L'Oreal ups profits, but is it sustainable?

Related tags Cent Goldman sachs

L'Oreal announced second half financial results broadly in line
with market expectations at the end of last week, boosted by strong
sales in both the US and emerging markets. However, analysts
believe that improvements in profitability will not be sustainable
in the longer term and have cut back on forecasts as a result.

Underlying sales for the company remained strong in the final six months and full year 2004 , despite results being dented by negative currency fluctations. The company said that its underlying sales grew by 3.6 per cent in 2004 to reach €14.53 billion, which was backed up by a 16.3 per cent increase in operating profit to €2.12 billion.

Goldman Sachs said that results for the second half were in line with its forecasts, with EBIT rising 22 per cent, against its forecast of 21 per cent. This meant that full year operating profit was up 10.1 per cent to €2,161 million, giving the company its 20th consecutive year of double digit growth.

However, Goldman Sachs said that it was disappointed with the quality of the earnings, pointing out that the external charges to sales ratio was well down, indicating that further operational savings are largely unsustainable.

Additionally the reintegration of provisions accounted for another substantial proportion of the EBIT growth, another factor that is considered to be largely unsustainable in the future.

In total Goldman Sachs says that theses two items accounted for 90 per cent of the improvement in L'Oreal's increase in EBIT. In view of this it has cut its earnings per share forecast for 2005 by 2 per cent as a result.

But despite the question mark over future operational improvements, L'Oreal's​ underlying sales results still look strong. On a regional basis the company's results showed that the mainstay European market is continues to remain steady, with like-for-like regional sales rising 1.1 per cent to €7.313 billion for the year.

Elswhere the company's fortunes have faired even better, particularly in the US market where a concerted advertising campaign for a number of its leading cosmetic brands has paid dividends. Like-for-like sales were up a healthy 8.1 per cent, against sales of €3.135 billion. However this figure was dented by the weak dollar, with published figures showing a fall of 0.3 per cent for 2004.

Sales in the developing markets also increased significantly, sustained by more favourable currency rates. In Eastearn Europe sales stood at €524 million, up 29.3 per cent on the previous year's like-for-like figures. Equally like-for-like sales in Asia were up 17 per cent to €1.269 billion.

On a divisional level, the company's Professional Products operations, which supplies hair salons on a global basis, increased its like-for-like sales by 7.6 per cent to €1.998 billion, while the largest division - Consumer Products - increased like-for-like sales by 5.8 per cent to reach €7.754 billion.

Biggest gains were seen in the company's Active Cosmetics division, reflecting consumers' increasing demands for cosmetic products with greater levels of functionality. Like-for-like sales in this division grew by 15 per cent to reach €852 million.

On the back of the results the company has also announced a reorganization of its executive operations, which means a succession plan that divides up the roles of the chief executive and chairman.

The current chairman and chief executive, Lindsay Owen-Jones announced that Jean-Paul Agon, currently president of L'Oreal US, will take on the role of chief executive, with a view to taking on the role as head of the company.

"I am keen to organize a smooth and transparent transition of the group's management reflecting the continuity of our results and our strategy. Jean-Paul Agon is the ideal candidate,"​ said Owen-Jones.