The Wall Street Journal-20080214-Earnings Digest- L-Oreal Net Gets New-Markets Lift

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Earnings Digest: L'Oreal Net Gets New-Markets Lift

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PARIS -- L'Oreal SA, the world's largest cosmetics company by revenue, is shrugging off stagnant consumer spending in the U.S. thanks to acquisitions and fast growth in emerging markets.

"The increase in emerging-market sales has a turbo effect on the global growth of the company," Chief Executive Jean-Paul Agon said in an interview.

France-based L'Oreal said net profit last year jumped 29% to 2.7 billion euros ($3.9 billion). Operating profit increased 11% to 2.8 billion euros. Last month, the maker of Lancome creams and Garnier shampoo said 2007 sales rose 8.1% to 17.1 billion euros.

Mr. Agon is counting on new markets to boost business this year, too. He expects sales to grow between 6% and 8%, led by consumers in countries such as Russia, China and Mexico. "There is a new middle class where people really want to have access to beauty products," Mr. Agon said.

In addition, a succession of recent acquisitions will provide room to grow further. Last month, L'Oreal agreed to buy YSL Beaute, the maker of Yves Saint Laurent perfumes, from French retail group PPR SA for 1.2 billion euros. "It will keep us quite busy, and our plate will be full for a while," said Mr. Agon, who took over as chief executive two years ago after heading the company's operations in the U.S. and Asia.

Emerging markets are increasingly important to consumer-products companies. Procter & Gamble Co. is counting on shoppers in places such as Mexico and China to buoy growth. Unilever has introduced brands such as Signal toothpaste to countries like Brazil and Indonesia.

For the first time, profits in L'Oreal's "rest of the world" category -- which excludes North America and Western Europe -- inched past those from North America, up 31% to 774 million euros. The region accounted for 4.7 billion euros of sales last year, 27% of the group's total. Sales in China, India and Russia all grew more than 30%, compared with 4.8% growth in dollar terms in North America.

The U.S. market remains central to L'Oreal, said Mr. Agon, and it is trying to rekindle demand by launching a new cosmetics line under the Ralph Lauren label this year. "Cosmetics boost consumers' morale," he said.

In other markets, L'Oreal is tailoring its approach. In China, where skin care is the biggest beauty category, L'Oreal first rolled out its celebrity-driven L'Oreal Paris brand in department stores. Now it is penetrating a different distribution channel -- pharmacies -- with its Vichy skin-care line.

In Turkey, where the company was unable to establish a strong foothold in mass-market distribution, L'Oreal recently acquired a local hair-care company, Canan, which it says will help increase the presence of its blockbuster Garnier label. "We have a complete portfolio, and we can play the right card in every country," says Mr. Agon.

L'Oreal has jumped on new trends -- such as consumers' desire for products that have a more natural image -- with the purchase of The Body Shop and organic label Sanoflore two years ago.

With YSL Beaute, Mr. Agon is ramping up L'Oreal's luxury division, which also houses the Armani and Lancome perfume brands. But it faces increased competition from Procter & Gamble, which recently won the licenses to make fragrances for Gucci and Dolce & Gabbana.

Mr. Agon is also trying to dodge other obstacles within the consumer-goods sector. By shrinking the number of purchasing centers to four from 30 a few years ago, L'Oreal has been able to keep costs stable even as prices of raw materials have risen.