L’Oreal shares slip as marketing spending weighs on margins

PARIS (Reuters) -Shares in the world’s largest cosmetics company L’Oreal dropped on Thursday as higher marketing spending put pressure on profitability, overshadowing forecast-beating sales and gains in market share.

The company’s spending on advertising and promotions, closely watched by investors, grew over the second half of the year. That weighed on the annual operating margin which came in at 19.1%, slightly missing the consensus cited by Credit Suisse analysts ahead of the results.

The stock was down 2.5% at 1057 GMT, among the worst performers on France’s blue-chip CAC 40 index. Analysts at Evercore pointed to second-half profits lagging sales, resulting in a 50-basis-point contraction of the operating margin.

“This lack of operating leverage, and arguably, modest return on the hike – which in turn translated into sales growth in-line with peers – could be indicative of diminishing returns on incremental marketing (overspending),” they said in a note to clients.

L’Oreal Chief Executive Nicolas Hieronimus defended the increase in a call with analysts.

“In this year of rebound, we rebalanced a little bit to allow (the consumer products division) to invest more strongly in their brands and it paid off”, he said, citing an acceleration of the division’s quarter-on-quarter growth and compared to the overall market.

The advertising investments were “a very large step-up on a much bigger sales basis,” analysts from Bernstein noted, while those at UBS flagged that L’Oreal spent nearly 2 billion euros more on marketing than in 2020, a 190-basis-point increase as percentage of sales.

Hieronimus added that the active cosmetics division, the only other division that posted a slight decline in operating profit margin, showed “major improvement” in absolute value.

Credit Suisse analysts cited concerns about a slowdown in China coming to “fruition,” although the company said in a statement on Wednesday that growth in the region was still 50% ahead of pre-pandemic levels.

Hieronimus told the call that performance in China slowed in the second half of the year due to a high comparison base and headwinds from the Omicron variant of COVID-19, but added the mid-term outlook was very good.

Fuelled by demand in North America, the beauty giant’s fourth-quarter sales of 9.09 billion euros ($10.40 billion) beat analysts’ forecast.

(Reporting by Piotr Lipinski and Mimosa SpencerEditing by Mark Potter and Bernadette Baum)