L'Oréal defies weak China business – growth continues

The French cosmetics group L'Oréal experienced a decline in sales of lipsticks and skincare products in China during the second quarter, which negatively impacted the company's growth. Despite challenging market conditions in China, the company slightly exceeded analyst expectations. L'Oréal, known for brands such as Maybelline and Helena Rubinstein, achieved a 5.3 percent increase in second-quarter sales on a comparable basis, amounting to 10.88 billion euros. This was slightly above expectations yet below the 11 percent growth seen in the first quarter. In North Asia, sales declined by 2.4 percent on a comparable basis, with sales in China remaining under pressure. Decreased consumer confidence and a difficult comparison base burden the Chinese market, although travel retail in offshore destinations such as Hainan improved in the first half of the year. Despite these challenges, operating profit rose by 8 percent in the first half to 4.6 billion euros, slightly surpassing consensus estimates. L'Oréal has benefitted in recent years from record sales and profits, supported by pandemic-related shopping and the so-called "lipstick effect." Nevertheless, the company now faces an uncertain future. CEO Nicolas Hieronimus lowered the expectations for global market growth in the beauty segment at the end of June due to continued weakness in China, now forecasting growth of 4.5 to 5 percent for the year instead of the previously expected over 5 percent. This resulted in stock losses for L'Oréal and other beauty companies. Strong growth in emerging markets, Europe, and North America was able to offset the stagnant beauty market in China and challenging comparisons in travel retail, said Hieronimus. He still expects market outperformance despite economic and geopolitical tensions. The consumer division, which includes Maybelline and the L'Oréal brand, increased by 6.7 percent but noted a slowdown compared to the beginning of the year due to weaknesses in the U.S. beauty market. The struggling Chinese business weighed on the luxury division, which still achieved comparable growth of 2.8 percent in the second quarter, driven by double-digit growth in North America and emerging markets. Stifel analyst Rogerio Fujimori emphasized that L'Oréal has so far successfully balanced the sluggish beauty business in China with above-average growth in other regions. However, persistent weakness in China remains the biggest risk. Shares of the beauty company have lost over 12 percent so far this year and are trading at 389 euros, corresponding to a market capitalization of 208 billion euros.