoa hair colorant to beauty salons, narrowed to 19.8 percent from 21.2 percent a year earlier. The division is slightly outperforming the market this year in North America and western Europe, L’Oreal said last month, noting that the market was difficult.
The operating margin at the consumer-products business, L’Oreal’s largest source of income, narrowed to 20.1 percent from 20.4 percent. The Body Shop’s profitability narrowed to 2.8 percent from 4.1 percent, while the dermatology division’s margin narrowed to 8.1 percent from 12.4 percent.
The Body Shop, which L’Oreal bought five years ago, is continuing its “militant” approach to innovations, including a new makeup range and Body Butter Duos.
Net income rose to 1.47 billion euros from 1.31 billion euros a year earlier. Net debt totaled 526 million euros as of June 30, L’Oreal said.
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