Wella battles with tough US market

Related tags Goldman sachs Marketing

Despite Wella reporting a 7.2 per cent increase in sales for its
core cosmetics and fragrance business in the first six months of
the year, the company has reported a drop in group profits bought
on by restructuring costs - a factor that analysts say has been
further exacerbated by a drop in market share for its US hair care
business. Simon Pitman reports.

Analysts Goldman Sachs said that the loss of US market share for its hair care business was attributable to the continued dominance of L'Oreal and a much more aggressive approach by PG for its distribution channels.

However, Goldman Sachs also acknowledged that Wella has continued to be aggressive in the fragrance segment, where it has numerous launches scheduled for the second half of the business year that will see it competing well with the likes of L'Oreal and Clarins.

Wella said that despite the general slowdown in the global economy, negative exchange rate effects and increasing pressure from competition, it had still been able to increase its sales in the Professional and Cosmetics & Fragrances divisions overall.

Wella Group's total sales amounted to €1,550.0 million between January and June 2004, compared to €1,546.2 million in the previous year. Considering exchange rate effects, this represented an increase of 2.4 per cent. The Group generated 68.1 per cent of its sales in Europe, 13.5 per cent in the Asia/Pacific region, 12.0 per cent in North America and 6.4 per cent in Latin America. Sales in Germany represented 27.0 per cent of Group sales. All of these figures remained consistent with market share in the corresponding six months of 2003.

The company said that after its promising start in the first quarter of 2004 the result for the second quarter was particularly affected by restructuring costs, one-off special costs and residual fixed costs from the Consumer business.

"These factors had a very adverse effect on the profits for the short business year," the company said in a statement.

This led to the group's operating profit slipping into the negative, reaching - €195.2 million.

Goldman Sachs says it believes the drop in profits was most likely caused by price drops and promotions in a number of its categories. In turn it said it was reducing its Earnings Per Share estimate from €2.99 to €1.37, which it said also reflected the one-off special costs associated with the reorganization of the business.

Wella said that in the 2004/2005 business year it is still expecting to expand its core competencies in the Professional and Cosmetics & Fragrances business. Expecting single-digit growth for the Professional division, the company said that it intends to improve overall operating profitability in the second half of the financial year.