Shares in the world’s largest cosmetics company, L’Oréal, dropped on Thursday, as higher marketing spending pressured profitability, overshadowing forecast-beating sales and market share gains.
Fuelled by demand in North America, the beauty giant’s sales rose by 11.2% on a like-for-like basis over the fourth quarter, to €9.09 billion ($10.40 billion), beating analysts’ forecast of €8.74 billion in a Refinitiv poll.
The company’s spending on advertising and promotions, closely watched by investors, grew slightly over the second half of the year, resulting in an annual operating margin of 19.1% – a tad below the market consensus cited by Credit Suisse analysts ahead of the results.
The stock was down around 3% at 09.25 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),’ analysts wrote in a note to clients.
While the company is known for taking a longer-term view and ploughing funds into marketing to outpace rivals, the advertising investments were ‘a very large step-up on a much bigger sales basis’, noted analysts from Bernstein.
After cutting advertising and product launches when the pandemic hit in 2020, L’Oréal resumed spending on marketing and new products last year.
Credit Suisse analysts said that concerns about a slowdown in China “did come to fruition”, although the company noted in a statement on Wednesday that growth in the region was still 50% ahead of pre-pandemic levels.
Nicolas Hieronimus, chief executive of L’Oréal, told a call with analysts that performance in China slowed in the second half of the year due to a high comparison base and headwinds from the Omicron variant, but added the midterm outlook was very good.